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Russell A. Stamets
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Bill Steinman
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At Alcoa, Who Knew What?

If, as Alba alleges, Alcoa overcharged it for supply contracts by $2 billion, and some or all of the money went into offshore accounts controlled by Alcoa’s agent and was used to bribe Alba’s personnel and other Bahraini government officials, then the focus of the U.S. government’s criminal investigation will be on whether anyone from Alcoa knew what was happening, or if the agent acted alone and without Alcoa’s knowledge.

The Justice Department last week intervened in Alba’s federal civil suit against Alcoa, asking the court to stay the case while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has said it’s innocent. “We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion,” Alcoa communications director Kevin Lowery said.

For U.S. prosecutors to obtain a criminal conviction of an individual under the FCPA, they must prove, among other things, that the defendant acted with “knowledge.” The most recent discussion of the knowledge element in an FCPA prosecution is U.S. v. Kay (No. 05-20604, 5th. Cir., 2008). In that case, the United States Court of Appeals for the Fifth Circuit said the government didn’t need to prove the defendants had specific knowledge about the FCPA. Instead, the court said, the government could satisfy the knowledge element by proving merely that the defendants understood that their actions were illegal.

Sitting en banc, the U.S. v. Kay appellate court — which was reviewing the trial court’s jury instructions on “knowledge” — said: To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. . . . The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal.”

U.S. v. Kay involved bribery offenses under the FCPA, which carry a potential prison term of five years. What about criminal violations of the accounting standards, for which individuals can face up to 20 years? Those prosecutions must include proof that the accused acted willfully. The FCPA says a willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer’s books, records, or accounts.

What about Alcoa’s corporate exposure for criminal charges? If any employee was involved with the agent and knowingly participated in bribing foreign officials in Bahrain, or intentionally cooked Alcoa’s books with respect to the overcharges and bribery, then Alcoa itself might be held criminally responsible under the doctrine of respondeat superior. That could happen even if Alcoa’s employees acted secretly, completely outside their authority, and against Alcoa’s policies.

“An Overview of the Organizational Guidelines” from the United States Sentencing Commission’s May 2004 release says this:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.

The statement reflects the majority view of the federal appellate courts that have considered whether corporations are criminally liable for the crimes employees commit while acting within the scope of their employment. Courts have said it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.

The rationale for applying respondeat superior to corporations is that criminal statutes such as the FCPA impose a duty upon the corporation to prevent its employees from committing the statutory violations. If it fails in its duty to prevent the criminal behavior, then the corporation itself should be made to answer for the same criminal acts.

Despite the doctrine of respondeat superior, the DOJ is now understandably reluctant to charge corporations with criminal offenses. The Arthur Andersen prosecution demonstrated the catastrophic consequences that can result from a corporate felony charge, which for Andersen was a death sentence, even though the firm was later exonerated. The DOJ has since adopted the practice for FCPA and other white collar offenses of offering companies deferred prosecution agreements as an alternative to criminal prosecutions.

In cases involving the FCPA, corporations have additional (albeit largely theoretical) protection from the harshness of the respondeat superior doctrine. The “Overview of the Organizational Guidelines” says this:

The [federal sentencing guidelines mitigate] the potential fine range – in some cases up to 95 percent – if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.

If, as Alba alleges, people from Alcoa were involved in activity that may violate the FCPA, then the company’s task, among others, will be to show that it has an effective compliance program, that top executives were unaware of any illegal conduct, and that it never concealed the conduct from the DOJ or SEC. If Alcoa can demonstrate these things, it will be eligible for mitigation of the potential criminal penalties. It is certainly true, however, that mitigation is less relevant when deferred prosecution agreements are offered. But the arguments for mitigation should still influence the DOJ’s determination of the terms of any eventual deferred prosecution agreement.

Would the presence of actual FCPA violations ruin Alcoa’s ability to establish that it has an effective compliance program? No. The Sentencing Guidelines stipulate that the failure to prevent or detect an FCPA offense “does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct.”

* * *

Alba’s allegations raise a multitude of FCPA issues for Alcoa, its employees and agent. We’ve mentioned just a few here, and we’ll come back to the case from time to time. As one pundit said to us, this will be a zoo.

Please click on the labels below for prior posts on the topics discussed above and for access to the sources and authorities referred to in the post. You can also contact us for the annotations.

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