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Corruption leads to D&O claims

Companies liable as U.S. increases FCPA enforcement

VANCOUVER, British Columbia—Increased U.S. enforcement of the Foreign Corrupt Practices Act can intensify directors and officers liability claims, senior industry executives said.

Lessons learned when doing business outside the United States, compliance program best practices and insurance coverage are the best ways organizations can protect themselves from D&O liability, panelists said during the Risk & Insurance Management Society Inc.'s Annual Conference & Exhibition in Vancouver, British Columbia.

The FCPA, a federal law with criminal and civil penalties jointly enforced by the Department of Justice and the Securities and Exchange Commission, punishes foreign bribery, inaccurate financial records and inadequate controls, the panelists said.

The law's anti-bribery provisions apply to publicly traded U.S. companies, their officers and employees that offer a form of payment to a foreign government official for the corrupt purpose of gaining or retaining any improper business advantage, said Christopher Mango, vp and director of corporate risk management for Hartford Financial Services Group Inc. in Hartford, Conn.

Since 2008, FCPA enforcement trends show that the size of the penalties are increasing, and seven of the 10 largest FCPA settlements occurred in 2010 and 2011, said Steve Shappell, managing director of Aon Corp.'s global legal and claims practice in Denver.

“In recent years, there has been an absolute explosion” regarding FCPA enforcement, Mr. Shappell said.

After the 2008 financial crisis, the U.S. government increased its FCPA resources in 2010, he said.

Other enforcement trends include a heightened due diligence on third-party business partners, such as acquisition targets; a broader definition of what constitutes a “foreign official;” and the SEC's control-person liability standard, which seeks the prosecution of individuals.

“Control-person liability will change the game,” Mr. Shappell said. “It's going to create a flood of litigation.”

Through lessons learned in recent years, the panelists identified high-risk geographies, transactions, business relationships and industries for FCPA case activity. These include oil and gas, mining, infrastructure, telecommunications and technology industries in countries such as China, Indonesia, Iraq, Nigeria and Mexico.

High-risk transactions and business dealings include using intermediaries to bribe officials; payoffs to custom officials; and travel, entertainment and other gifts.

For organizations to mitigate FCPA exposures, the anti-corruption compliance program should be assigned to a senior-level official with proper authority and resources. Clear policies that prohibit bribery should be adopted, Mr. Mango said.

Also, companies can conduct anti-corruption-focused reviews through monitoring and auditing procedures and by “targeting your internal audit to your most at-risk areas,” he said.

Common D&O claims resulting from FCPA investigations include securities class actions, derivative demands and derivative suits. D&O coverage extends to claims against directors and officers as well as defense costs, damages, investigative costs for derivative demands and disgorgement of profits on contracts secured with improper payments.

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