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Clarifying Comments

When I launched this blog in July 2009, part of my mission was to “explore the more analytical ‘why’ questions increasingly present in this current era of aggressive FCPA enforcement” and to “foster a forum for critical analysis and discussion of the FCPA (and related topics) among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons (see here for the complete mission statement).

From time to time, I am in contact with journalists who are interested in learning more about the FCPA, FCPA enforcement, and the issues explored in this blog.

I enjoy these exchanges, including the public service component of assisting (mostly non-lawyer) journalists better understand the FCPA and FCPA enforcement issues.

It is also gratifying to have one’s ideas and scholarship covered by various outlets.

However, from time to time, one’s ideas and opinions can be taken a bit out of context and that is, I believe, what occurred in the Corporate Crime Reporter’s (“CCR”) recent piece (see here).

Thus, the purpose of this post is to provide important clarifying comments – some of which appear in the more “complete” version of the interview in the print edition of CCR.

The CCR piece suggests that I am “constantly butting heads with FCPA Inc.” I don’t believe this is accurate. I have friends working at law firms who have an FCPA practice and through this blog, I have come to know many other FCPA practitioners, some of whom have accepted my invitation to guest post in this space. Other FCPA practitioners have told me “thanks for the very helpful blog … [it] goes a long way toward knitting together the FCPA and anti-corruption bar.”

In speaking of “FCPA, Inc.” I am speaking of an issue previously covered by other news outlets, including the Washington Post (see here). Among other things, the Post pieces notes that “FCPA business is booming, a welcome growth area for Washington law offices just as work on mergers and securities offerings has begun to wane.” The Post piece note as well that also “sharing in the bonanza [are] accounting firms, forensic computer specialists and a growing army of compliance consultants.” The Post piece concludes with this “… don’t think law firms aren’t playing off those fears by aggressively marketing their services as investigators, risk mitigators and compliance counselors” and the article notes that “the result is [a] sudden flood of labor-intensive legal work for both partners and associates, particularly in the local offices of big international firms.”

To suggest, as the CCR piece does, that my position is that the DOJ’s enforcement of the FCPA “is all a facade” is not true. The author of the CCR piece has a copy of my draft article titled “The Facade of FCPA Enforcement” which clearly states on page 1 that “This article does not argue, or even suggest, that every FCPA enforcement action is unwarranted or that no company or individual has never violated the FCPA. Rather, this article demonstrates that a significant majority of recent FCPA enforcement actions are a façade and argues that addressing the façade and subjecting FCPA enforcement actions to judicial scrutiny is in the public interest and of vital importance to those subject to the FCPA as well as the broader marketplace.” When presenting my paper at Georgetown Law School on March 22nd, I also made these clarifying remarks.

The CCR article discusses my contrarian position regarding Mark Mendelsohn’s defense of the Siemens matter and my follow up “point-counterpoint” exchange with Billy Jacobson that I included on my blog with his written permission (see here and here). What was a respectful exchange and critique has been recast in a way that may leave the appearance that I was questioning the integrity of these individuals. Do I disagree with the legal and policy positions of these current and former DOJ officials – often times yes. Am I accusing them of any actual improper conduct – most assuredly no.

Last week the Wall Street Journal ran a piece titled “SEC Lawyer One Day, Opponent the Next” (see here). Among other things, this article noted that “Iowa Sen. Charles Grassley, a Republican who has criticized the SEC’s revolving door, says the commission could include more-stringent limitations than the law requires in employees’ contacts, but more disclosure would help, too.”

In talking about the undeniable fact that most DOJ FCPA enforcement officials have big law firm FCPA experience and that most leading FCPA practitioners have DOJ or SEC FCPA enforcement experience, I am merely extending the WSJ’s SEC piece to the DOJ in the FCPA context.

I continue to believe, like many others, that such dynamics can raise red flags and have the potential for conflicts of interest. In a similar vein, my December 2009 post titled “Voluntary Disclosures and Role of FCPA Counsel” talks about potential conflicts of interest present in representing corporate clients in an FCPA enforcement investigation or action. (That post bolds the word potential at least 15 times).

Finally, I was clear in my more complete comments to CCR that I was raising issues of potential conflicts of interest and potential red flags. Left out of the CCR web article are my significant clarifying comments that I am not accusing anyone of anything, but rather raising, as others have, significant public policy concerns that, as evidenced by the WSJ article, are being raised and debated at the highest levels of government as well.

