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“FCPA Sanctions: Too Big To Debar?”

Debarment (or lack thereof) is a periodic topic on this site.

Previously, I covered “Siemens … The Year After” (here), a post that highlighted in the year after resolution of the Siemens record-setting December 2008 FCPA matter, the U.S. government continued to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”

In September 2010, I highlighted (here) the FBI’s $40 million contract with BAE – months after the FBI participated in resolution of the $400 million FCPA related enforcement action against the company.

In my November 2010 testimony (here) before the U.S. Senate, I stated as follows. “In order for the DOJ’s deterrence message to be completely heard and understood egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation should be followed with debarment proceedings against the offender.”

This testimony prompted then Senator Arlen Specter (who chaired the hearing) to ask me several follow-up questions for the record relating to debarment. (See here for the Q&A’s). Senator Christopher Coons (who also participated in the November 2010 hearing) also asked debarment follow-up questions of the DOJ.

As highlighted last week (here), the DOJ is opposed to a “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.” As noted in the prior post, the DOJ’s responses seemed anchored in self-interest in that such a remedy would lessen its FCPA caseload, would make its job more difficult, and would take away it flexibility and leverage and resolving FCPA enforcement actions.

Enter Dru Stevenson (Professor of Law, South Texas College of Law – here and a past contributor to the site) and Nick Wagoner (a law student at South Texas College of Law).

Stevenson and Wagoner recently released a yet to be published article titled “FCPA Sanctions: Too Big to Debar?” (See here).

The authors (who can be reached at dstevenson@stcl.edu and nicholas.wagoner@gmail.com) provide this article summary.

“Despite the dramatic escalation in corporate fines and imprisonment imposed under the FCPA in recent years, a particularly lethal sanction for combating foreign corruption remains unused—suspension or debarment of prosecuted entities from future contracts with the U.S. Many of the firms caught bribing foreign officials have extensive contracts with a number of domestic federal agencies; meaning debarment may be a particularly devastating penalty both for the government contractor and the agency it transacts business with.

This begs the question: are certain private contractors too big to debar? As this Article demonstrates, it appears so. Certain federal agencies have become highly dependent on a handful of private firms responsible for satisfying the vast majority of government contracts. Because of the potential “collateral consequences” that may result from the collapse of a debarred contractor, these firms have enjoyed bailouts from agency officials who refuse to sanction corrupt practices through suspension or debarment. If ridding foreign markets of corruption truly is a top priority of the U.S., it seems both unfair and imprudent for federal agencies to continue awarding lucrative, multibillion-dollar contracts to firms recently prosecuted for fraudulently obtaining such contracts overseas.

This situation leads to the jaded viewpoint that paying fines when caught bribing foreign officials has “simply become a cost of doing business.” To help illuminate these concerns and lend support to the thesis, this Article examines the third largest FCPA-related enforcement actions to date: the BAE Systems case. On March 1, 2010, BAE Systems paid approximately $400 million in fines for its corrupt practices abroad. In the 365 days that followed however, BAE was awarded U.S. contracts in excess of $58 billion dollars. The U.S.’s refusal to debar BAE because of the risk of “collateral consequences” provides a case study of the benefits and drawbacks to deterring foreign corruption through suspension and debarment. This Article concludes that the U.S. must begin to diversify its portfolio of federal contractors so that prosecutors may leverage the legitimate threat of suspension and debarment to more effectively deter foreign corruption.”

A Conversation with Richard Alderman Regarding BAE

In October 2010, I published (here) a detailed Q&A with Richard Alderman (Director of the U.K. Serious Fraud Office).

Given that the BAE matter was still pending in the U.K. courts, Mr. Alderman declined to answer BAE related questions.

In February, I re-submitted my BAE questions (along with a few additional questions relating to the December 2010 U.K. resolution of the BAE matter – see here for the prior post) to Mr. Alderman.

Our Q&A can be found here.

Publication of Mr. Alderman’s BAE-specific responses are timely given recent developments regarding BAE.

WikiLeaks recently published (here) a cable detailing certain information regarding termination of the U.K. inquiry regarding BAE and its relationship with certain Saudi officials, including in connection with the al-Yamamah contract.

Even though the cable adds little to what is already in the public domain regarding this matter (see here for the April 2009 PBS Frontline documentary Black Money – including interviews with several of the individuals referenced in the cable), the WikiLeaks cable has generated significant interest and has prompted a senior MP, Sir Menzies Campbell, to call for a Commons investigation.

The U.K. Telegraph (here) quotes Campbell as follows:

“This leak tells us how strong a case was available. If the information in this document had been before Parliament and the British public, there is no way that the Labour government could have influenced the termination of the investigation. The particular issue which will cause a great deal of annoyance is the fact there was prima facie evidence that a government department had been subjected to fraud. If prosecution is no longer possible, it is open to the Commons’ business innovation and skills committee to conduct a full investigation.”

For additional coverage, see here from Sue Reisinger (Corporate Counsel) and here from Samuel Rubenfeld (Wall Street Journal Corruption Currents).

Returning to my Q&A with Mr. Alderman, the following topics, among others, are explored:

(i) how the U.K. law on double jeopardy significantly affected the SFO’s investigation of BAE and how the “current system [in the U.K.] for dealing with parallel criminal investigations conducted in a number of different countries does not work effectively and needs change;”

(ii) whether the U.K. government was faithful to its OECD obligations in its handling of the BAE matter;

(iii) criticism of the SFO-BAE plea agreement by the U.K. sentencing judge; and

(iv) “shortcomings” in the U.K. system and how Mr. Alderman would like a system that “is far more transparent […] that commands public confidence, together with a much stronger role for the judiciary.”

One Year Since The FCPA’s Darkest Day

One year ago today, the DOJ filed a criminal information (here) against BAE Systems plc.

