Originally published in The D&O Diary by Kevin M. LaCroix.
The US Department of Justice’s blockbuster announcement in late May that US prosecutors have indicted 14 defendants on corruption charges involving activities of the International Federation of Football (FIFA) and related regional member organizations captured news headlines around the world. The story has continued to dominate the news, as new details about the scandal have continued to emerge. But while the press coverage has been comprehensive, it has not always been entirely precise. Among other things, contrary to the suggestion in many domestic US press reports, the DoJ’s massive criminal indictment does not include any charges under the Foreign Corrupt Practices Act (FCPA). However, at least according to some commentators, based on the allegations made to date, certain companies could find themselves facing FCPA-related scrutiny.
The Department of Justice’s May 27, 2015, press release concerning the indictment can be found here. The government’s 161-page indictment itself can be found here. The Wall Street Journal’s May 28, 2015, front page article describing the allegations in the indictment and related government court filings can be found here.
Part of the confusion about the possible involvement of FCPA-related allegations has to do with the fact that the core misconduct alleged is the making of improper payments to FIFA officials by representatives of sports marketing companies. According to the DoJ’s press release, the criminal defendants are alleged to have “systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.”
But though the FIFA corruption-related indictment includes improper payment allegations, the criminal action is not a FCPA prosecution, as the Southern Illinois Law School Professor Mike Koehler points out in a June 1, 2015, post on his FCPA Professor blog (here). Rather, as the DoJ summarized in its press release about the indictment, the criminal action involves charges of racketeering, wire fraud and money laundering conspiracies. Some of the defendants were charged with obstruction of justice and tax evasion.
As Professor Koehler notes, the FCPA does not apply to every type of bribe. The FCPA’s anti-bribery provisions apply only to bribe payors and not bribe recipients. In addition, in order for there to be an offense within the ambit of the FCPA, the improper payment must have been made (or attempted to be made) to a “foreign official.” The FIFA officers involved do not, according to Koehler, appear to meet the statute’s definition of foreign official.
While the prosecutors are not relying on the FCPA, they [are] relying a weapon that if they are able to use successfully here could broaden the US authorities’ power to pursue corruption claims globally. As Wayne State Law Professor Peter Henning discusses in a June 1, 2015, post on his White Collar Watch blog on the New York Times website (here), the US prosecutors’ indictment, made largely in reliance on the Racketeering Influenced and Corrupt Organizations (RICO) Act, will test the extent to which the US law can be applied to conduct much of which took place outside of the US.
RICO, according to Professor Henning, gives the prosecutors “the firepower to bring all the defendants together in a single case by asserting that there was a pattern of rampant corruption tying the defendants together into a larger scheme.” The prosecutors are essentially alleging that the indicted individuals were using FIFA as a criminal enterprise.
As Professor Henning notes, the lower US courts have struggled since the US Supreme Court issued its 2010 decision in Morrison v. National Australia Bank to determine whether or not Congress intended RICO to apply extraterritorially. The criminal defendants will likely challenge the US authorities’ ability to rely on RICO. As Henning notes, “If RICO can be added to a case involving multiple defendants to claim that they engaged in a pattern of misconduct, then the Justice Department will indeed have a very big stick to attack corruption almost anywhere.”
And even though the allegations thus far may not support FCPA-related allegations, the conduct alleged could, Professor Koehler notes, “result in FCPA scrutiny for certain companies.”
In particular, the government’s indictment includes allegations of bribery involving an unnamed US sportswear company. According to the Wall Street Journal, the company referred to in these “barely veiled references” is Nike Inc. Nike is not named in the indictment and neither it nor any of its executives have been charged with wrongdoing. However, as the Wall Street Journal detailed in a June 4, 2015, front page article (here), the indictment and related charging documents allege that up to $30 million from the sponsorship pact the clothing company signed in 1996 with the Brazilian soccer federation was paid through a side deal between the company and a middleman. The middleman used part of that money to pay bribes, according to the indictment. Jose Hawill, the owner of the middleman, Traffic Brazil, has admitted to crimes including money laundering, fraud and extortion.
These allegations relating to Nike, as more fully detailed in the FCPA Professor blog post linked above, could, according to Professor Koehler, “potentially implicate the FCPA’s books and records and internal controls provisions.”
