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My Two Cents On The FCPA’s Affirmative Defenses

Students looking for scholarship ideas, should consider the Foreign Corrupt Practices Act.

Why?

There is a good chance that publication of an article will generate coverage and discussion on the blogosphere and elsewhere.

Case in point is Kyle Sheahen’s “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act.” (see here).

For prior coverage of Sheahen’s article see here, here and here.

Sheahen’s article is about the FCPA’s two affirmative defenses – the so-called local law and promotional expense defenses.

Big picture, Sheahen terms these defenses as being “hollow,” “illusory,” and “useless in practice.”

For starters, I respectfully disagree with Sheahen’s statement that “business and businessmen accused of giving bribes to foreign officials have fared poorly in federal courts” as well as the implication that this somehow supports his thesis.

The three FCPA trials cited from 2009 – Frederick Bourke, William Jefferson, and Gerald and Patricia Greene were a mixed bag for the DOJ, not slam-dunk successes.

For starters, the jury found Jefferson not guilty of substantive FCPA anti-bribery violations (see here).

Sure, Bourke was found guilty by a jury of conspiracy to violate the FCPA and the Travel Act (as well as making false statements to the FBI) (see here), yet when the DOJ alleges that one is a key participant of a “massive bribery scheme” yet secures only a 366 day sentence (see here) from a judge who remarks that “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both” – I struggle to put such a case in the decisive “win” category for the DOJ. Plus, Bourke’s case is currently on appeal (see here).

The Green case (see here) would seem to represent the cleanest win for the DOJ even though the sentencing judge expressed concerns whether the Green’s conduct caused any harm in sentencing the couple to six months in prison thereby rejecting the DOJ’s recommended ten year sentence. (See here).

Sheahen’s article was published before the Giffen Gaffe (see here). Giffen aggressively mounted a legal defense and, whether for legal, political or other reasons, the case that began with charges that Giffen made “more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” ended with a one-paragraph superseding information charging a misdemeanor tax violation. Further, back in 2004, Giffen was successful in having FCPA-related criminal charges dismissed when the trial court judge (see here) concluded that the DOJ offered “the slenderest of reeds” to support the collateral criminal charge.

Going back in time …

George McLean won his FCPA case when the Fifth Circuit concluded, see 738 F.2d 655 (5th Cir. 1984) that the FCPA, as it then existed because of the subsequently repealed Eckhardt Amendment, barred prosecution.

Donald Castle and Darrell Lowry (two Canadian “foreign officials”) won their FCPA-related cases, see 741 F.Supp. 116 (N.D. Tex. 1990), when the court dismissed their criminal indictments. The DOJ asserted that even though the officials could not be prosecuted under the FCPA, they could be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA. However, the court declined DOJ’s invitation to extend the reach of the FCPA through the application of the conspiracy statute to Castle and Lowry.

Richard Liebo was acquitted, following a three week jury trial, of several counts including nine counts of violating the FCPA’s anti-bribery provisions and one count of violating the FCPA’s accounting and record keeping provisions. See 923 F.2d 1308 (8th Cir. 1991). He was found guilty of one FCPA count concerning his company’s purchase of honeymoon airline tickets for the cousin and close friend of Captain Ali Tiemogo, the chief of maintenance for the Niger Air Force. In connection with this conviction, the Eighth Circuit found that the district court “clearly abused its discretion in denying Liebo’s motion for a new trial” and remanded for a new trial.

Hans Bodmer didn’t fare too badly either in 2004 when Judge Shira Scheindlin (the same judge in the Bourke case) held that the portion of the criminal indictment “charging Bodmer with conspiracy to violate the FCPA contravenes the constitutional fair notice requirement, and the rule of lenity demands its dismissal.”

Of course, the DOJ has had its fair share of FCPA successes, but it remains a misperception that FCPA defendants have “fare[d] so badly” in FCPA trials as Sheahen, and others, have asserted.

Returning to the substance of Sheahen’s article, he discusses the October 2008 Bourke decision by Judge Scheindlin (see 582 F.Supp.2d 535) – a case of first impression on the FCPA’s local law defense.

