Wednesday, June 27, 2007

Another High Profile Corruption Investigation Underscores a Growing Area of Potential D & O Risk

Photo Sharing and Video Hosting at Photobucket With its announcement (here) that it is the target of a Department of Justice antibribery investigation, BAE Systems added its name to the growing list of foreign-domiciled companies targeted by U.S. officials for alleged violations of U.S. anticorruption laws. The recent high-profile investigation of Siemens (about which refer here), as well as investigations involving Total, the French oil company, and Magyar Telecom of Hungary, not to mention a long list of domestic companies, are all part of an increasingly tough stance by U.S. regulators and prosecutors toward allegedly corrupt business activities.

The BAE disclosure says that the U.S. investigation relates “to the company's compliance with anticorruption laws including the company's business concerning the Kingdom of Saudi Arabia." News reports (here) state that the investigation involves a 20-year old transaction involving the Al-Yamamah Saudi arms deal, and encompasses two areas of activities. The first is the alleged use of a supposed slush fund that BAE used to transfer tens of millions of dollars of hospitality benefits to Saudi officials. The second is the allegation that Prince Bandar bin Sultan, the former Saudi ambassador to Washington, received a total of up to 1 billion British pounds in the form of deposits to a Saudi embassy bank account at Riggs Bank in Washington, D.C. In addition to the Department of Justice investigation, the Financial Times reports (here) that BAE is also the target of an SEC investigation focused on potential violations of the books and records provisions of the Foreign Corrupt Practices Act (FCPA).

The British government previously brought a halt to an investigation by the Serious Frauds Office because of national security concerns. (Saudi Arabia apparently threatened to end intelligence collaboration with Great Britain if the investigation continued.) Beyond these concerns, there are additional complications to the circumstances under investigation. The first is that the Saudi government’s relation the Saud royal family is highly interwoven, creating a complicated issue over the question, for example, of who rightfully was the beneficiary of the deposits to the Riggs Bank account. And while Prince Bandar undoubtedly was, as the Saudi Ambassador to Washington, and as Saudi Arabia's current national security chief, a government official, it could prove very difficult to show that even very large amounts of cash actually bought influence, since he is a an extremely wealthy person (his 56,000 sq. ft. Aspen mansion is on sale for $135 million).

But while there are these complicating factors, it is apparently not a constraint on any enforcement action against BAE that it is foreign domiciled and the alleged corrupt activity aimed at influence outside the U.S. Even if the involvement of the Riggs bank account were not a sufficient nexus, the U.S. authorities have already demonstrated their willingness and ability to pursue foreign domiciled companies for corrupt activities abroad. Indeed, last year, the Department of Justice forced Statoil, the Norwegian state oil company, to pay a $21 million fine for bribery activities involving Iranian government officials, even though the company had already paid a $3 million fine in connection with a Norwegian investigation. (The company did get a credit for the prior payment).

The current high profile investigations against Siemens and now BAE are significant in their own right, but the larger significance is that these two prominent cases may be that they are only a part of more than 55 public companies the Financial Times reports (here) that U.S. officials are currently investigating for overseas corruption. These investigations can of course result in fines and penalties that may be significant in and of themselves. But as I have pointed out in prior posts (most recently here), these investigations can also lead to follow on civil lawsuits alleging improper disclosures or accounting inadequacies as a result of the underlying activities or the investigations themselves.

With over 55 publicly traded companies under investigation, the possibility of follow on civil litigation could represent an increasingly significant D & O risk. These risks extend to foreign domiciled companies whose shares trade on U.S. exchanges, as well as domestic companies with significant overseas operations or activities. In an increasingly global economy, this risk could become an important part of the D & O liability exposure, particularly given the U.S regulators’ and prosecutors’ increased focus on anticorruption issues.

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