Insurance for FCPA Investigations, Contributed by Charles E. Leasure III, Pepper Hamilton LLP
The U.S. Foreign Corrupt Practices Act of 1977 (FCPA), 15 U.S.C. § 78dd-1 et seq., makes it illegal for a company, its employees, directors, officers, and agents to make a bribe or unlawful payment, or give anything of value to any foreign governmental official in order to obtain business with that government.
The FCPA is jointly enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The activities addressed under the scope of the FCPA can occur inside or outside of the United States and still be enforced by the SEC and/or the DOJ.1
Companies subject to FCPA enforcement may turn to insurance to assist with costs to investigate claims that they violated the FCPA. Insurance is available for certain FCPA claims, but is often limited, and rarely covers the actual fines and penalties. This article addresses the FCPA in brief, outlines basic insurance coverage available with respect to the FCPA, and highlights two new products from the insurance industry that may provide additional insurance for this rapidly increasing corporate exposure.
The FCPA in Brief
The primary focuses of the FCPA are the anti-bribery provisions and the books and records requirements. Most of the major enforcement actions reported in the news involve allegations of unlawful payments to public officials, but violations of books and records requirements are also prosecuted under the FCPA.
— Anti-bribery Provisions
Enforcement of anti-bribery provisions in the FCPA captures a variety of situations and is much broader than a classic cash payment or bribe to a public official. The FCPA prohibits paying money and “anything of value” to a foreign official. The interpretation of “anything of value” is very open-ended and somewhat vague. There is any number of things that could fall within the FCPA’s purview, including gifts, meals, entertainment, employment offers, etc.
— Books and Records Requirements
“Issuers” under the definition in the FCPA are essentially companies with securities listed on U.S. securities exchanges. Books and records requirements ensure that companies are keeping accurate records with respect to payments made to foreign entities. Compliance with the books and records provisions requires that issuers keep accurate and detailed records and maintain a system for internal accounting control.
FCPA Enforcement and the Potential Costs
According to almost every commentator addressing the FCPA, enforcement is a priority and the number of actions is on the rise. As stated above, the DOJ and the SEC jointly enforce the FCPA in the United States. In 2004, the SEC and DOJ brought a total of five actions under the law.2 The SEC and DOJ initiated an all-time high of seventy-four enforcement actions in 2010; there were forty-eight actions in 2011.3
Costs related to FCPA enforcement can be enormous—both in fines and penalties, investigation expenses, and in costs related to “follow-on” litigation. Increased focus on enforcement of the FCPA and similar laws enacted in other parts of the world4 will likely exaggerate liabilities and expenses for companies doing business around the globe. New private causes of action that are (at least tangentially) related to FCPA violations are also rising in frequency.5 These “follow-on” cases will prove to be costly for companies forced to defend activities that are related to the prohibited acts of the FCPA.
Penalties under the FCPA are harsh. Companies may be fined up to $2 million per violation of the anti-bribery provisions.6 Individuals may be subject to penalties of up to $250,000 per violation and five years in prison.7 Fines and penalties for violations of the books and records provisions can result in a $25 million fine for the company and a potential fine of up to $5 million and imprisonment for up to 20 years for individuals.8 In addition to statutory penalties, companies may also have their ability to do business with government programs terminated, be forced to disgorge profits, and be obligated to pay for independent monitoring.
The monetary liabilities associated with major FCPA violations constitute a significant and material cost for many companies. Several spectacular high profile FCPA actions in the last few years demonstrate the potential harm to a company that runs afoul of the FCPA. For example, Siemens reported $1.6 billion in expenses related to an FCPA audit and investigation.9 Avon Products reported that it spent $154 million in 2009 and 2010 in legal bills alone for its FCPA exposure to a foreign bribery investigation.10 Halliburton paid $559 million in fines for actions in Nigeria related to the construction of a gas plant.11
Directors and Officers Insurance Coverage for FCPA Investigations
Most standard directors and officers (D&O) policies contain language that may cover certain FCPA claims. That coverage is usually limited to individuals, and is also limited by exclusions in the policy and the definitions of “claim” and “loss.” Entity coverage, sometimes referred to as “Side C,” provides coverage for defense and indemnity costs incurred by the company, but usually only with respect to securities claims. “Securities claim” is most often defined in D&O policies to exclude payment for an FCPA violation.
