July 30, 2012
FCPA Exposures and Insurance Solutions
Wal-Mart, the world's largest retailer, has suffered a string of troubles since recent allegations surfaced of its wide-spread use of bribes in Mexico to help speed its business expansion. Bribing foreign officials in connection with business activities has been illegal for over 30 years as a violation of the Foreign Corrupt Practices Act (FCPA). Besides directly violating that Federal statute, Wal-Mart's activities in Mexico spawned numerous shareholder class action lawsuits that name the company and its directors and officers as well as assert damages to shareholder value and to the company itself from FCPA violations. Additionally, at the company's most recent shareholder meeting, institutional shareholders made a concerted effort to vote down its CEO's reelection effort along with those of four board members because of their involvement in the bribery situation. Then, most recently, a pension fund filed a shareholder derivative lawsuit naming the company's current board and other directors and officers as defendants. The suit seeks to recover for the company any amounts it pays to resolve the bribery related claims.
Wal-Mart may be one of the biggest companies to run into FCPA trouble, but it is not alone. All U.S. companies which operate internationally, public and private, large and small, face increasing FCPA exposures, both directly through Federal enforcement actions and indirectly from private plaintiffs. On the Federal level, the agencies charged with FCPA enforcement continue to target individuals and made 2011 the second highest ranking year for total individual prosecutions in FCPA history. Besides a continued uptick in prosecutions, the penalties in FCPA cases are also significant. The average FCPA sanction last year, including criminal fines, SEC penalties, disgorgement, and interest, totaled $33.8 million. Given the exposures to companies who may not have the financial wherewithal of Wal-Mart, FCPA exposures warrant an examination of any company's insurance protections to determine how those policies would respond in the event of FCPA claims.
Structure of the FCPA
The statute has two primary components: the books and record keeping provisions and the anti-bribery sections. The FCPA's books and records provision is much broader than the anti-bribery one and extends to all SEC reporting companies, domestic as well as foreign. Those sections ensure that companies keep accurate records as respects payments they make to foreign entities.
The anti-bribery section of the act applies to all U.S. companies and their directors, officers, employees, and agents. A company or individual violates the FCPA's anti-bribery provisions by paying, offering, or promising to pay money or anything of value to any officer or employee of a foreign government or a public international organization to induce the recipient to misuse his official position to direct business wrongfully to the payer.
Two governmental agencies enforce the provisions of the FCPA. The Securities Exchange Commission (SEC) enforces FCPA bribery and books and records violations by public companies, and the Department of Justice (DOJ) prosecutes criminal violations. They share jurisdiction over civil violations.
Besides the Federal government's direct efforts to investigate and prosecute FCPA violations, the whistleblower provisions contained in the Dodd-Frank Act serve as an additional, potential source of FCPA enforcement. Dodd-Frank's incentives for whistleblowers - up to 30% of all monetary recoveries - coupled with the Federal government's stated intent to vigorously pursue FCPA violations, make the landscape in this area increasingly treacherous.
Fines and Penalties
As enforced through the SEC and DOJ, the FCPA imposes both civil and criminal penalties. Civil penalties for anti-bribery violations include fines up to $10,000 for companies or individuals, per violation (keeping in mind that most prosecutions allege multiple violations). Civil penalties for accounting violations range up to $500,000 for companies and $100,000 for individuals, per violation.
Criminal penalties for anti-bribery violations include fines of up to $2 million for companies and $250,000 for individuals, per violation, with jail terms for individuals of up to five years. Criminal penalties for accounting violations range up to $25 million for companies and $5 million for individuals.
FCPA Related Claims
The FCPA itself does not provide for a private right of action. That does not, however, prevent private plaintiffs from pursuing various causes of actions based upon activities that allegedly violate the FCPA. For example:
Securities Class Actions
As an example of class actions arising from alleged FCPA violations, Wal-Mart shareholders filed suit claiming that defendants failed to disclose that its executives had been involved in a bribery scheme. Plaintiffs then alleged that as a result of defendants' false statements, Wal-Mart's stock traded at artificially inflated prices and then fell when the truth emerged, damaging those plaintiffs who bought during the class period.
Besides claims from shareholders, corporate executives can also face exposure to derivative lawsuits stemming from an FCPA claim. In Wal-Mart's case, institutional shareholders allege that its officers and directors breached their fiduciary duties to the company and its shareholders by failing to properly handle credible allegations of bribery and attempting to cover up details of the scandal. The claim seeks "to recover corporate assets lost as the result of its wrongful acts, tighten legal and regulatory compliance structures, and institute improved governance oversight."
Conduct that violates the anti-bribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO). For example, a competitor might bring an action under RICO alleging that the bribery led to the defendant winning a foreign contract.
