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Friday Roundup

FCPA enforcement down 100% and some items for the weekend watch/read list.

Enforcement Down 100%

Last year at this time there were already 23 FCPA enforcement actions (22 defendants in the Africa Sting case and the Natco Group enforcement action).

So far this year there have been 0.

Thus, FCPA enforcement is down 100%.

I don’t expect you to take this statistic seriously and I don’t intend it to be. Rather, it is meant as a commentary on the often times odd obsession some have with FCPA enforcement statistics (misleading as they may be in many cases).

On to more meaningful commentary by others.

For Your Viewing Pleasure

Two titans of the FCPA bar, Homer Moyer (here) and Martin Weinstein (here) were recently the focus of separate interviews on the BulletProofBlog as to various FCPA topics.

Informative views here and here.

For Your Reading Pleasure

Gary Stein (here – Schulte Roth & Zable) has an informative overview (here) of “Sentencing of Individuals in FCPA Cases.”

I’ve been documenting the growing trend of judges significantly rejecting DOJ sentencing recommendations in FCPA cases (see here) and Stein “hits the nail on the head” with this paragraph:

“The DOJ exercises virtually unlimited discretion in deciding who gets charged in FCPA cases and, for all practical purposes, in deciding the amount of the financial penalty imposed against corporate violators. But sentencing of individual defendants, particularly after U.S. v. Booker, is ultimately a matter of judicial, not prosecutorial discretion. And it has become apparent that there is a wide and growing rift between the views of the DOJ and the courts as to the appropriate sentences for individual violators in FCPA cases.”

Tired of all the “are you ready” hysteria surrounding the U.K. Bribery Act?

If so, you will want to read “Keep Calm and Carry On” (here) by Alexandra Wrage (President of Trace) recently published by In Compliance Magazine. Among other things, Wrage states that “the argument that companies that have navigated FCPA waters for a decade or more are unprepared for the new UK Act is unfounded.”

See here for my “bold” prediction that implementation of the U.K. Bribery Act (whenever that occurs) is not that big of deal for most companies and that U.K. enforcement of the Bribery Act is likely to be measured and disciplined.

*****

A good weekend to all.

The FCPA and Potential Reforms

Last week’s U.S. Chamber of Commerce Annual Legal Reform Summit included a panel titled: “Navigating a Global Marketplace — Foreign Corrupt Practices Act and Potential Reforms.”

Amanda Ulrich (here), an associate in the New York office of Debevoise & Plimpton, LLP, provides a summary in this guest post.

*****

The recent expansion of FCPA enforcement and new FCPA-related bounty provisions in the Dodd Frank Act had audience members thoroughly engaged as an impressive assembly of speakers from the public and private sectors gathered to discuss these issues at the United States Chamber of Commerce’s Annual Legal Reform Summit last week.

Michael B. Mukasey, former Attorney General of the United States and current partner at Debevoise & Plimpton LLP, introduced and moderated a panel that also included John S. Darden, former Assistant Chief of the Fraud Section of the Department of Justice (“DOJ”) and currently a partner at Patton Boggs, LLP, Cheryl J. Scarboro, Chief of the FCPA Unit within the Division of Enforcement at the U.S. Securities and Exchange Commission (“SEC”), George J. Terwilliger III, former DOJ Deputy Attorney General and currently global head of the White Collar Practice Group of White & Case LLP, and Andrew Weissmann, former Chief of the Criminal Division of the U.S. Attorney’s Office for the Eastern District of New York and Co-Chair of the White Collar Practice at Jenner & Block LLP. The audience was treated to a vigorous debate on FCPA enforcement between representatives of the private sector who called for more clarity and predictability in enforcement, and individuals arguing the federal government’s perspective, looking to level the playing field for business through increased enforcement and increased cooperation among foreign and domestic agencies.

The discussion opened with remarks by Judge Mukasey, who commented that the rapid expansion of FCPA enforcement in the United States since 2004 has brought increased anxiety to companies, which are concerned about competitive disadvantages in the global business environment. Judge Mukasey suggested, however, that this anxiety should be tempered by the fact that 34 countries have signed on to the Organization of Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Transactions. He noted further that although the United States remains in the forefront of enforcement, with the UK’s Anti-Bribery Bill coming into effect next year, there is a global trend towards more vigorous enforcement of anti-bribery laws.