Polish Up The Resume

Do you know a thing or two about the FCPA?

Does foreign bribery enforcement policy interest you?

Do you like to design and conduct FCPA training sessions?

Do you like to publicly speak on FCPA issues?

If you answered yes to these questions, the DOJ has a job for you!

Title – Deputy Chief, Fraud Section – FCPA.

The current DOJ Deputy Chief, Fraud Section – FCPA is Mark Mendelsohn. His pending departure has been discussed and confirmed for some time now.

Last Friday, DOJ posted this job opening.

Looking for an extra perk? You will be covered by this, and other, blogs!

Africa Sting – The Lawyers

Christopher Matthews over at Main Justice has a thorough piece (here) about the lawyers representing the Africa Sting defendants.

The lawyers in this high-profile case include an eclectic mix of solo practitioners, small criminal defense firms, and large firms which substantial FCPA expertise. The lawyers include a former U.S. attorney, several former prosecutors, and firm with a public website www.entrapped.com. (See here for prior posts regarding potential entrapment issues in this case).

Lawyers for the Africa Sting defendants are due back in court tomorrow.

While respectful of the obvious human dimension of this case, the Africa Sting case could not have come at a better time for FCPA practitioners, which tend to be employed by large law firms – although not exclusively.

The upside from this case is perhaps more indirect than being directly involved in the actual case. The Africa Sting case has received mounds of media attention and notoriety in sectors of the economy that tend not to have FCPA compliance and risk assessment on the to-do list. If nothing more, the Africa Sting case has raised public consciousness of the FCPA and has nudged certain businesses to pick up the phone and talk to an FCPA practitioner.

Voluntary Disclosures and the Role of FCPA Counsel

Dyncorp International Inc. (“Dyncorp”), a provider of “specialized, mission critical professional and support services for the U.S. military, non-military U.S. governmental agencies and foreign governments” (according to its recent 10-Q filing) (see here) recently disclosed a potential FCPA issue.

Page 19 of its filing states:

“We have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. The payments, which we believe totaled approximately $300,000 in the aggregate, were made to sub-contractors in connection with servicing a single existing task order that the Company has with a U.S. government agency. We have retained outside counsel to investigate these payments. We are in the process of evaluating our internal policies and procedures and are committed to improving our compliance procedures. During the past week, we voluntarily brought these matters to the attention of the U.S. Department of Justice and the Securities and Exchange Commission. We cannot predict the ultimate consequences of these matters at this time, nor can we reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flow. We have not recorded any reserves with respect to this matter.” (emphasis added).

This disclosure, along with the more recent disclosure that Dyncorp’s Senior Vice President, Chief Compliance Officer and Executive Counsel was terminated (see here) has been covered by the Wall Street Journal (see here and here) and has been discussed elsewhere (see here).

I inject the following question/issue into the conversation (so to speak).

Why did Dyncorp voluntarily disclose to DOJ/SEC conduct that is arguably not even a violation of the FCPA? More broadly, what do such voluntary disclosures of potential FCPA issues say about the potential conflict of interests FCPA counsel has in advising companies as to the important disclosure issue.

First things first.

As readers of this blog likely know, many FCPA enforcement actions result from voluntary disclosures companies make to DOJ and (if an issuer) to SEC.

The reason?

There are some “carrots” out there.

First, “The Principles of Federal Prosecution of Business Organizations” (see here) (a.k.a. the former Thompson Memo which is now included in the US Attorney Manual) state that one of the factors a prosecutor should consider in deciding whether to criminally charge a company is the “value of cooperation” and the “corporation’s timely and voluntary disclosure of wrongdoing and its cooperation with the government’s investigation…” (see 9-28.700).

Second, Chapter Eight of the Federal Sentencing Guidelines (specifically s. 8C2.5(g)) (see here) will reduce an organization’s “culpability score” (which is key in calculating a company’s fine upon conviction as well as the company’s fine in a settlement) if: “the organization (A) prior to an imminent threat of disclosure or government investigation; and (B) within a reasonably prompt time after becoming aware of the offense, reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct”

See (here) for what Assistant AG Breuer recently told an FCPA audience about voluntary disclosure.