These allegations not only, according to the Journal, “cast a long shadow” over Nike, but they also raise questions–rightly or wrongly–about other sponsorship companies. Let me emphasize here that insofar as I know, there has been no suggestion whatsoever that any other sponsorship companies have been involved in any misconduct. Nevertheless, as the Journal put it, the allegations in the FIFA scandal are “a big headache” for the several companies that have in recent years paid millions of dollars for marketing rights at the FIFA-sponsored soccer events. According to the Journal, six companies–Adidas, Coca-Cola, Emirates, Hyundai, Sony and Visa–paid nearly $190 million to FIFA to be official marketing sponsors for the 2014 World Cup. A second tier of sponsors paid an additional $171 million in connection with the World Cup. A May 28, 2015, Business Insider article detailed in the sponsors reactions to the news of the scandal can be found here.
There are yet other firms that have found themselves unfortunately associated with the unfolding FIFA scandal, including in particular the banks that are alleged to have funneled the cash associated with the improper payments. A detailed section of the indictment captioned “The Centrality of the US Financial System” states that the “the defendants and their co-conspirators relied heavily on the United States financial system in connection with their activities,” adding that “this reliance was significant and sustained and was one of the central methods and means through which they promoted and concealed their schemes.”
According to the indictment, bribes ranging in the millions of dollars allegedly found their way between accounts at Citibank, JPMorgan, HSBC, Barclays and other banks. According [to] statements of the US Attorney for the Eastern District of New York, where the indictment was filed, as quoted in a May 28, 2015, International Business Times article (here), the banks are being probed as part of the continuing investigation, adding that “It’s too early to say whether there is any problematic behavior, but it will be part of our investigation.” According to a May 28, 2015, Daily Mail article about the allegations involving the banking institutions (here), Britain’s Serious Fraud Office is looking into whether any of the alleged corruption took place on British soil or involved any UK firms or individuals.
Another organization that has found itself associated with the unfolding FIFA scandal is KPMG, the global accounting and auditing firm. KPMG acted as FIFA’s auditor. FIFA also audits a number of the regional member organizations that operate under FIFA’s umbrella. According to an interesting June 5, 2015, Marketwatch article entitled “FIFA Auditor KPMG Totally Missed the Soccer Scandal” (here), by Francine McKenna, the author of the re: The Auditors blog (here), KPMG also prepares an audited summary at the end of each of the four-year World Cup cycles. In addition KPMG represented both the Russian and the Qatari organizing committees (although Qatar switched to E&Y in 2011). McKenna’s article quotes several commentators as stating, among other things, that KPMG should have caught and called out the illegal activities. A June 3, 2015, CFO.com article (here) raises many of the same questions concerning KPMG.
While many observers are shocked by the wrongdoing alleged in the FIFA scandal, others have been more outraged by the prosecution itself. For example, in a statement on the Kremlin website, Russian President Vladimir Putin charged that the criminal allegations are part of a US conspiracy for world dominion; accused the US of “persecution;” and asserted that criminal prosecution was “just one more brazen attempt [by the US] to spread its jurisdiction to other states.” Putin also asserted with respect to the individual defendants named in the indictment that “aren’t US citizens, and if anything happened, it didn’t happen on the territory of the US.”
However, as Professor Koehler notes, that while the indictment does refer to conduct outside the US, much of the conduct is also alleged to have taken place inside the US or to involve US-affiliated individuals and entities:
As to the core alleged bribery scheme, three of the defendants are US citizens; various of the regional soccer associations implicated have offices in the US; several of the intermediate sports marketing companies have headquarters, offices or affiliates in the US; and the indictment contains several allegations concerning use of US-based bank accounts, phone calls from the US; and in-person meetings in the US in furtherance of the alleged bribery scheme.
One might argue not only that Putin has challenged the criminal prosecution out of concern for where it might lead with respect to the 2018 World Cup, now scheduled to take place in Russia, but also that he clearly prefers a world in which bribes can be paid and received with impunity and without scrutiny.
One question I have received over the past few days has to do with what the potential D&O insurance implications might be from these events. The short answer, without further information about what D&O insurance protection the various organizations might carry (if any), is that it is just hard to tell. A typical domestic US D&O insurance policy will include within the definition of a covered “Claim” the initiation of a criminal action following indictment. However, the 14 individuals who were named in the recent indictment represented a variety of different organizations and institutions, only some of which are domiciled in the US.