Expanding Views on Jurisdiction have led to Global Enforcement by the DOJ

Mr. Darden presented the DOJ’s perspective on the expansion of FCPA enforcement, and explained that, since 2005, the DOJ’s Fraud Section has concluded more than 40 criminal FCPA matters and collected over $2 billion in criminal fines. He noted that the six largest FCPA investigations have been resolved in the past 22 months, that more than 75 individuals have been criminally charged with FCPA violations since 2005, and that more than 45 of those individual prosecutions have taken place in the past two years. These statistics dwarf those of the first thirty years of FCPA enforcement.

According to Mr. Darden, the recent surge in enforcement is the result of an expanding view of jurisdiction by the government, as applied to both corporations and individuals. For corporations, the FCPA applies not only to U.S. corporations and foreign companies whose shares are traded on U.S. exchanges and regulated by the SEC, but also individuals and companies that take any action in the United States in furtherance of a bribery scheme. As a result of a more expansive jurisdictional reach, Mr. Darden argued that the idea that U.S. companies are disadvantaged by stringent FCPA provisions has been turned on its head; he noted that five of the six largest FCPA actions have involved foreign corporations.

Mr. Darden pointed out that the expanding fight against bribery has extended beyond the scope of the FCPA itself. Although the FCPA punishes only the payor (as opposed to the Federal Anti-Kick Back Law, which punishes both the payor and the payee), at least two FCPA-related cases in the last few months have involved charges against foreign officials under other statutes.

SEC stepping up enforcement, increasing cooperation with other agencies, but approaching remedies with more flexibility

Ms. Scarboro described the FCPA program at the SEC, where, she noted, FCPA enforcement has been a high priority for quite some time. In 2010 alone, with several cases still ongoing, the SEC has settled with 11 corporations and 7 individuals, recovering over $400 million in disgorgement and civil penalties.

Ms. Scarboro reminded the audience that the SEC has reorganized its efforts and now has a dedicated unit focused exclusively on combating foreign bribery. She said that the division has become smarter, more proactive, and more internally coordinated; the unit has also increased the SEC’s coordination with the DOJ. In addition, there have been more coordinated efforts with investigative authorities in other countries, including in connection with the Siemens investigation and this year’s Innospec case. Ms. Scarboro said that the SEC and the DOJ have been at the forefront of enforcing this country’s OECD obligations and have begun encouraging and engaging international counterparts in the pursuit of anti-bribery enforcement.

Ms. Scarboro emphasized that the SEC will continue to pursue disgorgement of profits in its FCPA investigations, and also explained that the SEC has begun to focus on industry-wide corruption, taking individual instances of bribery and investigating whether patterns emerge within a given industry. The SEC has stepped up its pursuit of individuals, she said, viewing enforcement against individuals as a better deterrent than enforcing sanctions against a company.

The SEC has pursued a more flexible approach to remedies in its investigations. To encourage cooperation by businesses under scrutiny by federal agencies, Ms. Scarboro explained, the SEC has begun pursuing deferred prosecution and cooperation agreements with companies that voluntarily report and cooperate with the SEC. She said that the SEC fashions relief on a case-by-case basis, given that the facts and circumstances of each case, as well as the level of cooperation, differ significantly, and the SEC considers a broad range of factors in determining the relief in each case.

Calls for Reform from the Private Sector

Andrew Weissman has written critically about the statute in the past, and recently released an article, sponsored by the U.S. Chamber of Commerce’s Institute for Legal Reform, calling for specific reforms to the statute. Mr. Weissmann expressed concern that, because the vast majority of FCPA-related cases against corporations, like those involving allegations of other criminal law violations, are settled without trial, the DOJ and the SEC serve as the judge and jury; thus, there is no meaningful way to question their interpretation of the FCPA’s grey areas.

Mr. Weissman’s second major stated concern was that, due to the lack of clarity in enforcement, companies are less likely to pursue business opportunities in countries seen as highly corrupt, such as China, where the risks of running afoul of the FCPA are high. The potential for FCPA enforcement hangs over such business ventures, and Mr. Weissman characterized this as a tax on companies looking to do business abroad.

Mr. Weissman encouraged the United States to adopt a provision similar to one contained in the UK’s Anti-Bribery Bill, which, when it becomes effective in April 2011, will provide a defense to enforcement actions for companies that devote “adequate” resources to creating and enforcing anti-bribery procedures. Mr. Weissman suggested that the British statute recognizes the limitations of what a corporation can do about the actions of its individual employees.

