It’s too soon to call it a pattern. But there’s something new in Foreign Corrupt Practices Act enforcement. During 2007, the U.S. ramped up two investigations that covered not just individual companies but entire industries. That, we think, is worth a second look.
One industry-wide investigation involves about a dozen oil and gas services firms — among them are Schlumberger, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp. and Global Industries. They were all customers of Swiss-based logistics firm Panalpina. It allegedly bribed customs agents and other government officials, especially in Nigeria, Saudi Arabia and Kazakhstan. The second industry-wide investigation includes the leading manufacturers of orthopedic implants. The Securities and Exchange Commission and the Department of Justice want to know whether they violated the FCPA by making payments to doctors employed by government-owned hospitals overseas. Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc and Medtronic Inc. disclosed investigations during the year and denied violating any laws.
The two investigations had very different beginnings. The one covering the oil and gas services companies germinated in 2004, when ABB Vetco Gray settled FCPA violations. Some of its offenses involved customs-clearance practices in Nigeria and other countries, where Panalpina was its clearing agent. The medical device makers’ overseas practices probably came under scrutiny in early 2007. That’s when Johnson & Johnson (which owns device maker Depuy) said it voluntarily disclosed to the Department of Justice and the Securities and Exchange Commission that “subsidiaries outside the United States are believed to have made improper payments in connection with the sale of medical devices in two small-market countries. “
Despite their different starts, one question about the two investigations is, why now? Why, after thirty years of FCPA history, are there two industry-wide investigations? What’s changed? Here’s one theory. Since the Sarbanes-Oxley Act became law on July 30, 2002, U.S. reporting companies have to investigate and self report any potential violations of U.S. law, including the FCPA. Failing to do that isn’t just bad housekeeping — it’s a go-to-jail offense. So internal investigations and self-reporting practices are now more independent, robust and comprehensive. In the SOX-driven era, directors and officers have to be absolutely certain that what they disclose to regulators and prosecutors (and shareholders, of course) is the truth, the whole truth, and nothing but the truth. Coming up an inch short of the bar is not an option.
Today’s performance-enhanced internal investigations — which have multiplied, thanks in part to the SOX whistleblower provisions — often produce credible evidence about industry-wide practices. A chapter or two about competitors is common — and the Feds expect to read the unabridged versions. Medtronic — a huge orthopedic device maker — alluded to the government’s expectation in its latest Form 10-Q: “The letter [from the SEC requesting information] notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors.”
We can also do some speculating. Could companies that become potential targets of FCPA prosecutions bargain for leniency by implicating others? We don’t know if that’s happened yet. But in price fixing cases, for example, there have long been well-recognized rewards for companies that are the first to talk about their co-conspirators. Could similar behavior emerge in FCPA cases among industry peers?
As we said at the top, there’s no pattern yet — just a couple of industry-wide investigations that got rolling in the same year. But we’ll keep watching.
View prior posts about the oil and gas services companies here.
View prior posts about the medical device makers here.