Enhanced Anti-Corruption Scrutiny in Construction Industry

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Robert A. Gallagher
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Anthony Finizio
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Michael A. Schwartz

Bribery and corruption have long plagued the construction industry, particularly in emerging markets in Latin America, Eastern Europe, the Middle East and Asia-Pacific. Large contracts often trickle down through layers of subcontractors and consultants, presenting opportunities for corruption at each level. The risk is enhanced in certain foreign jurisdictions where public officials may expect payment in exchange for state-issued licenses or government contracts.

Recent enforcement trends indicate that both the U.S. Department of Justice and the Securities and Exchange Commission are increasingly targeting the construction industry for anti-bribery and corruption actions under the Foreign Corrupt Practices Act. And several former DOJ officials recently commented that the construction industry has become a focus of anti-corruption enforcement efforts.

The FCPA is a formidable tool for regulators, who will investigate whether there has been anything of value provided directly (or indirectly through third parties) to influence a foreign government. While certain safe harbors apply — including (i) de minimis payments made to expedite routine governmental action or (ii) the payment being lawful in the foreign jurisdiction — these exceptions are construed narrowly and can be difficult to apply in practice. The FCPA also requires adequate internal accounting controls to prevent and detect improper payments, as well as maintenance of internal books and records that accurately and transparently reflect all payments.

While primarily designed to apply to U.S. companies or persons, FCPA jurisdiction extends to all companies controlled by a U.S. parent corporation or registered to conduct business in the United States. Even a wholly foreign corporation can come within the ambit of the FCPA if the transactions that led to the corrupt payments were made within the United States.

Several notable recent enforcement actions illustrate the trend:

Cognizant Technology: In February 2019, the SEC announced that New Jersey-based Cognizant Technology Solutions Corporation agreed to pay $25 million to settle charges it violated both the anti-bribery and books and records provisions of the FCPA when two of its former executives — including its chief legal officer — allegedly facilitated the payment of bribes to an Indian government official to obtain permits and operating licenses required for the construction of Cognizant’s new campus in Chennai, India. The construction firm responsible for building the campus allegedly paid the bribes directly to the government official and was later reimbursed by Cognizant through inflated change orders.

The former executives were indicted on criminal charges, but the DOJ declined criminal prosecution of Cognizant itself based on several mitigating factors, including Cognizant’s voluntary and timely self-disclosure of the matter, thorough and comprehensive internal investigation, and the robust nature of Cognizant’s preexisting compliance program.

Eletrobras: In December 2018, the SEC announced the settlement of charges against Brazilian state-owned utility company Centrais Elétricas Brasileiras S.A. (Eletrobras) for violating the books and records and internal accounting controls provisions of the FCPA. According to the SEC, former officers at Eletrobras’s nuclear power generation subsidiary engaged in a bid-rigging and bribery scheme with private Brazilian contractors in connection with the construction of a nuclear power plant. The Eletrobras officers allegedly agreed to inflated construction costs in exchange for kickbacks from the contractors totaling approximately $9 million.

The SEC found that material weaknesses in Eletrobras’s internal financial reporting controls contributed to the bribery scheme flourishing undetected. Eletrobras — publicly traded on the NYSE — was permitted to accept a cease-and-desist order and civil penalty of $2.5 million without admitting or denying the findings because it took prompt remedial action. The prompt remedial efforts included conducting an internal investigation and voluntary document production, appropriately disciplining numerous employees involved in the alleged misconduct, enhancing internal accounting controls, and adopting new anti-corruption policies and procedures.

Implications for Contractors

Contractors can manage the risks presented by projects in foreign jurisdictions through a comprehensive compliance program, including regular FCPA-related training for company employees and consultants, rigorous internal controls designed to detect and prevent improper payments, and appropriate due diligence on all subcontractors, consultants, agents, suppliers and vendors. Contractors should incorporate anti-bribery and anti-corruption provisions in their contracts, including considering provisions that grant the contractor the right to audit payments made or received by third parties.

If a contractor uncovers conduct that may run afoul of the FCPA, prompt investigation, appropriate remedial measures (which may include self-disclosure), and a robust preexisting compliance program may result in leniency from the SEC and/or the DOJ.