While the News of the World phone hacking investigation is still in its early stages, the possibility of parent company News Corp. being forced to make restitution to victims, families, shareholders and even the UK and US governments through civil and criminal litigation, and the US Foreign Corrupt Practices Act, is very real.
It would not be the first time that cooperating agencies in the United States and the United Kingdom used the long arm of anti-bribery laws to wrest assets from a company simultaneously. But the investigations started last week by the FBI and the UK Serious Fraud Office (SFO) into the bribery allegations at UK media company News International and its parent company News Corp. may yet produce the highest profile case.
Asset Recovery* Watch has confirmed that while formal charges have not yet been brought, US Department of Justice* (DOJ) officials in London are working with the SFO to investigate how far-reaching the bribery was. A source in Washington with knowledge of the London investigation who did not want to be identified confirmed that investigators are looking at possible violations of the US Foreign Corrupt Practices Act (FCPA).
The DOJ has confirmed that a preliminary investigation is under way into possible bribery, but stopped short of using the magic word: FCPA. The US has used that law in recent years to force restitution and inflict penalties on companies as well as individuals who use bribery and graft to earn business abroad. Mayer Brown's Michael Volkov, an FCPA expert, said that even if the case does not otherwise wash up on US shores, there could still be an FCPA component.
Case to get 'very interesting very quickly'
"The situation should get very interesting very quickly. Subjects of the investigation are likely to get interview requests from the Justice Department/UK and from News Corp's outside counsel. The government may learn information before News Corp. It will be very difficult for News Corp. outside counsel to conduct a timely internal investigation, especially with two government enforcement agencies looking at the same conduct," wrote Volkov on his blog, michaelvolkov.blogspot.com.
Last week, News Corp. hired former prosecutor Mark Mendelsohn, who was chief federal prosecutor for FCPA before leaving DOJ in 2010 to join Paul, Weiss, Rifkind, Wharton & Garrison LLP in Washington. His hiring seems to signal News Corp.'s readying for battle in the FCPA arena.
"Inquiries often start with a limited set of facts but very quickly morph into an examination of the entire business," said Mike Koehler, author of the FCPA Professor blog. "They tend to be very cumbersome, and because they are newsworthy they cause a lot of reputational damage."
Safeguards at issue
News Corp. will face enormous fines and penalties if they can't prove they had in place safeguards to prevent bribery, according to Thomas Fox, an attorney* and FCPA expert in Houston.
"It may be difficult to understand how expensive and all-encompassing FCPA is. If you don't have anti-corruption policies in place that's the first strike against you, and it's downhill from there," he said.
The biggest individual target in that battle would no doubt be James Murdoch, scion to News Corp. CEO and chairman Rupert Murdoch. The younger Murdoch has caught heat in the past week after giving testimony before British Parliament that he was not intimately aware of the details of a phone hacking settlement made years before the scandal broke this month. Several former staffers of News of the World have disputed that claim. While Murdoch was not under oath, if it is proven that he was aware of the phone hacking epidemic at News of the World, his individual exposure to liability would ramp up in an FCPA case.
Volkov and others point out that while there has been considerable speculation about FCPA implications, the law's application in the case is actually quite cut and dried. The law applies to bribes paid to foreign officials by US companies. News Corp. is a US company (incorporated in Delaware) and its subsidiary, News International, paid bribes to police officers in London, who clearly fit the definition of foreign officials.
"The interesting issue, however, is the Justice Department's prosecutorial discretion and how it exercises it," Volkov wrote. "Some have suggested that the Justice Department should defer to the UK SFO since much of the conduct occurred in the UK. Unfortunately, the UK Bribery Act was not effective when the conduct occurred, and the SFO would have to apply its hodgepodge of bribery laws. The FCPA is clean, and it applies."
Potential US connection with 9-11
A more tangible connection to the US could exist if claims allegedly made by a former New York police officer that he was approached by a News of the World reporter for 9-11 victim phone numbers – presumably to hack them – prove to be true. But for now, the grist is still there to make an FCPA case – as well as civil and criminal cases against the company and its directors.
Once, individuals were practically never prosecuted under the FCPA, but the landscape of enforcement has shifted. In February 2010, the FBI sprung a trap that netted more than 20 executives from the gun manufacturing industry. Since then, DOJ has initiated investigations into such companies as Avon and Hewlett Packer and many others. The record-breaking 2008 Siemens settlement of $800 million was the highest profile FCPA case to date, but News Corp.'s implication could dwarf that in press coverage, if not dollar amounts.
And dollar amounts are a significant consideration. Although News of the World was a small cog in the Murdochs' global media empire, it was still the most profitable individual property in the UK, with a circulation of 2.6 million. It could be determined that the 168-year-old paper gained a competitive advantage through its bribery, scooping competitors and breaking stories thanks to "sources" that turned out to be hacked voicemail accounts.
But there is no consensus on how US prosecutors would evaluate this activity. The FCPA allows for broad interpretation of what is deemed "proceeds" of the bribery. Murdoch's News Corp. could be on the hook for the money and James Murdoch could be charged criminally if it is proved that he knew of the bribery.
The largest FCPA asset recovery* total was an $800 million fine paid by engineering giant Siemens in December 2008.
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