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“Frankly, If You Bring In A Couple Billion Dollars A Year, You Just Keep On Going,” And Other Musings From Former FCPA Prosecutors

listeningin

This Trace International Bribe, Swindle or Steal podcast is a recording of a recent panel discussion between former FCPA prosecutors Charles Duross (DOJ), Nat Edmonds (DOJ) and Richard Grime (SEC).

It is an informative listen on several levels including voluntary disclosure and international cooperation and set forth below are some of the more candid comments from the former FCPA prosecutors.

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Friday Roundup

Roundup

Odebrecht / Braskem settlement amount is significantly trimmed, a form of bribery?, quotable, deficient internal controls, and scrutiny alerts and updates. It’s all here in the Friday roundup.

Odebrecht / Braskem Settlement Amount Significantly Trimmed

There was much false and misleading reporting about the FCPA settlement amount in the December 2016 FCPA enforcement action against Odebrecht / Braskem.

As highlighted in this post, after accounting for various credits and deductions (including for payments to Brazil and Swiss law enforcement agencies and a claimed inability to pay) the net FCPA settlement amount (subject to potential future adjustments) was approximately $420 million. The $420 settlement amount consisted of approximately $260 million in connection with the Odebrecht criminal information and plea agreement; $94.8 million in connection with the Braskem criminal information and plea agreement; and $65 million in connection with the SEC’s related enforcement action against Braskem.

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For-Profit Public Enforcement

Bucket full of money

An article by Margaret Lemos (Duke University School of Law) and Max Minzner (University of New Mexico School of Law) titled For-Profit Public Enforcement in the Harvard Law Review recently caught my eye.  The article does not concern – or even mention – the Foreign Corrupt Practices Act, but the issues discussed in the article are nevertheless FCPA relevant.

Why?

Because it seems the metric by which DOJ FCPA prosecutors judge themselves is by the quantity of enforcement actions brought and not necessarily the quality of those enforcement actions.

For instance, as highlighted in this previous post, when the DOJ’s Assistant Chief of the Criminal Division left the DOJ, the FCPA talking point in the DOJ press release was as follows.

“The Criminal Division has also substantially increased enforcement of the Foreign Corrupt Practices Act (FCPA), convicting three dozen individuals for FCPA-related offenses – a record number – and entering into more than 40 corporate resolutions involving eight of the top 10 largest FCPA penalties in history.”

There was no mention in the DOJ’s press release of the several instances during the individual’s tenure at DOJ in which the DOJ was put to its burden of proof in FCPA enforcement actions and lost.

Likewise, as highlighted here and here, when the DOJ’s FCPA Unit Chief left the DOJ, the main talking point seemed to be as follows.

“Under his leadership, the FCPA Unit resolved more than 40 corporate cases, which include about two-thirds of the top 25 biggest corporate resolutions ever. Those matters resulted in approximately $1.9 billion in monetary penalties and the conviction of more than two dozen business executives and money launderers.”

Again there was no mention in the relevant press releases of the several instances during the individual’s tenure at DOJ in which the DOJ was put to its burden of proof in FCPA enforcement actions and lost.

That FCPA enforcement may be a convenient cash cow for the government was an issue specifically addressed in this prior post. The post profiled various statements to this effect, several from former DOJ and SEC officials, including the following quote from a former Assistant Chief of DOJ FCPA enforcement: “[t]he government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”

In short, the issues discussed in “For-Profit Public Enforcement” may have certain parallels to FCPA enforcement.

The article abstract is as follows.

“This Article investigates an important yet undertheorized phenomenon: financial incentives in public enforcement. Each year, public enforcers assess billions of dollars in penalties and other financial sanctions for violations of state and federal law. Why? If the awards in question were the result of private lawsuits, the answer would be obvious. We expect that private enforcers — the victims of law violations and their fee-seeking attorneys — will attempt to maximize financial recoveries. Record recoveries come as no surprise in private class actions, for example. But dollar signs are harder to explain in the context of public enforcement. Unlike private attorneys who are paid a percentage of the recovery, public enforcers are paid by salary. They have no direct financial stake in successful enforcement efforts. We assume that public enforcers pursue financial awards only for their deterrent value, not for the benefits that such recoveries can bring the enforcement agency itself.