A company deciding whether or not to voluntarily disclose to the government will thus have to weigh the risk of the government finding out about the conduct in the absence of the company’s voluntary disclosure (and thus likely assume the risk of a harsher fine/penalty) vs. voluntarily disclosing the conduct to the government, yet being able to take advantage of the above mentioned “carrots”.

In weighing these options in the face of evidence of an actual FCPA violation, companies often choose the voluntary disclosure route – although the merits of the voluntary disclosure route and how to assess the leniency are issues subject to debate.

The weighing of these options when confronted with evidence of an actual FCPA violation is one thing.

However, and as demonstrated by Dyncorp’s recent disclosure, companies often also voluntarily disclose conduct to DOJ/SEC that may only potentially violate the FCPA.

Perhaps the analysis is similar to that above; however, is there any other area of law where companies (and their counsel) race to Washington to tell the government not about an actual violation of law, but merely about a potential violation of law (save perhaps for the DOJ’s antitrust leniency program (see here) which nevertheless involves actual violations)?

Before addressing the issue of what potential conflict of interest FCPA counsel may have in advising companies as to the important disclosure issue (particularly where the disclosure merely involves a potential FCPA violation), a bit about why the conduct Dyncorp disclosed is arguably not even a violation of the FCPA.

I’ve written before (see here) about the Fifth Circuit’s decision in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) on the FCPA’s obtain or retain business element and how the court concluded that payments to customs officials to reduce customs duties and sales tax could fall within the FCPA, but that such conduct does not automatically constitute an FCPA violation. The Kay case is one of the few instances in which a court has rendered a substantive FCPA decision.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. However, because these enforcement actions have not been contested, it remains an open question as to under what circumstances such payments can indeed satisfy the FCPA’s obtain or retain business element.

Dyncorp’s disclosure (“[w]e have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies”) involves the type of payments at issue in Kay and one reason why the conduct Dyncorp disclosed is arguably not even a violation of the FCPA is the equivocal nature of the Kay decision (the only case law on this subject).

Here is the real head-scratcher though.

The Dyncorp payments were not made in order to obtain or retain business with any foreign government or foreign government entity, but rather assisted Dyncorp obtain or retain business with the U.S. government.

Has there ever been an FCPA enforcement action where the questionable payments were made to assist the payor in obtaining or retaining business with the U.S. government? To my knowledge no, and if anyone is aware of such an enforcement action please do let me know.

True, the DOJ’s “Lay-Person’s Guide to the FCPA” (see here) (the DOJ’s interpretation of the statute) notes “that the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality.”

However, as the Kay court noted, the payments still need to be in connection with foreign business (i.e. seemingly not business with the U.S. government).

The Kay court framed the issue as follows: “…how attenuated can the linkage be between the effect of that which is sought from the foreign official in consideration of a bribe (here, tax minimization) and the briber’s goal of finding assistance or obtaining or retaining foreign business with or for some person, and still satisfy the business nexus element of the FCPA?” (emphasis added).

Later in the opinion, the Kay court framed the issue as follows: “…the question whether the defendants’ alleged payments constitute a violation of the FCPA truly turns on whether these bribes were intended to lower ARI’s cost of doing business in Haiti enough to have a sufficient nexus to garnering business there or to maintaining or increasing business operations that ARI already had there, so as to come within the scope of the business nexus element as Congress used it in the FCPA.” (emphasis added).

In holding “that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage” (emphasis added), the Kay court still nevertheless focused on business in a foreign country (… “the FCPA’s legislative history instructs that Congress was concerned about both the kind of bribery that leads to discrete contractual arrangements and the kind that more generally helps a domestic payor obtain or retain business for some person in a foreign country…) (emphasis added).

The Kay court’s focus on foreign business is consistent with the FCPA’s extensive legislative history which also focuses on payments made to secure foreign business, not business with the U.S. government.

This provides another reason why Dyncorp’s disclosure of “certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies” in “connection with servicing a single existing task order that the Company has with a U.S. government agency” is arguably not even a violation of the FCPA.

So the question remains, why did Dyncorp disclose this conduct – conduct that could only potentially violate the FCPA?

This leads to the final issue/question – what potential conflict of interest does FCPA counsel have in advising companies as to the important disclosure issue (particularly where the disclosure only involves a potential FCPA violation)?