Bourke argued that the FCPA’s local law affirmative defense was applicable because, under Azeri law even though the payments were illegal, he was relieved from criminal responsibility when he reported the payments at issue to the President of Azerbaijan.

Judge Scheindlin disagreed, drawing a hard line between payments – the focus of the FCPA’s local law affirmative defense in her mind – and the related issue of whether a person could not be prosecuted in the foreign country because a provision may relieve that person from criminal responsibility.

Judge Scheindlin concluded that “an individual may be prosecuted under the FCPA for a payment that violates foreign law even if the individual is relieved of criminal responsibility for his actions by a provision of the foreign law.”

I agree with Sheahen’s statement that Judge Scheindlin’s decision of first impression narrowed the FCPA’s local law defense “to the point of extinction.”

I would go a step further and argue that Judge Scheindlin’s decision would seem to violate the basic axiom that a statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant.

In other words, courts should not suppose that Congress intended to enact unnecessary statutes and there is a presumption against interpreting a statute in a way that renders it ineffective.

The local law affirmative defense was added to the FCPA in 1988 and we must presume that Congress intended to enact the affirmative defense for some reason.

It was widely assumed by Congress in 1977 (when the FCPA was enacted), and by the Congress that amended the FCPA in 1988 to include the local law defense as well, that no nation’s written law permitted bribery of its officials.

Yet, given Judge Scheindlin’s narrow construction of the local law defense, the decision would appear to render the local-law defense (a statutory term that must have some meaning) inoperative, superfluous and insignificant.

As to the promotional expense defense, I would respectfully disagree with Sheahen’s apparent conclusion that the defense is meaningless just because it has never been successfully invoked by an FCPA defendant at trial.

Because of the “carrots” and “sticks” the DOJ and SEC possess in an FCPA enforcement action, and because of the resolution vehicles typically offered to FCPA defendants to resolve an FCPA enforcement action (such as non and deferred prosecution agreements) there is much about the FCPA that has never been subjected to judicial scrutiny.

That does not mean however that an element or defense not successfully invoked at trial renders that element or defense meaningless or hallow.

Indeed, Sheahen discusses the FCPA Opinion Procedure Release process. Through this mechanism, those subject to the FCPA have gained degrees of comfort from DOJ “no enforcement” opinions that are based on the promotional expense defense.

Although the Opinion Procedure Releases are not precedent, countless others in the legal, business, and compliance communities find comfort in these releases, as well as the statute itself, when analyzing real-world conduct for potential FCPA exposure.

FCPA enforcement is in need of many fixes and indeed the Opinion Procedure Release process is likely not the best way for the DOJ to make its enforcement positions known.

However, these structural flaws in FCPA enforcement, coupled with the typical ways in which FCPA enforcement actions are resolved, necessarily leads to the conclusion that the FCPA’s affirmative defenses are “hollow,” “illusory,” and “useless in practice.”

*****

I provided Sheahen with my draft post so that he could respond and here is what he said.

“Professor Koehler,

Thank you for your thorough analysis. Although DOJ’s trial record in FCPA prosecutions is not a clean sheet, the government has still been substantively successful in almost every FCPA case that has gone to trial. Further, the fact remains that no FCPA defendant has successfully invoked either the local law or the promotional expenses defense in an FCPA enforcement action.

Also, while I agree that the promotional expenses defense provides some guidelines for compliance with the FCPA, neither it nor the local law defense provide a meaningful defense to an enforcement action. Accordingly, Congress must take action to ensure that individual and corporate defendants have the actual ability to raise the affirmative defenses contemplated by the statutory scheme.

Thanks again and all the best,

Kyle Sheahen
sheahen2010@lawnet.ucla.edu

Report Cards

The start of school is just around the corner, but summer is report card time for various groups focused on reducing bribery and corruption.

This post highlights two such report cards: Transparency International’s Annual Progress Report of the OECD Anti-Bribery Convention and The OECD Working Group on Bribery Annual Report.

Transparency International 2010 Progress Report of the OECD Anti-Bribery Convention

On July 28th, Transprancy International (TI) (see here) released its sixth annual Progress Report on Enforcement of the OECD Convention.