As an example, an action arose from a company's guilty pleas in which it admitted violations of the FCPA by bribing government officials to ensure ongoing sales in foreign countries. Competitors filed suit alleging that the defendants' actions harmed their sales of competing and alternative products and were unlawful conspiracies in restraint of trade in violation of the Sherman Act.
FCPA situations have also led to claims by pension plan participants against companies and their board members alleging violations of their ERISA fiduciary duties. The complaints assert that the defendants breached their duties to the class of participants by investing the plan assets in company stock knowing that the company and individuals within the company were violating FCPA by bribing officials to obtain business.
D&O Insurance Coverage Issues
Facing the various types of claims spawned by allegations of FCPA violations, corporate executives are likely to first look to their Directors and Officers (D&O) liability insurance for protection for themselves and their company. The D&O policy, as an insurance product, was developed to offer protection from the largest exposure facing corporate management-shareholder class actions. Over time, insurers have extended protection to corporate entities for securities claims. Consequently, FCPA related shareholder class actions and even the derivative matters facing Wal-Mart would likely be picked up under a typical D&O policy. The D&O policy may not, however, provide individuals or their companies with the same level of protection for the other types of direct or indirect FCPA claims. Outlined below are a number of issues relating to D&O coverage that should be examined in light of direct and indirect FCPA claims.
Claim Trigger-Coverage under a D&O policy is triggered when a claim is first made against an insured. How a particular policy defines "claim" determines when the insurer will start paying under the policy. If the policy uses the filing of a lawsuit, criminal indictment, or formal investigation as the trigger point, an individual insured or the company may incur millions of dollars in costs before those events without insurance recourse. FCPA situations commonly begin with subpoenas, informal governmental investigations, or even company-initiated internal investigations. Nevertheless, some newer policy forms offer broader triggers, including notices of informal government inquiries. Thus, if any of the those events qualify as a defined "claim" under a D&O policy there may be coverage for those legal, accounting, and expert costs. Because of those significant costs, however, many D&O insurers may offer only limited coverage for such expenses.
Insured Persons vs. Insured Company-As already mentioned, D&O insurance was developed primarily to protect those people managing a company or sitting on its board. Only later, for various reasons, did the coverage expand to cover the corporation itself, but only in certain cases-typically involving securities claims. Consequently, unless an FCPA matter encompasses issues that fall within the policy's definition of securities claim, there will not be coverage available for the corporate entity.
Dishonesty or Criminal Acts Exclusion-A standard exclusion contained in D&O policies bars coverage for intentional criminal or dishonest acts. An FCPA matter, by its nature, involves acts implicated by this exclusion and warrants close scrutiny. In negotiating coverage terms, efforts should be made to narrow the scope of the provision as much as possible by limiting its application to only those cases where an adjudication of misconduct is obtained in the proceeding.
Coverage for Fines and Penalties-FCPA violations come with huge potential fines. Some insurers offer coverage for certain fines and penalties under their D&O polices. Those offerings should be closely examined to determine whether the coverage grant is for individual insureds and the corporate entity. Also, the limits being offered may be relatively small and tied to a particular section of the FCPA, as opposed to the exposure presented by the entire statute. Additionally, public policy may preclude insurers from indemnifying individuals for fines or penalties.
Limits Adequacy-Individuals and companies may incur significant costs in dealing with FCPA matters. If an insured is able to expand their D&O coverage to address many of the FCPA related risks, they face the unintended consequence of having inadequate amounts of insurance. For example, the expanded coverage means the limits may be depleted - through investigation costs, for example - with nothing left to pay a shareholder suit or criminal prosecution. Accordingly, any expansion of coverage must include a limits adequacy assessment.
Besides the provisions noted above, those involved in the purchase of D&O coverage should review the entire policy in light of FCPA exposures.
Separate FCPA Coverage
The insurance marketplace has taken notice of the increasing exposure facing individuals and companies from the FCPA and has begun to develop insurance products specifically designed to help fill the actual and perceived gaps in D&O coverage. At this point, the insurance market is moving cautiously in this area, no doubt tempered by the huge amounts incurred in dealing with FCPA claims. Nonetheless, given the risks involved, these new offerings should be considered. Below are few notable factors to consider with regard to stand-alone FCPA insurance:
As global trade continues to represent a larger portion of many organization's sales, exposures to FCPA related claims grows. These exposures to companies and the people who run them warrants a close examination of the insurance protections in place or available in the marketplace.
Integro's experienced brokers and coverage counsel can help you make sure your coverage meets your needs when you need it most-in the event of a claim. To learn more about your FCPA risks and possible coverage and exclusions, contact us today.