By raising this issue/asking this question, I am not accusing Dyncorp’s counsel of anything (I don’t even know which firm is representing Dyncorp). Rather, I ask this question in the context of the Dyncorp’s disclosure because it seems to present (for the above reasons) the perfect “case” in which to raise this lurking issue / ask this lurking question (even though the same question could legitimately be asked in connection with other corporate voluntary disclosures of conduct that could potentially violate the FCPA).

It truly is the “elephant in the [FCPA] room” in my estimation.

Here is the potential conflict of interest as I see it. FCPA counsel has every incentive (it would seem) to nudge a corporate client to make the disclosure.

Simply stated, no disclosure, the “case” (for all practical purposes) is over and thus no more billable hours.

Conversely, with the disclosure the “case” continues meaning more billable hours.

Often times if a voluntary disclosure is made the “case” continues for several more years as DOJ (and if applicable) SEC will demand a wide range of factual information and documents involving the conduct at issue.

Morever, often times the “case” gets expanded because a favorite question of the enforcement agencies is something along the following lines – “if Business Unit A was involved in this conduct in Country A, how do we know that Business Unit A was not also involved in this conduct in Country B, and, more broadly, how do we know that the Company (in general) was also not involved in this same conduct in Countries C,D, and E (all FCPA high-risk jurisdictions)?

Because cooperation with the government’s investigation is a prominent factor a prosecutor weighs in deciding whether to criminally charge a business entity under the above described “Principles of Prosecution”, a corporate client invariably (yet reluctantly) will accept FCPA’s counsel’s recommendation to broaden the “case” to demonstrate cooperation with the DOJ/SEC’s investigation.

Next thing the company knows, it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) to travel around the world to answer DOJ/SEC’s questions even though the voluntary disclosure that got this whole process started involved conduct that may not actually violate the FCPA.

Because FCPA counsel’s “worldwide review” will often not be deemed credible unless it comes back to DOJ/SEC with at least something of concern or suspicion, FCPA counsel will often disclose several small, non-material, practically meaningless issues which also could potentially violate the FCPA.

DOJ/SEC, to demonstrate the thoroughness of its investigation, will often include these “tag-along” facts in the ultimate resolution documents (most often a non-prosecution or deferred prosecution agreement).

Thus, disclosure often times leads to significantly more work, and more billable hours for FCPA counsel. Because FCPA counsel is able to demand premium billing for its services given the high-profile, sensitive nature of the issue, the disclosure decision is literally a several hundred thousand / multimillion dollar issue for FCPA counsel and could mean the difference between several more months / years of work and no additional work.

To be clear, I am not suggesting any actual conflict of interest by Dyncorp’s counsel (or any other FCPA counsel for that matter).

Rather, I am pointing out that a potential conflict of interest is present in FCPA counsel’s disclosure advice given the significant difference in billable hours hinging on the disclosure decision.

This potential conflict of interest is hardly ever discussed, and this is not surprising given that few “outside” of the FCPA bar (given the opaque nature in which FCPA enforcement actions are resolved) even know how the disclosure and resolution process actually works to ask the question.

Here is another issue that is hardly ever discussed.

The same enforcement officials who often encourage the voluntary disclosure route, and speak of the credit that will be given to a company when it voluntarily discloses, are the same individuals who often rotate in and out of government service and the FCPA bar. Again, I am not suggesting any actual conflict of interests by these individuals.

However, these potential conflict of interest issues (i.e. the “elephants in the [FCPA] room”) should not be shoved aside in analyzing why there are so many FCPA voluntary disclosures (including of conduct that may only potentially violate the statute) and why FCPA enforcement is indeed the unique creature that it is.

Another FCPA Speech

Last week it was the Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (see here), this week the audience for Assistant Attorney General Lanny Breuer was ACI’s National Forum on the FCPA

The ACI conference (see here) is a signature event for the FCPA bar and FCPA compliance community. Breuer participated in past ACI events as a private FCPA practitioner at Covington & Burling and yesterday he gave the keynote luncheon address.

The link to the speech on the DOJ website is inactive, but the speech is embedded in this piece from the WSJ Law Blog (see here).

The speech covers a wide range of topics and will be of interest to all FCPA practitioners and others interested in following FCPA developments.