Mr. Weissman also called for more clarity with respect to what constitutes an “instrumentality” of a foreign government, light-heartedly suggesting that almost everyone in China is an instrumentality of the government. Mr. Weissman fears that, without more clarity, a business would not know whether it could take someone employed at General Motors out to dinner (as the U.S. government is now a shareholder). Similar arguments might apply to hospitality provided to an employee of Bloomberg (as New York Mayor Michael Bloomberg owns 85% of that company), or a Professor at Columbia (a school that receives public grants).

Judge Mukasey noted that the United States has a facilitation payment exception that the UK statute does not have, but Mr. Weissman described the facilitation payment exception as very narrow, and limited to grease payments that expedite inevitable occurrences. Judge Mukasey characterized this exception as applying to payments that help a company to “move up the list” toward an approval it would obtain in any event as opposed to helping a company “get on the list.” Mr. Weissman also noted that there is no de-minimis exception in the FCPA, putting companies at risk of FCPA violations even for very minor favors or transactions.

Although the new UK statute goes beyond the FCPA in some ways – including its extension to commercial bribery – Mr. Weissmann believes that the availability of the “adequate procedures” defense makes that statute more reasonable than the FCPA.

The intent standard applied in FCPA enforcement actions also concerns Mr. Weissman. For individual prosecutions under the FCPA, he explained, the intent standard is “willfulness,” which is considerably more stringent than the “knowing” standard applied to corporations. The “knowing” standard, Mr. Weissman argued, makes doing business in certain countries very risky, as the act in furtherance of the bribery needs to be only an intentional act, that is, not one that is a mistake.

Anomalies Resulting from Increased Enforcement

Mr. Terwilliger began his discussion of anomalies in increased enforcement by noting that U.S. companies are devoted to free market principles, and that corrupt markets are not free – a principle sufficient to justify anti-bribery enforcement but not necessarily sufficient to justify uneven enforcement.

Mr. Terwilliger outlined problems with what he described as the great leverage held by the DOJ and the SEC in FCPA enforcement: few trials (almost no trials involving corporate defendants) and no body of jurisprudence governing the field, which results in no real opportunity for corporations to contest the government’s decision to pursue an FCPA enforcement action.

Although prosecutors stress the benefits of self-reporting and internal investigations, Mr. Terwilliger expressed an ongoing concern of many corporations that plaintiff’s lawyers representing shareholders and sometimes competitors have begun to latch on to those self-reports in pursuing litigation against companies who report bribery activities.

Similarly, Mr. Terwilliger explained that, in his view, the new bounty provisions of the Dodd Frank Act, which provide for recoveries of up to 30% of settlements with the SEC in excess of $1 million, misalign incentives that are crucial for successful self-reporting. The best source for self policing bribery issues are a company’s employees, and as such, companies are now required to rely on people who have financial incentive to go directly to the government to report these issues. Mr. Terwilliger said he viewed this as a major concern given that a company’s willingness to self-report is often a consideration in the remedies pursued by government agencies.

Incentives for Self-Reporting

Mr. Terwilliger argued that the incentives for companies faced with potential FCPA violations are also skewed in the self-reporting context. The better the procedures to detect bribery, the more likely the company will be to uncover bribery and face the decision of whether or not to self-report. Rather than being rewarded for voluntarily rooting out bribery problems, companies are often faced with costly punishment, an anomaly that weighs heavily in the board room when determining whether to self-report. Mr. Terwilliger called for the creation of a presumption of non-criminal disposition and reduced penalties for companies voluntarily reporting FCPA violations. Judge Mukasey added that such an approach could help lawyers in advising their clients on FCPA compliance policies.

Mr. Darden responded that the DOJ would see this as an unnecessary step, because the program is working well without such a “carrot.” Characterizing Mr. Terwilliger’s suggestion as amnesty and comparing it to the anti-trust division’s amnesty program, Mr. Darden said that the DOJ does not need companies to come forward and voluntarily report, whereas the anti-trust division’s amnesty policy is justified by the fact that it is impossible to investigate a cartel without one member of that cartel coming forward. Mr. Darden said that additional carrots are not needed in anti-bribery enforcement, as companies have shown that there is enough incentive to come forward.