“The 2010 report covers 36 of the 38 parties to the Convention, all except Iceland and Luxembourg. It covers enforcement data for the period ending 2009 unless otherwise stated and includes reports on recent case developments through June 2010. Like prior reports, this report is based on information provided by TI experts in each reporting country selected by TI national chapters.”

According to Appendix A of the report, the U.S. experts responding to the TI questionnaire were Lucinda Low (here) and Tom Best (here) of Steptoe & Johnson LLP.

In summary fashion, the report states:

“The increase in the number of countries with active enforcement from four to seven is a very positive development, because active enforcement is considered a substantial deterrent to foreign bribery. With the addition of Denmark, Italy and the United Kingdom, which previously were in the moderate category, there is now active enforcement in countries representing about 30 per cent of world exports, 8 per cent more than in the prior year.”

“The number of countries in the moderate category has changed from 11 to 9 countries, because three countries have moved up to the active category and one country, Argentina have moved up from the lowest category. The risk of prosecution in the nine countries with moderate enforcement – representing about 21 per cent of world exports – is considered an insufficient deterrent. Among this group are G8 members France and Japan.”

“The most disappointing finding is that there are still 20 countries – including G8 member Canada – with little or no enforcement, representing about 15 per cent of world exports. That number has shown little change in the last five years. This is deeply disturbing because companies in these countries will feel little or no constraint about foreign bribery, and many are not even aware of the OECD Convention. Governments in these countries have failed to meet the Convention’s commitment for collective action against foreign bribery.”

The report contains the following conclusions.

Current Levels of Enforcement are too Low to Enable the Convention to Succeed

“With active enforcement in only seven of the 38 parties to the Convention, the Convention’s goal of effectively curbing foreign bribery in international business transactions is still far from being achieved. The current situation is unstable because the Convention is predicated on the collective commitment of all the parties to end foreign bribery. Unless enforcement is sharply increased, existing support could well erode. Danger signals include efforts in some countries to limit the role of investigative magistrates, shorten statutes of limitations and extend immunities from prosecution. The risk of backsliding is particularly acute during a time of recession, when competition for limited orders is intense.”

Cause of Lagging Enforcement: Lack of Political Will

“The principal cause of lagging enforcement is lack of political will. This can take a passive form, such as failure to provide adequate funding and staffing for enforcement. It can also take an active form, through political obstruction of investigations and prosecutions. The lack of political will must be forcefully confronted not only by the Working Group on Bribery but also by the active involvement of the OECD Secretary-General, as well as high-level pressure on the laggards from governments committed to enforcement.”

Although the TI Report probably did not have the U.S. and U.K. in mind when making the above statement, many have questioned whether both the U.S. and U.K. governments lacked the political will to charge BAE, a large defense contractor to both governments, with bribery offenses. The U.S. enforcement action (see here) was not an FCPA enforcement action and the U.K. enforcement action (here) merely concerned a book keeping issue in Tanzania. And of course, TI’s statement about lack of political will was made before the Giffen Gaffe (see here).

Positive developments noted in the TI Report include:

“During the last year prosecutors in the US, Germany and the UK announced a number of settlements of important foreign bribery cases in which the defendants agreed to pay fines amounting to many hundreds of millions of dollars. These settlements demonstrate the ability of prosecutors to resolve cases without interminable litigation. The settlement levels provide a sharp wake-up call to international business regarding the gravity of foreign bribery.”

In seeming recognition of how aggresive enforcement of bribery laws can become a cash cow (see here for more) for the enforcing government, the report then states: “[The settlements] should also make clear to laggard governments that investing in adequate enforcement can have substantial returns.”

Other snippets from the TI Report.

As to the U.K.’s delay of the Bribery Act (see here for more) the report states:

“… it is regrettable that the entry into force of the law has been delayed until April 2011. There should be no further delay. It is also important that the consultation on the publication of official government guidance on compliance will not result in weakening any provision of the law.”