Or do they? Contrary to the conventional wisdom on the division between public and private enforcement, this Article argues that public enforcers often seek large monetary awards for self-interested reasons divorced from the public interest in deterrence. The incentives are strongest when enforcement agencies are permitted to retain all or some of the proceeds of enforcement — an institutional arrangement that is common at the state level and beginning to crop up in federal law. Yet even when public enforcers must turn over their winnings to the general treasury, they may have reputational incentives to focus their efforts on measurable units like dollars earned. Financially motivated public enforcers are likely to behave more like private enforcers than is commonly appreciated: they will undertake more enforcement actions, focus on maximizing financial recoveries rather than securing injunctive relief, and compete with other would-be enforcers for lucrative cases. Those effects will often be undesirable, particularly in circumstances where the risk of overenforcement is high. But financial incentives might provide a valuable spur to action for agencies that currently are performing well below optimal levels. Policymakers recognize as much when they seek to boost private enforcement by promising prevailing plaintiffs supracompensatory damages. We show that financial incentives can serve a similar purpose in the public sphere, offering policymakers an additional tool for calibrating the level of public enforcement.”

In other respects, the article talks about:

“Law enforcement is a big business.”

“[A]gencies seeking to build reputations as effective enforcers will tend to emphasize easily measurable accomplishments rather than more amorphous forms of success.”

“[F]inancial recoveries purport to convey information about the size or importance of the agency’s enforcement program.”

“[H]igh recoveries (either in a single case or in the aggregate) can make an enforcement program appear effective. An agency that is trying to cultivate a reputation as an effective enforcer may therefore find special value in financial awards.”

“[E]nforcement lawyers can be subdivided into two categories: career attorneys seeking a long-term career in the public sector and non-career attorneys who plan for the private sector after a short period of time.”

“Individual [enforcement] attorneys may seek to develop a public reputation for effective enforcement, and emphasizing monetary awards is a straightforward way to do this.  Just as [enforcement] agencies focus on financial rewards because they are easy to measure and easy to compare, individual lawyers may do the same because other measures of their competence are difficult to evaluate.  In other words, agency attorneys may believe that the best sort of ‘winning’ record is one that begins with a dollar sign and ends with a long series of zeroes.  A reputation for strong enforcement is initially valuable internally, but when the lawyer leaves the public sector, it is also useful for attracting clients.”

“[T]here is reason to believe that a strong enforcement program will lead to more job-creation in private firms that defend against the relevant government actions. […] The more robust the enforcement program, the more lucrative are the job prospects for former enforcement attorneys.”

Is The DOJ Picking on Non-U.S. Companies and Individuals?

Today’s post is from David Simon (Foley & Lardner).

*****

The debate over whether the United States should impose its values on the rest of the world through enforcement of the Foreign Corrupt Practices Act (“FCPA”) is over.

Almost everyone now rejects the cultural relativist argument—that there are different business cultures in different parts of the world, and that the United States should respect those differences and refrain from imposing our standards of doing business on U.S. companies operating abroad.  Rather, the rise of anti-corruption legislation, the proliferation of OECD standards, and increased enforcement—not only by the United States, but by many countries enforcing their own anticorruption laws—all show an emerging consensus that corruption of this nature is objectively bad.  The United States should be commended for leading the way on this.

Yet the recent enforcement activity of the Department of Justice[i] (“DOJ”) raises questions as to whether it is enforcing the FCPA in a manner consistent with the statute’s purpose (and the overarching purpose of domestic criminal law).  According to Deputy Assistant Attorney General James Cole, whose remarks are available here, that purpose is U.S.-centric:

“In enacting the FCPA … Congress recognized that foreign bribery had tarnished the image of U.S. businesses, impaired public confidence in the financial integrity of U.S. companies, and had hampered the functioning of markets, resulting in market inefficiencies, market instability, sub-standard products and services, and an unfair playing field.”

True enough, but it is hard to dispute that the focus of FCPA enforcement has to some extent shifted away from U.S. businesses and citizens.  As noted on FCPA Professor, eight of the top ten corporate FCPA settlements have involved non-U.S. businesses.