The first paragraph of the charging document stated that BAE was “the largest defense contractor in Europe and the fifth largest in the United States as measured by sales.”

The information alleged that BAE served as the “prime contractor to the U.K. government following the conclusion of a Formal Understanding between the U.K. and the Kingdom of Saudi Arabia (“KSA”)” in which BAE sold several Tornado and Hawk aircraft, “along with other military hardware, training and services,” to the U.K. government, which sold the material and services to the Saudi government. The information refers to these frequent arrangements as the “KSA Fighter Deals.” In connection with these deals, the information alleges that “BAE provided substantial benefits to one KSA public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.”

According to the indictment, BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.” For instance, the information alleges that BAE “provided support services to [the] KSA Official while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The information alleges that a single BAE employee during one year submitted over $5 million in invoices for benefits provided to the KSA Official.

Yet, BAE was not charged with violating the FCPA.

Rather, BAE was charged with one count of conspiracy for “making certain false, inaccurate and incomplete statements to the U.S. government and failing to honor certain undertakings given to the U.S. government, thereby defrauding the United States …”. Among the false statements BAE made to the U.S. government was its commitment to not knowingly violate the FCPA.

365 days ago I wrote (here) as follows:

“Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today. The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”

Interesting twists and turns followed.

One month later (see here), BAE announced yesterday that Michael Chertoff, President Bush’s former Secretary of Homeland Security, joined its board. Since 2005, BAE has received over $200 million in Department of Homeland Security contracts.

September turned out to a strange month.

The DOJ blessed BAE’s monitor, a person per the plea agreement that shall have “sufficient independence from [BAE] to ensure effective and impartial performance of the monitor’s duties.”

Yet, the monitor blessed by the DOJ was a lawyer in a U.K. law firm that represented BAE and a law firm that represented the Saudi official who was the alleged recipient of the improper payments given rise to the enforcement action that required the monitor in the first place. (See here).

As Bruce Carton, writing for Compliance Week noted (here), “perception-wise, at least, I would think that a monitor who is not employed by a law firm that has multiple clients involved in the underlying alleged conduct would be a far ‘cleaner’ choice.”

Then a few weeks later (see here) the FBI, the same agency that assisted in the investigation of BAE’s conduct giving rise to the February 2010 enforcement action, awarded a $40 million information security contract to a BAE entity. This contract was merely the most noteworthy of the millions of dollars in government contracts BAE entities have received in the last 365 days.

Every time I hear the DOJ say that bribery “will not be tolerated,” that it will hold “accountable” those who corrupt foreign officials, that it will “vigorously pursue violations of the FCPA, and that it will apply a “consistent, principled approach” in prosecuting cases … I think of the FCPA’s darkest day and its aftermath.

Picking and Choosing?

The sentencing memos in the Ousama Naaman matter are interesting reads. Naaman’s memo (here), submitted by Abbe Lowell of McDermott Will & Emery (here), provides a glimpse into cooperation by an individual FCPA defendant.

The DOJ’s memo (here), while requesting a downward departure, details how Naaman’s cooperation was not great at all and how Naaman is seemingly contesting various facts and issues he agreed to in pleading guilty.

The DOJ seeks a recommended sentence of 90 months (7.5 years) which would result in 79 months of additional incarceration given that Naaman has already 11 months of time served.

As previously reported (here), Naaman’s sentencing has been delayed until April 18th.

One aspect of the DOJ’s sentencing memo I found interesting is where the DOJ warns the judge that a “minimal sentence could not only possible be construed as a violation of U.S. treaty obligations […] but could do much to undermine the efforts by the United States Departments of Commerce and State to educate U.S. businesses about the harm caused by and risk of engaging in transnational bribery.” (See pgs. 34-36).

The treaty reference is to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (see here) and the DOJ specifically cites Art. 3 Sec. 1 – “The bribery of a foreign public official shall be punishable by effective, proportionate and dissuasive criminal penalties. The range of penalties shall be comparable to that applicable to the bribery of the Party’s own public officials.”

Is the DOJ picking and choosing which articles of the OECD Convention it wants to abide by?

Article 5 of the same OECD Convention, under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Are we to believe that the Giffen prosecution (see here for prior posts) was not influenced by considerations on the “potential effect upon relations with another state.”?

Are we to believe that the BAE prosecution and the lack of FCPA charges (see here for the prior post) was not influenced by “considerations of national economic interest” or the “identity of the natural or legal persons involved.”

It would seem that every time the DOJ specifically states in a sentencing memo (i.e. Siemens, BAE, Daimler, etc.) that, in deciding how to resolve a case, it considered the collateral consequences – including the risk of debarment and exclusion from government contracts – that prosecution of the offense is being “influenced by considerations of national economic interest” or the “identity of the natural or legal persons involved.”

In an effort to avoid yet another rejection of its FCPA sentencing recommendation, the DOJ is now warning a judge that a “minimal sentence” could be “construed as a violation of U.S. treaty obligations.”

In doing so, is the DOJ picking and choosing which articles of the OECD Convention it will abide by?

Senate Hearing Follow-Up

On November 30, 2010, the Subcommittee on Crime and Drugs of the Senate Judiciary Committee held a hearing “Examining Enforcement of the Foreign Corrupt Practices Act.” (See here).

During the hearing, Senator Specter asked if I “would be willing to give [the committee] a hand” as to certain issues.

Shortly after the hearing, I received and responsed to five follow-up questions from Senator Specter for the hearing record. The questions related to the Siemens and BAE enforcement actions; debarment issues; and what I termed “bribery, yet no bribery” in my “Facade of FCPA Enforcement” article and my prepared statement. (see here and here).

With the permission of the Senate Judiciary Committee, I provide the responses here.

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