Why Comply?

The potential consequences of a Foreign Corrupt Practices Act violation for an individual are easy to explain and understand. Personal tragedies result from the losses of freedom, jobs and reputations, and there’s often financial ruin and damage to families. But the possible consequences to a corporation — and indirectly to its employees, shareholders, creditors, customers, suppliers and other stakeholders — are more complex. A good explanation, however, comes from KBR in its 2007 annual report. The disclosure is comprehensive and clear, and downright spooky.

As discussed in our prior post, KBR’s former chairman and CEO, Jack Stanley, just pleaded guilty to violating the FCPA. He helped arrange (and conceal) at least $182 million in illegal payments to Nigerian government officials. The continuing investigation by U.S. authorities is the focus of KBR’s FCPA disclosure. Although the scale of the potential violations behind the disclosure is unusual, most of the possible consequences that KBR describes could apply to most public companies with FCPA concerns.

We’ve deleted a few KBR-specific references and broken the disclosure into smaller chunks for readability. Otherwise, it’s straight from the annual report.

Here it is:

A person or entity found in violation of the FCPA could be subject to fines, civil penalties of up to $500,000 per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2 million per violation.

It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of us or our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided the government authorities during the investigations.

Agreed dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA.

Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries. . . . Suspension or debarment from the government contracts business would have a material adverse effect on our business, results of operations, and cash flow.

These investigations could also result in (1) third-party claims against us, which may include claims for special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, (4) adverse consequences on our ability to obtain or continue financing for current or future projects and / or (5) claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us or our subsidiaries. . . .

In addition, our compliance procedures or having a monitor required or agreed to be appointed at our cost as part of the disposition of the investigation have resulted in a more limited use of agents on large-scale international projects than in the past and put us at a competitive disadvantage in pursuing such projects.

Continuing negative publicity arising out of these investigations could also result in our inability to bid successfully for governmental contracts and adversely affect our prospects in the commercial marketplace. In addition, we could incur costs and expenses for any monitor required by or agreed to with a governmental authority to review our continued compliance with FCPA law.

The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not expect these investigations to be concluded in the immediate future. The various governmental authorities could conclude that violations of the FCPA or applicable analogous foreign laws have occurred . . . In such circumstances, the resolution or disposition of these matters . . . could have a material adverse effect on our business, prospects, results or operations, financial condition and cash flow.

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