Likewise, the number of individual FCPA prosecutions against non-U.S. citizens has been increasing.  In recent years, individual criminal prosecutions have been brought against citizens of the Ukraine, Hungary, Slovakia, Switzerland, Venezuela, and Sri Lanka—and some involve very tenuous connections to the United States.

For example, as previously highlighted on this blog, in December 2011 the DOJ charged, among others, former Siemens executive and German national Stephan Signer under the FCPA based on conduct concerning the Argentine prong of the 2008 Siemens enforcement action.  The jurisdictional allegation against Signer was that he caused Siemens to transfer two wires to bank accounts in the United States in furtherance of a scheme to bribe Argentine government officials.[ii]

I do not argue that the FCPA does not permit the DOJ to charge non-U.S. citizens or companies.  Indeed, the 1998 amendments make it clear that Congress intended to give the DOJ that power, providing it with jurisdiction over several categories of non-U.S. entities and individuals.  It should be noted, however, that the DOJ has adopted a markedly broad interpretation of the FCPA’s territorial jurisdiction provisions, resulting in increasingly attenuated connections between the United States and individual defendants like Mr. Signer.  These connections may include merely “placing a telephone call or sending an e-mail, text message, or fax from, to, or through the United States.”[iii]  The legal significance of these increasingly tenuous jurisdictional justifications, previously referred to on FCPA Professor as “de facto extraterritorial jurisdiction,” remains a contentious, and related, issue.

The question I raise here is not whether the DOJ’s policy of enforcement is legal, but whether such a focus (or, at least, the perception of such a focus) on non-U.S. persons and companies is prudent and appropriate.  In describing the principles underlying the jurisdiction to prescribe, the American Law Institute (“ALI”) notes that the United States has “generally refrained from exercising jurisdiction where it would be unreasonable to do so.”[iv]  But “[a]ttempts by some states—notably the United States, to apply their law on the basis of very broad conceptions of territoriality or nationality [has bred] resentment and brought forth conflicting assertions of the rules of international law.”[v]  Indeed.

The concerns I have about this are not confined to FCPA enforcement.  The same trend is apparent in other areas of the law, such as economic sanctions and export controls.  The pattern of enforcement being concentrated against non-U.S. companies is shown just as sharply under those laws, with the recent economic sanctions against such firms as ING Bank ($619 million against Netherlands financial institution), Royal Bank of Scotland ($100 million against UK financial institution), and Credit Suisse ($536 million against Swiss financial institution).  With the U.S. Government reportedly considering the first $10 billion penalty for violations of U.S. economic sanctions laws against BNP Paribas (a French financial institution), French President Francois Hollande reportedly has personally lobbied against what is perceived as an unfair singling out of an EU financial institution for payment of such a large fine.  To the French Government, at least, the inequity of the U.S. Government assessing a fine that surpasses the entire yearly profits of one of the largest French financial institutions is plain.

The pattern of enforcement described above, should it be allowed to continue, sends a message to the rest of the world that the DOJ is mostly interested in big dollar settlements and soft foreign targets.  Is this the message we wish to send to our foreign allies in the fight against corruption?

Although the DOJ’s application of the FCPA (and other laws governing international business conduct)  to prosecute increasing numbers of foreign persons may be legal, and technically “reasonable” at international law, that does not necessarily make it appropriate or advisable.  Rather, these attempts to apply a broad conception of territoriality in pursuit of greater numbers of prosecutions and larger settlements may be more damaging than DOJ perceives.  This has the potential to undermine the U.S. position that anti-corruption is a global issue, and counteracts the progress the U.S. has made in altering its image from that of an overreaching imperialist power to a competent and moderate leader in the creation and enforcement of global anti-corruption norms.

*****

This article in today’s New York Times DealBook discusses many of the same issues highlighted in the above post.


[i] I focus here principally on the DOJ, not the SEC.  The DOJ, of course, is a law enforcement agency charged with enforcing criminal laws.  The SEC is a regulatory agency, and the companies and individuals subject to its jurisdiction essentially opt in by taking advantage of the U.S.’s financial markets.

[ii] Indictment at 40, United States v. Uriel Sharef, et. al., 11CR-1-56 (S.D.N.Y 2011), available at http://www.justice.gov/criminal/fraud/fcpa/cases/sharef-uriel/2011-12-12-siemens-ndictment.pdf.