Often, if this insurance is available for individuals, it is reserved strictly for defense costs. Actual indemnity payments are usually limited by exclusions for fraud, personal profit, knowing violation of a law, etc. The definition of “loss” may also specifically exclude “fines and penalties.” D&O policies differ in terms and conditions, whether there exists coverage for certain aspects of FCPA violations will depend on the actual language in the policy.
What is sometimes referred to as “follow-on” litigation resulting from FCPA investigations includes exposure to civil actions brought by shareholders claiming that the FCPA violations harmed the stock price.12 Depending on the actual issues and allegations, insurance under a D&O policy could be triggered for the collateral or “follow-on” litigation.13 These civil lawsuits often allege a breach of fiduciary (or other) duty by the directors and officers in the failure to implement or enforce controls or compliance programs to prevent FCPA violations.
Insurance for informal and internal investigations is a hot issue in the D&O insurance world. Recent extensions of coverage throughout the industry are beginning to insure certain costs with respect to informal and formal investigations against an entity.14 This new coverage is now triggered by informal requests for documents and interviews (as opposed to the former requirement of a subpoena or other formal document). However, the costs of an FCPA investigation are often specifically excluded and the grant of insurance for investigation costs may be limited strictly to securities claims.
Recent Insurance Industry Response
Insurers and their clients recognize the mostly uninsured exposure to the FCPA. Several companies have introduced FCPA-specific insurance products in response to the need for coverage. Marsh and Chartis are two of the first insurance industry companies to introduce new products for FCPA exposure.
Marsh’s product, developed by its FINPRO practice, is called “FCPA Corporate Response.” According to its website, this insurance provides investigation coverage for both individuals and the organization.15 It will cover the costs of “legal, accounting, auditing, and consulting fees” due to an FCPA claim.16 This coverage is underwritten by XL Insurance and will also cover investigation costs of foreign governments under laws similar to the FCPA.17 Although it is a significant extension of coverage for the investigation costs, the insurance will not cover fines and penalties imposed under the FCPA.
Chartis’s product is called “FCPA Investigation Extension.” This coverage enhancement amends the exclusion for “Corrupt Practices” in its Investigation Edge policy under the following language:
FCPA Investigation Extension: Exclusion (d) Corrupt Practices shall not apply to any Investigation of any actual or suspected bribery of foreign government officials located in any Identified Country by or on behalf of any Issuer in violation of [FCPA] or in violation of that portion of any similar foreign law that prohibits bribery of foreign government officials. . . .18
At the moment, the limits available under the Chartis extension are $5 million. This coverage also excludes fines and penalties.
As evidenced by the examples above, $5 million is most likely not sufficient to insure against the extreme costs of serious FCPA investigations. However, if the products are successful, capacity will enter the market and higher limits will be available.
Every company with an FCPA exposure should examine its risk and consider purchasing insurance to cover FCPA investigations. They must have internal controls and adequate compliance programs in place to prevent violations. Increased enforcement by both U.S. and foreign governments means that any company doing business in a foreign land may be subject to an investigation of its business practices.
In order to bolster the compliance plans, each company must start with its current insurance program and review the various applicable exclusions and definitions in the D&O policies. Some companies may already have limited insurance for FCPA investigations. The new products on the market should eliminate any question of whether an FCPA investigation is covered under a current D&O insurance program. However, at least in this initial stage of FCPA coverage, the insurance may offer limited protection. Obviously, whether the insurance is worth buying will depend on the terms offered, the limits available, and the premium cost in relation to the FCPA exposure.19
Charles E. Leasure, III has over 20 years experience practicing insurance and reinsurance law and provides a full range of litigation, arbitration and counseling services. His clients include insurers, reinsurers, reinsurance intermediaries, insurance brokers, and reinsurance pool managers. Mr. Leasure handles a variety of complex commercial insurance and reinsurance litigation at the trial and appellate levels of state and federal court as well as hearings before arbitration panels. He provides claims and state regulatory advice to insurance and reinsurance companies and brokers. Mr. Leasure counsels non-insurer corporate clients regarding risk management, with a specific interest in insurance placement and protection including self-insurance. He also is a licensed insurance producer in Pennsylvania and helps clients procure appropriate insurance and reinsurance cover.
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