As to the use of alternative resolution vehicles such as non-prosecution and deferred prosecution agreements – a common way corporate FCPA enforcement actions are resolved (see here and here for more) and a model the U.K. SFO seeks to follow – the report contains this recommendation:

“The Working Group should undertake a study on the use of negotiated settlements to resolve foreign bribery cases. There are strong reasons for negotiated settlements, most importantly to avoid the high costs, long delays and unpredictable outcomes of litigation. However, there is concern that these settlements could be questionable deals between prosecutors and politically influential companies. Therefore, procedures should be adopted to make settlement terms public and subject to judicial approval. This should follow a public hearing where representatives of the country where the bribes were paid, competitors and other interested stakeholders such as public interest groups should be given an opportunity to present their views.”

The report also states as follows:

“TI considers that all settlements should be submitted to judicial review independent from the Prosecutor’s Office. This review should include a public hearing with representatives of the country where the bribe was paid, competitiors and civil society organisations before the settlement becomes final and published detailed conclusions.”

In a section of the report discussing current cases and trends, the report notes that some fines and penalties are based on the amount of the bribe while in other cases the fines and penalties are based on the amount of profit or gain from the transaction.

In apparent recognition that many FCPA fines and penalties (even eye-popping ones such as Siemens) still result in the company seemingly emerging from the prosecution with a net profit from the improper activity, the report states:

“TI considers that corporate fines should exceed the amount of profit from the wrongdoing.”

Further, the TI report questions whether the increase in enforcement and the penalties imposed are actually making any difference as it states: “[w]hile the amounts paid by companies are rising steadily in some jurisdictions, the question remains whether there is adequate deterrence.”

Continuing the dialogue on the question of “where should fines and penalties” go (see here and here for more) the report states:

“It would be desirable for the OECD Working Group on Bribery to conduct a study on corporate liability and penalties. TI considers that part of the fines paid or profits reimbursed should be made available for the benefit of the country that suffered from the offence.”

In addition to Transparency International, the OECD itself issued a summer report card.

OECD Working Group on Bribery Annual Report

On June 15th, the OECD Working Group on Bribery issued its annual report (see here).

As stated in the report, “the OECD has been at the forefront of international efforts to combat corruption in business, taking a multi-disciplinary approach, via its Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as well as through its work in the areas of taxation, development aid, and governance.”

The Anti-Bribery Convention (here) has been implemented by 38 countries (see here) and these countries comprise the OECD Working Group on Bribery.

Among recent achievements noted by OECD Secretary General Angel Gurría are:

“Israel—the Working Group’s newest member— […] underwent a series of intense
evaluations and implemented significant anti-bribery legislative changes to the anti-bribery standards expected of candidates for membership of the OECD;” and

“Chile, which recently became a member of the OECD, also passed legislation that holds Chilean companies liable for bribing foreign public officials when doing business abroad;”.

Secretary General Gurria also noted that “in 2009, Russia officially asked to join the Anti-Bribery Convention as part of its OECD membership drive” and that the OECD is also deepening relations on anti-bribery issues with China, India, Indonesia and Thailand, and hopes to bring other countries on board.”

As the report notes, 2009 “marked the completion of ten years of monitoring Parties’ implementation and enforcement of the Anti-Bribery Convention.”

This is the first year that official data on enforcement efforts by Parties
to the Anti-Bribery Convention is publicly available. The data (see here) is from “Decisions on Foreign Bribery Cases from 1999 to December 2009.”

According to the report, “the data has been compiled and published by the OECD Secretariat on the basis of statistics, data and information provided by the Parties to Convention in order to provide a realistic picture of the level of enforcement in the jurisdiction of each of the Parties. However, the responsibility for the provision and accuracy of information rests solely with the individual Parties.”

Further, in a seeming reference to U.S. enforcement of the FCPA and the frequency by which FCPA enforcement actions are resolved through non-prosecution agreements, the report notes that the data includes information “provided on a voluntary basis by certain countries concerning the number of foreign bribery cases that have been resolved through an agreement between the law enforcement authorities and the accused person or entity, with or without court approval.”

Interested in how many individuals and business entities have been criminally sanctioned by OECD signatory nations for bribery? Curious as to how many investigations are currently pending by signatory nations? Want to compare Hungary to Iceland or the U.S. to Germany?

It is all possible with OECD data.

Mounties Lay Corruption Charges

The U.S. is not the only country with an anti-bribery law on its books.

In this guest post, Mark Morrison (here) and Michael Dixon (here) of Blake, Cassels & Graydon LLP discuss a recent enforcement action brought under Canada’s Corruption of Foreign Public Officials Act.

