H.P.’s Foreign Entanglement
Peter J. Henning follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch.
The last month or so has not been very pleasant for Hewlett-Packard.
The company’s recent 10-Q disclosed that the Justice Department and Securities and Exchange Commission have expanded an investigation of possible bribe payments in connection with contracts the company obtained in Russia. Such payments may violate the Foreign Corrupt Practices Act (F.C.P.A.), an area where the federal government has investigated more aggressively over the last few years.
This disclosure comes on top of other recent legal problems at H.P. Joe Nocera’s recent column in The New York Times described H.P.’s directors as “the most inept board in America” for its lawsuit against its former chief executive, Mark V. Hurd. On Aug. 30, the Justice Department announced a $55 million settlement of a civil fraud claim against H.P. for paying “influencer fees” — in other words, kickbacks — in return for favorable recommendations to the federal government to buy the company’s products.
As Mr. Nocera pointed out, H.P. is unlikely to succeed in its legal battle with Mr. Hurd, but that is more of a distraction than anything else. A widening F.C.P.A. investigation, on the other hand, may end up costing the company millions of dollars in legal fees as it deals with demands for documents while conducting its own internal inquiry. And any settlement with the government would likely involve both criminal fines and civil monetary penalties, along with other remedial measures, ratcheting the price up further.
About White Collar Watch
Peter J. Henning, writing for DealBook’s White Collar Watch, is a commentator on white-collar crime and litigation. A former lawyer at the Securities and Exchange Commission’s enforcement division and then a prosecutor at the Justice Department, he is a professor at the Wayne State University Law School. He is currently working on a book, “The Prosecution and Defense of Public Corruption: The Law & Legal Strategies,” to be published by Oxford University Press.
The bribery investigation began in Russia in connection with a contract with a former German subsidiary of H.P. that involved the installation of a computer network in, of all places, Russia’s chief prosecutor’s office. Russian and German prosecutors are looking into the transaction, which took place from 2002 to 2006, and have requested documents from the company.
In its 10-Q, H.P. notes for the first time that the investigation is not limited to that one contract in Russia: “The U.S. enforcement authorities have recently requested information from H.P. relating to certain governmental and quasi-governmental transactions in Russia and in the Commonwealth of Independent States subregion dating back to 2000.”
It is not clear how many contracts or transactions may be involved, but the expanded time frame and geographic scope probably means the inquiry will be an extended one, rather than something H.P. can wrap up quickly. As sometimes happens, once one part of a multinational company is scrutinized for bribery, problems in other areas can pop to the surface.
The recent settlement by Siemens of overseas bribery charges shows how corruption can spread throughout a company. Subsidiaries operating in France, Argentina, Turkey and the Middle East were found to have paid bribes to obtain contracts, and Siemens paid $800 million in criminal fines to the Justice Department and disgorgement to the S.E.C. as part of the settlement.
The F.C.P.A. is part of the federal securities laws, and most cases involve the S.E.C. along with the Justice Department because one part of the act requires corporations to maintain proper books and records, something that is rarely done when a bribe is paid. The Justice Department has become much more aggressive in pursuing foreign bribery cases, including conducting an undercover sting operation that resulted in more than 20 people being arrested on charges of offering bribes to participate in a fictitious security contract with an African nation.
The recent addition of enhanced whistle-blower rewards in the Dodd-Frank Act authorizes the S.E.C. to pay 10 percent of any recovery realized, up to a maximum of 30 percent, to those who provide valuable information related to any type of securities fraud. F.C.P.A. cases are very likely to be among the most common instances for whistle-blowing by corporate employees.
F.C.P.A. charges are also very difficult to defend once the government obtains evidence that payments were made to foreign officials “in obtaining or retaining business” in that country. The act recognizes two defenses to a charge, first the payment was lawful under the laws of the country where it was made, and second the expenses were reasonable for the promoting the product or implementing the contract.
Neither defense has been successfully offered in court to this point. Even worse, according to an article by Kyle Sheahen that will be published shortly in the Wisconsin International Law Journal, “the defenses are virtually useless in practice.”
Even if H.P. is found to have violated the F.C.P.A., that does not mean the company’s ability to win government contracts would be at risk. Professor Mike Koehler, who analyzes these issues on the FCPA Professor blog, noted that the Siemens settlement did not seem to have any real effect on the company’s relationship with the federal government. “One of the unfortunate beauties of engaging in bribery the U.S. government terms ‘unprecedented in scale and geographic scope’ is no slowdown in U.S. government contracts in the immediate aftermath of the enforcement action,” he noted.
The impact from any F.C.P.A. violation may change, however, under a bill under consideration in Congress. The legislation, called the Overseas Contractor Reform Act and passed by the House Oversight and Government Reform Committee in July, requires debarment from future government contracts for any person or company found in violation of the F.C.P.A. The bill states the policy that “no Government contracts or grants should be awarded to individuals or companies who violate the Foreign Corrupt Practices Act.”
Whether the House and Senate will pass the legislation remains to be seen, but corporate integrity is, like mom and apple pie, not easily opposed. While the current aversion to corporate America may be abating, this is the type of reform that may well take hold to put some more bite into the F.C.P.A.
For H.P., a burgeoning foreign bribery investigation is not good news because of the costs and uncertainly it engenders. If the Overseas Contractor Reform Act becomes law, it will make it even more imperative that the company try to avoid any finding of a violation of the F.C.P.A., perhaps through a deferred or non-prosecution agreement that can let it avoid a finding of a violation.
– Peter J. Henning
The Overseas Contractor Reform Act
H.P.'s Foreign Entanglement - NYTimes.com
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