Mr. Terwilliger argued that, in his experience with certain long-running voluntary FCPA investigations, it would have been impossible for the DOJ to gather the same evidence as was gathered in a voluntary investigation, and said that the anti-trust program is a very good analogy to the DOJ’s program. He also noted that he was not discussing amnesty, but rather a reduced penalty that would give the company better incentives to self-report.

Mr. Darden and Ms. Scarboro both stated that only about one-third of FCPA investigations are voluntarily reported to the DOJ or the SEC, but the proportion of cases that are resolved with cooperation of the companies being investigated is much higher than one-third, and in those cases that cooperation factors significantly into the remedies the agencies seek.

Ms. Scarboro noted that the U.S. Sentencing Guidelines, which the DOJ uses (and courts apply) in assessing fines for FCPA violations, provide for downward departures, and the availability of non-prosecution agreements gives the DOJ added flexibility. While other enforcement models, like the UK’s, provide for the negotiation of remedies prior to the investigation, the U.S. model gives federal agencies discretion to account for a variety of facts and circumstances after an investigation to assess the proper penalty. The SEC, for example, in determining whether to bring an action against a corporation, considers the corporation’s cooperation in the investigation and its remediation efforts in determining what remedies the SEC will seek, if any.

Ms. Scarboro noted that, in many cases, the level of cooperation is sufficient that the SEC will not initiate a full investigation. Those cases are generally not publicized in order to avoid unwanted publicity or embarrassment for the cooperating companies. Mr. Darden echoed that sentiment, and said that, while some companies affirmatively publicize their avoidance of FCPA charges, in many cases when the DOJ determines not to pursue charges, companies do not want the publicity of the DOJ’s decision not to prosecute or investigate, because that publicity could give rise to the need to issue a new 8-K.

During a Q&A period, Mr. Darden stated that the Federal Prosecution Principles, which were supposed to add clarity, have in some cases raised more questions than answers. In an attempt to give more clarity, especially in the area of compliance, the Prosecution Principles fail to give guidance about the type of cases the DOJ seeks to pursue. For example, the DOJ cares less about a company with some far flung employee who did not “get the memo” on the company’s anti-bribery compliance policy, than it does about a higher level corporate employee generating phony documents. Mr. Darden said that the failure to distinguish these schemes is a weakness in the Federal Prosecution Principles and is driving a need for more clarity.

Conclusion

Although the private sector has called for reform, the federal agencies responsible for FCPA enforcement have signaled no reversal of the trend of increased enforcement of the FCPA against companies and individuals at home and abroad.

The TI Report

[Before turning to the TI Report, I am pleased to share that FCPA Professor has been named a “Top 25 Business Law Blog” by LexisNexis. Voting is open for the top blog, which will be announced on November 3rd. Here is the link to vote. Thank you for your support]

Earlier this week, Transparency International a “global civil society organization leading the fight against corruption” released its annual Corruption Perceptions Index (“CPI”) (see here).

As TI’s report explains, the CPI “draws on different assessments and business opinion surveys” to compile an index “relating to bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts.”

In a release TI noted that the “2010 CPI shows that nearly three quarters of the 178 countries in the index score below five, on a scale from 0 (perceived to be highly corrupt) to 10 (perceived to have low levels of corruption), indicating a serious problem.

The United States scored a 7.1 in the CPI index – 22nd out of 178 countries and below several European countries, New Zealand, Australia, Japan, Qatar, the United Kingdom, and others. As others have reported (here) “this was the lowest score awarded to the United States in the index’s 15-year history and also the first time it had fallen out of the top 20.”

In a video release (here) TI’s Chair, Hugette Labelle, stated that “corruption remains a serious obstacle and cause for concern” and that a “vital issue remains enforcement without which all the laws in the world will be of little value.”

While the CPI may just seem like a bunch of numbers, the index has real-world application as many companies and FCPA compliance professionals calibrate FCPA risk assessment to the CPI.

The TI Report

[Before turning to the TI Report, I am pleased to share that FCPA Professor has been named a “Top 25 Business Law Blog” by LexisNexis. Voting is open for the top blog, which will be announced on November 3rd. Here is the link to vote. Thank you for your support]

Earlier this week, Transparency International a “global civil society organization leading the fight against corruption” released its annual Corruption Perceptions Index (“CPI”) (see here).

As TI’s report explains, the CPI “draws on different assessments and business opinion surveys” to compile an index “relating to bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public sector anti-corruption efforts.”

