On September 16th "Individual 1" pleaded guilty in federal courts to one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and other statutes. His guilty plea arose from the 18th January, 2010 arrest of twenty two executives charged with criminal offences in Las Vegas, NV. The arrests were a cooperative "Sting" between the FBI and the UK’s MI5.
By way of background, the FCPA is a US law which has two primary focuses. First, it relates to creating transparency of accounts of publicly traded companies. The second relates to deterring bribery of foreign officials by individuals or corporations. Under the anti-bribery provision, corporations are subject to fines of up to USD $2M and individuals are subject to fines up to USD $100K and as many as 5 years imprisonment. Much larger fines can be levied due to the expansion of criminal penalties for wilful violations of the 1934 Act under the Sarbanes-Oxley Act (SOX).
It would be detrimental to see this purely as a US law affecting only US citizens and US companies. The reason is simple, besides the law applying to an "Issuer" which is a company whose securities trade in the USA; FCPA applies to what the Department of Justice (DOJ) calls a "Domestic Concern." The application of this term of art applies to anyone, anywhere if the person or company has any interest in the USA. Directors and Officers need to immediately start asking questions. Namely, "Do we have an anti-fraud/bribery policy?", "How often are contracts with foreign companies/consultants reviewed for their appropriateness?" .
Remember, the act does not need to occur in the USA for the D&O to be held liable. To illustrate the importance, in the largest FCPA case involving a foreign company, 1.6M billable hours were spent on forensics and advisory at a cost of USD $850M and USD $150M was spent in creating an anti-corruption kit for many of its operating entities. This was in addition to the settlements reached with regulators which where in excess of USD1.5B.
There are no private rights of action for violations of FCPA, but companies do face additional exposures such as, regulatory action brought by SEC and/or DOJ. Securities Class Action(s) filed by shareholders, and the potential actions brought by foreign governments alleging corruption of officials, money laundering, and anti-trust. What is worse is that Directors and Officers can be held vicariously liable for failing to have adequate control procedures.
Thinking of the implications and coupled with Extradition Treaty agreements which are unilateral with the USA, and a foreign Director or Officer may find themselves in a US court very soon as was seen in 2006 with the "NatWest 3." In addition, there has been increasing pressure placed on foreign regulators to improve internal controls and to stop bribery through the passing of similar legislation.
The new UK Bribery Act which comes into effect as law in April 2011 is a good example of countries addressing the matter. There are also similar statutes in China, Hong Kong, and The Netherlands with more to follow. And just in case you were wondering, of the 22 arrested on the 18th, 4 were foreign executives, 3 of whom were British. "Individual 1" is American and sentencing has not been set, but the others are waiting on baited breath as their fates may follow in similar direction.
It has been more than a year since the economy went into an out-and-out tailspin. Tough economic conditions have taken their toll on Main Street and Wall Street alike, and the timetable for recovery is unknown.
The state of the economy is affecting all of us—especially the directors and officers of corporate entities. With some commentators predicting more financial turmoil on the horizon, the promise of corporate reimbursement (indemnification) of legal bills, settlements and judgments against corporate directors and officers, past and present, becomes uncertain. This scenario warrants the most comprehensive Directors and Officers (D&O) liability coverage available in the market.
Without strong so-called "Side A coverage," insurance for non-indemnified claims, directors and officers might risk not only their standing in the company; they might risk their own personal assets as well. Whether part of a robust comprehensive D&O policy or as a standalone Side A D&O contract, such policies can provide coverage when their organization cannot indemnify directors and officers because of corporate governance, statutory restrictions, the type of claim made (e.g., shareholder derivative claims) or simply the financial inability to pay.
Why does this matter? Business headlines say it all: fiscal concerns, bankruptcy, corporate crime. In addition, if you recall the stock options backdating scandal, you probably know that shareholder derivative actions are now on the rise. And, for retired independent directors trying to enjoy their retirement years in peace, a non-indemnified major D&O claim against them for actions taken years earlier can be especially damaging.
It is notable that Side A D&O coverage in the United States has grown more competitive in recent years—and not a moment too soon. By expanding the scope of protection offered, insurers are trying to help organizations provide the most comprehensive coverage to their directors and officers.
Thus, with increasing exposures, it is paramount that Risk Managers and Chief Financial Officers explore all possible options for the most suitable coverage, including broad Side A coverage features as well as special coverage for retired independent directors.
The most innovative organizations are marketing the most advanced D&O offerings as there is just no telling when the economic conditions of the past year may lift. Until that time, the smartest companies are keeping their most valued executives securely covered.
On September 16th "Individual 1" pleaded guilty in federal courts to one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and other statutes. His guilty plea arose...
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