Nine of the indicted individuals are current or former officers or directors of FIFA or CONCACAF, the regional confederation for North America, South America, and the Caribbean. Several of the individuals were officers or directors of both FIFA and CONCACAF. FIFA is an international body and entity registered under Swiss law and headquartered in Zurich. CONCACAF is incorporated in Nassau, Bahamas, with its current headquarters location in Miami, Florida. (Before 2012, it was headquartered in New York.) Because any D&O insurance policy FIFA might carry likely was issued in Switzerland, it is a little more difficult for me to assess what its terms might provide. Any separate coverage CONCACAF might carry likely would have been issued in the US. In any event, a challenging issue that will face those who were officers or directors of both FIFA and CONCACAF, is which policy (if any) should respond to the allegations that have been made against them.
In addition to the nine current or former FIFA or CONCACAF officials, the indictment also named five other individuals, four who were employed by sports marketing firms located in Argentina, Brazil and the US, while a fifth individual was employed by broadcasting-related firms. These individuals will have to look to their respective corporate employer’s D&O insurance policies (if any). The extent of protection available to these individuals may well depend on where the policies were issued, as terms and conditions often vary by country. Typically, however, private company D&O insurance policies include the initiation of a criminal action by an indictment within the definition of a covered Claim.
All of the individual defendants are alleged to have engaged in intentional criminal misconduct. The typical D&O policy will contain an exclusion precluding coverage for criminal or fraudulent misconduct. However, most modern D&O policies will provide that the precluded conduct must be established by an “adjudication” in order for the exclusion to be triggered. As long as the allegations are merely alleged but unproven, the exclusion will not be triggered. However, a conviction or even a guilty plea would likely trigger the exclusion.
As a result, all of these individuals will face the potential problem that if they are convicted (or even if they plead guilty), their respective D&O insurers would, depending on the nature of the charge for which they were convicted, likely have the right to seek recoupment from them of any amounts the insurers have paid in their defense (as I discussed in a recent post, here). In that regard, it is worth noting that in addition to the 14 individuals who were named as defendants in the recent indictment, the DoJ’s press release also refers to four individuals and two entities that between 2013 and 2015 each pled guilty [to] charges presented against them in a criminal information. There is no way to tell whether these individuals, affiliated with FIFA, CONCACAF and sports marketing firms, sought to have their respective organizations’ carriers pay for their criminal defenses. To the extent the carriers did pay any amount, and to the extent the criminal pleas triggered any potentially applicable policy exclusions, the carriers may have the right to seek to recoup those amounts.
A more interesting question from a D&O insurance standpoint will be whether or not there will be any follow-on civil litigation. Because FIFA and CONCACAF are themselves membership organizations rather than commercial stock corporations, it is not immediately apparent who the potential claimants might be (except perhaps their respective affiliated membership organizations). The possibility of either criminal proceedings or civil litigation involving the various sponsors, banks and accounting firms who have been drawn into this scandal presents a different set of issues. While the possibility of these firms getting drawn into the legal proceedings at this point seems unlikely, the possibility at least raises a D&O insurance underwriting issue for the firms in question.
I will say this, that while the allegations in the US indictment do not relate directly to the selection of World Cup sites for 2018 and 2022, and while much of the investigation has yet to play out (including in particular the ongoing investigation in Switzerland of the site selections for the 2018 and 2022 World Cups), if you wanted an example of how a corrupt process can produce distorted results, you wouldn’t need to look much further than the selection of Qatar as the site for the 2022 cup. Almost from the moment it happened, the Qatar site selection has been mired in controversy owing (among many other things) to questions about the suitability of the site for the event. In particular, the sheer impossibility of holding the event in Qatar during the summer months has caused innumerable problems, as a result of which the event has now been shifted from its traditional June and July time frame to a mid-November to mid-December time frame – which will of course wreak havoc with the schedule of most of the domestic soccer leagues.
This is all too bad, because as the 2014 event in Brazil showed, the World Cup is one of the world’s great spectacles. As a soccer fan, I find all of this news and controversy truly dismaying.
Kevin M. LaCroix is an attorney and executive vice president, RT ProExec, a division of R-T Specialty. RT ProExec is an insurance intermediary focused exclusively on management liability issues.
Kevin has been involved in directors’ and officers’ liability insurance for nearly 30 years. He began his career as a coverage attorney and partner at the Washington, D.C law firm of Ross, Dixon and Bell. More recently, Kevin served as President of Genesis Professional Liability Managers, a D&O underwriter and part of the Berkshire Hathaway group of companies.
