U.S. Prosecutors Targeting Mid-Level, Senior Corporate Officers in Foreign Bribery Cases

Woodruff Sawyer’s Amantea Advises Adding Specific D&O Endorsement to Ensure Coverage

Directors and officers will be the target of more federal prosecutions under the U.S. anti-bribery statute, said a top U.S. Justice Department official. Mark Mendelsohn, the department official who oversees enforcement of the Foreign Corrupt Practices Act (FCPA), told Reuters that recent cases against individuals under the act were intended to send a strong deterrent message.

“If you look at who we’re prosecuting, we’re prosecuting mid-level to senior level corporate officers and employees, CEOs, CFOs, heads of international sales. My point is these are people with significant positions in companies,” he said.

A focus on increased prosecutions of individuals comes as no surprise to Denise Amantea, a partner with Woodruff Sawyer Insurance in San Francisco.

“This isn’t surprising,” Amantea said. “The Securities Exchange Commission (SEC) and the Department of Justice (DOJ) have been focusing on individuals, singling them out as opposed to companies. That’s happening across the board whether it’s insider trading or for the Foreign Corrupt Practices Act or Reg FD (Regulation Fair Disclosure),” she said.

In January, an FBI undercover operation netted 22 employees in the military and law-enforcement products sector. The biggest prosecution to date of individuals under the FCPA, the case recently yielded a guilty plea and promises to ensnare other executives.

Even with the increased focus on individual prosecutions, Amantea hasn’t seen a significant rise in prosecutions against individuals under the FCPA, yet.

“I’ve heard staffers say ‘we are going to start focusing on individuals as opposed to companies’ but not exclusively,” she said. “I think they are trying to strike some fear into the individual directors and officers so that they don’t feel like they can hide behind the company and let the company bail them out.”

In the last five years, FCPA lawyers have prosecuted more FCPA cases than they did between 1977, when the FCPA was enacted, and 2005. The law imposes criminal and civil penalties for paying bribes to foreign government officials to secure or retain business abroad.

Amantea does expect the number of SEC and DOJ enforcements against individuals to continue to rise, and advises agents to vet directors and officers (D&O) liability policies to make sure there is exclusive coverage for FCPA violations.

Typically, defense costs are the big exposure for the D&O carrier under FCPA claims, and carriers are clear about covering such costs, Amantea said. However, D&O carriers vary on whether they will pick up any fines handed down by the feds.

“The fines can be as much as $250,000 for individuals as per violation, and up to $5 million if it’s criminal,” she said. And often times defense costs will end up more costly than the fines, she added.

Some carriers will agree to cover the fines and penalties but as a precaution she advises her clients to include specific coverage for FCPA violations.

“I usually like to see an explicit endorsement for the Foreign Corrupt Practices Act violation just in case the definition of claim in the policy would somehow restrict coverage for it,” Amantea said. “Sometimes the definition of a securities claim could be read to exclude a Foreign Corrupt Practices Act violation, especially with respect to the company. So you want to be sure to add that endorsement just so there’s no argument about it later,” she said.

Getting companies and their directors and officers to buy into additional coverage is easier than ever, Amantea said. But not necessarily in reaction to increased individual prosecutions.

“In general directors and officers are just a much more sophisticated group across the country and they understand much better their exposure,” Amantea said. “They are making sure they have indemnity agreements that are strong and hold up and they all love Side A (coverage) because that is for the directors and officers only – they always insist on a layer of that at the top somewhere.”

For clients, the D&O market is better than ever, Amantea noted as well. “From the directors and officers perspective the pricing is still very soft. And because there are so many new entries – new insurance carriers coming into the D&O market – as brokers we can get a lot of very broad terms and conditions.”

Reuters reporter Dan Margolies contributed to this story.

Topics USA