[iii] See U.S. Dep’t of Justice & U.S. Sec. Exch. Comm’n, A Resource Guide to the U.S. Foreign Corrupt Practices Act, 11 (Nov. 14, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.

[iv] Restatement (Third) of the Foreign Relations Law of the United States, § 403 cmt. a. (1986).

[v] Id. at Chapter One: Jurisdiction to Prescribe, Subchapter A.: Principles of Jurisdiction to Prescribe, Introductory Note.

“They’re Grading Prosecutors On Those Kinds Of Recoveries”

According to this article, at a recent Global Lawyer Forum sponsored by InsideCounsel in Chicago, DLA Piper partner Tara Lee talked about the aggressive nature of U.S. regulators and stated as follows.

“I think, frankly, it comes at least in part from a profit motive.  The Department of Justice, in the past three to six years, has made more money from two categories of enforcement — the FCPA and the False Claims Act — than they have in every kind of criminal fine combined. … They’re grading prosecutors on those kinds of recoveries.”

Regardless of what one thinks of Lee’s comment, one has to at least acknowledge the widely perceived opinion that FCPA enforcement is a government cash cow.  For instance, this prior post collected numerous such statements (many from former DOJ enforcement attorneys).

The perception that FCPA enforcement is a government cash cow is driven by a number of factors including the theories of enforcement advanced in many large enforcement actions.  For instance, this prior post regarding the $398 million Total enforcement action highlighted the following points.

  • The enforcement action was against a French oil and gas company for making improper payments to an Iranian Official through use of an employee of a Swiss private bank and a British Virgin Islands company.
  • The vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 16 to 18 years prior to the 2013 enforcement action).
  • The sole U.S. jurisdictional nexus (a required legal element for an anti-bribery violation since Total is a foreign issuer) was a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.

The perception that FCPA enforcement is a government cash cow is also driven by the undeniable fact that FCPA settlement amounts have come a long way in a short amount of time.  (See here for the prior post).  Indeed, as FCPA practitioners from Gibson Dunn rightly observed: “[a]n unmistakable characteristic of [2013] FCPA enforcement is that the market rate for resolving a corporate FCPA enforcement action spiked precipitously in 2013.”

The perception that FCPA enforcement is a government cash cow is also driven – to a significant extent – by the apparent obsession the DOJ and SEC have with FCPA enforcement statistics.

  • How did the DOJ describe FCPA enforcement under a recent former Assistant Attorney General?  By the numbers (see here).
  • How did another former Assistant Attorney General describe FCPA enforcement in her last speech in that position?  By the numbers (see here).
  • How did the former Chief of the DOJ’s FCPA Unit describe his tenure at the DOJ?  By the numbers (see here).
  • How did current Deputy Attorney General James Cole describe FCPA enforcement in his last FCPA specific speech?  By the numbers (see here).
  • How did current SEC Chair Mary Jo White describe FCPA enforcement in her recent Congressional testimony?  By the numbers (see here).

Returning to the statement that began this post, Lee’s statement has merit and prosecutors and enforcement agencies seem to be grading themselves on quantitative metrics such as the number of enforcement actions and the settlement amounts collected.

However, by focusing on the quantity of FCPA enforcement, the quality of that enforcement is often left unexplored. The simplistic notion advanced by the enforcement agencies (and others) seems to be that more FCPA enforcement is an inherent good regardless of enforcement theories, regardless of resolution vehicles, and regardless of actual outcomes when put to its burden of proof.

This logic is troubling and ought to be rejected.

In a legal system founded on the rule of law, a more meaningful form of government enforcement agency success is prevailing in the context of an adversarial system when put to the burden of proof. As to this form of success, during this new era of FCPA enforcement, the DOJ and SEC have had far less “success” in enforcing the FCPA.  (See here for instance).

(By the way, the InsideCounsel article contains, similar to most recent InsideCounsel articles about the FCPA, false and misleading statistics.  For instance, contrary to the suggestion in the article, between 2009 and 2011 there have not been 162 DOJ and SEC FCPA cases.  In addition, contrary to the suggestion in the article, the SEC did not collect $3.4 billion in FCPA penalties in 2013.)

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