Here are a few highlights:

On individual prosecutions – “…we tried more individuals for FCPA violations than in any prior year. And we indicted more individuals than ever before. That is no accident. In fact, prosecution of individuals is a cornerstone of our enforcement strategy. […] Put simply, the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.”

On how the DOJ learns of FCPA issues – “Although many of these cases come to us through voluntary disclosures, which we certainly encourage and will appropriately reward, I want to be clear: the majority of our cases do not come from voluntary disclosures. They are the result of pro-active investigations, whistle blower tips, newspaper stories, referrals from our law enforcement counterparts in foreign countries, and our Embassy personnel abroad, among other sources.”

On resolving corporate FCPA matters – “…despite rumors to the contrary, we do also decline prosecution in appropriate cases. […] With regard to corporate cases, the Department will continue to pursue guilty pleas or, if necessary, indictments against corporations – when the criminal conduct is egregious, pervasive and systemic, or when the corporation fails to implement compliance reforms, changes to its corporate culture, and undertake other measures designed to prevent a recurrence of the criminal conduct. We also recognize that there will be situations in which guilty pleas or criminal charges are not appropriate. Now, we may have good-faith disagreements about when those circumstances present themselves, but we do not take our task lightly. We are mindful of direct impact on the company itself, as well as the numerous collateral consequences that often flow from these charging decisions. We are sophisticated attorneys, and we understand the challenges and complexities involved in doing business around the globe.”

On corporate monitors – “In appropriate cases, we will also continue to insist on a corporate monitor, mindful that monitors can be costly and disruptive to a business, and are not necessary in every case. That said, corporate monitors continue to play a crucial role and responsibility in ensuring the proper implementation of effective compliance measures and in deterring and detecting future violations.”

On whether to make a voluntary disclosure – this is a “sometimes difficult question” […] a question I grappled with as a defense lawyer. I strongly urge any corporation that discovers an FCPA violation to seriously consider making a voluntary disclosure and always to cooperate with the Department. The Sentencing Guidelines and the Principles of Federal Prosecution of Business Organizations obviously encourage such conduct, and the Department has repeatedly stated that a company will receive meaningful credit for that disclosure and that cooperation. […] I can assure you that the Department’s commitment to meaningfully reward voluntary disclosures and full and complete cooperation will continue to be honored in both letter and spirit. I am committed to no less.”

On the road ahead – “In addition to holding culpable individuals accountable and meaningfully rewarding voluntary disclosures and genuine cooperation, we will continue to focus our attention on areas and on industries where we can have the biggest impact in reducing foreign corruption.” Breuer then discusses the pharma industry in particular.

On asset forfeiture and recovery – “We will seek forfeiture in all appropriate cases going forward. […] We will be taking advantage of the expertise of both the Fraud Section and our Asset Forfeiture and Money Laundering Section to forfeit and recover the proceeds of foreign corruption offenses.” Breuer’s comments on this topic largely shadow the recent comments of Attorney General Holder (see here).

On enhanced resources – “As I imagine most of you have heard, in 2007 the FBI created a squad with agents dedicated to investigating potential FCPA violations. The squad has been growing in size and in expertise over the past two years. In addition, we have begun discussions with the Internal Revenue Service’s Criminal Investigation Division about partnering with us on FCPA cases around the country. Finally, we are now pursuing strategic partnerships with certain U.S. Attorney’s Offices throughout the United States where there are a concentration of FCPA investigations.”

On Mark Mendelsohn’s rumored departure as DOJ Deputy Chief – FCPA – “… as we look to the future, we will be building on the extraordinary efforts and success of our Deputy Chief over the FCPA area, my friend Mark Mendelsohn, who is beginning to explore options for the next phase of his career. Mark has been an exceptional public servant and a visionary steward of the FCPA Program. Regardless of where Mark chooses to go, we will miss him greatly.”

******

Last week, I questioned Breuer’s characterization of the Jefferson verdict in his pharma address (see here). In that address he said as follows:

“In the past few months, we have the completed the trials of the Greens in California, of Mr. Bourke in New York and of former Congressman William Jefferson in Virginia. In each of these cases, individuals were found guilty of FCPA violations and face jail time.”

Yesterday, Breuer correctly noted, as to the Jefferson case, as follows: Jefferson “was convicted of a conspiracy of which one object was to violate the FCPA by bribing former high-ranking Nigerian government officials.”

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