*****

The Royal Canadian Mounted Police (“RCMP”) recently announced that they have laid charges under the Canadian equivalent of the FCPA, the Corruption of Foreign Public Officials Act (“CFPOA”), against a former employee of an Ottawa based technology company in relation to alleged overseas bribery. Few details have been released at this time, but it appears that the charges relate to alleged bribes paid to a foreign government official in an effort to secure a multi-million dollar contract. At this point in time, no charges have been laid against the company or other individuals, but comments by the RCMP suggest that further charges may be pending.

This is the second charge laid to date under CFPOA. The first related to the conduct of a United States Immigration Officer who was hired as a consultant by a Canadian corporation. In 2005, that corporation pled guilty and was sentenced to a fine of $25,000. A number of other bribery cases in Canada have also dealt with the corruption of domestic officials, but these have proceeded under the provisions of the Canadian Criminal Code.

What is interesting about this case to those of us who practice in the area is that we have been expecting something of this nature for some time as Canada has been under significant pressure from the OECD to meet its international anti-corruption enforcement obligations. In response to this pressure, the RCMP has established a special unit solely dedicated to investigating international bribery. The unit, with divisions in Ottawa and Calgary, has been actively engaged in several investigations, however, this is the first charge they have laid. Further charges are anticipated as other investigations progress.

Another interesting point raised by this case is the extent to which the Canadian courts are willing to apply the CFPOA to the extraterritorial actions of Canadian citizens. While the Canadian government previously introduced a Bill to amend the CFPOA to clarify its application to Canadians acting outside Canada, this Bill was not passed into law. In the absence of this Bill, the Canadian test for jurisdiction, as determined by the case law, is different than that employed in the US. Historically, only cases with a “real and substantial” link to Canada will be considered as falling within the jurisdiction of the Canadian courts. Accordingly, the Canadian test requires that a portion of the illegal activity occur within Canada or a real connection to Canada. While we do not know to what extent the alleged corrupt activity occurred in Canada, this case appears to represent the first opportunity for the Canadian courts to clarify the reach of the CFPOA to Canadian citizens acting abroad.

A Canadian Corruption Scandal?

A coalition of NGOs recently requested that Blackfire Exploration, a privately owned Canadian exploration and mining company headquartered in Calgary (here), be investigated for potential violations of Canada’s Corruption of Foreign Public Officials Act (CFPOA) based on alleged improper payments made to the Mayor of Chicomueselo in the State of Chiapas, Mexico.

For more on the NGOs claims, including its letter to the Royal Canadian Mounted Police and documents the NGOs claim support its allegations, see here.

Among other things, the NGOs state in the letter that Blackfire “provided the mayor with […] benefits including airline tickets for himself, his family and his associates. These payments and other benefits were apparently made in response to the Mayor’s demands for ‘favours'”. According to this report in The Calgary Herald, Blackfire “decided to stop the ‘ridiculous propositions’ after the mayor asked for Blackfire to set up a sexual affair with a Playboy model.”

For more about the CFPOA, see here for a prior post.

North of the Border

We point the compass north in what has become “comparative law week” here at the blog and take a look at Canada’s “FCPA-like” domestic statute – the Corruption of Foreign Public Officials Act (“CFPOA”).

Saddle up, the Royal Canadian Mounted Police “have established a special unit dedicated to investigating international bribery and enforcing the CFPOA” according to a Canadian law firm which recently released a bulletin titled “Canada’s Corruption of Foreign Public Officials Act: What You Need to Know and Why” (see here).

The bulletin is an informative read and “provides an introduction to the CFPOA, contrasts it with the anti-bribery provisions of the FCPA, and provides a brief update on recent developments in Canada.”

According to the bulletin, an amendment to CFPOA was recently introduced to provide for extraterritorial jurisdiction much like 78dd-1(g) and 78dd-2(i) provide for U.S. issuers and domestic concerns.

The authors note that “[w]hile the CFPOA has been in force for a decade, it is only recently that it has been the subject of minimal enforcement efforts by Canadian authorities.” However, the authors predict, “this is likely to change in the future.”

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