In a release TI noted that the “2010 CPI shows that nearly three quarters of the 178 countries in the index score below five, on a scale from 0 (perceived to be highly corrupt) to 10 (perceived to have low levels of corruption), indicating a serious problem.

The United States scored a 7.1 in the CPI index – 22nd out of 178 countries and below several European countries, New Zealand, Australia, Japan, Qatar, the United Kingdom, and others. As others have reported (here) “this was the lowest score awarded to the United States in the index’s 15-year history and also the first time it had fallen out of the top 20.”

In a video release (here) TI’s Chair, Hugette Labelle, stated that “corruption remains a serious obstacle and cause for concern” and that a “vital issue remains enforcement without which all the laws in the world will be of little value.”

While the CPI may just seem like a bunch of numbers, the index has real-world application as many companies and FCPA compliance professionals calibrate FCPA risk assessment to the CPI.

The OECD Report – Initial Observations

Yesterday, the OECD released its much anticipated “Phase 3” report (here) on the U.S. implementation and enforcement of the “Convention of Combating Bribery of Foreign Public Officials in International Business Transactions.” In other words, the OECD Report (“Report”) comments on U.S. enforcement of the FCPA, a statute which (at least in theory) is supposed to model the OECD Convention.

As noted in this OECD release:

“The Working Group commended the United States for its engagement with the private sector, substantial enforcement, and commitment from the highest levels of the U.S. Government. In addition to the recommendation on facilitation payments, it also made recommendations that include the following on ways to improve U.S. enforcement:

– Consolidating publicly available information on the application of the FCPA, including the affirmative defence for reasonable and bona fide expenses;

– To increase transparency, making public, where appropriate, more information on the use of Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) in specific cases; and

– Ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution.

The Working Group also highlighted good practices developed within the U.S. legal and policy framework that helped it achieve such a high level of enforcement, including the creation of specialised enforcement units dedicated to foreign bribery, and the use of plea agreements, DPAs and NPAs and the appointment of corporate monitors. These efforts have also encouraged the establishment of robust compliance programmes and measures among companies subject to U.S. anti-bribery law. The Working Group also welcomed the United States’ efforts to encourage close co-operation between the United States and foreign authorities.”

The Report is perhaps the single largest collection of FCPA related information and statistics ever in one document. This post will be the first of several posts in the coming days on the information and views contained in the Report.

This post highlights the “Executive Summary,” “Introduction” and “Recent Trends in Investigation and Prosecuting FCPA Violations” sections of Report. In addition, this post discusses specific sections of the Report dealing with the FCPA’s “obtain or retain business” and “foreign official” elements as well as the use of NPAs or DPAs to resolve FCPA matters.

Before turning to the Report’s Executive Summary, let me provide one of my own. [For ease of reading, my observations in this post are in italics].

There is no question that the U.S. is a world leader in enforcing its domestic foreign bribery statute (the FCPA) and the Report rightfully commends the U.S. for this. However, quantity does not always mean quality and U.S. enforcement of the FCPA is not without criticism and questions, including in the Report. One would hardly realize this if all one did was read this joint statement of the Departments of Justice, Commerce and State, and the Securities and Exchange Commission issued yesterday in connection with the Report’s release.

But the criticisms and questions are in the Report and the Report contains this contradiction: while loudly praising the U.S. for its “high level” of enforcement, the Report quitely criticizes and questions many of the policies and enforcement theories which yield the “high level” of enforcement. For instance, the Report notes that the FCPA’s language “does not specifically convey” that cases concerning “an operating license or permit to operate a business, or a reduction in tax or import duty” are in violation of the statute. Yet, many FCPA enforcement actions are based on this theory. Further, the Report notes that “due to an absence of explicit language in the definition of foreign official” it is an open question whether employees of so-called state-owned or state controlled enterprises are “foreign officials” under the FCPA. Yet, numerous FCPA enforcement actions are based on this theory. The Report notes that the increase in NPAs and DPAs “are one of the reasons for the impressive FCPA enforcement record in the U.S.” yet also notes that these agreements are subject to little or no judicial scrutiny.

Perhaps the message for other OECD member nations reading the Report is this – enforce your domestic bribery law in questionable ways, seemingly inconsistent with the intent of the legislature in passing the law, and figure out a way to resolve the enforcement actions without judicial scrutiny. If so, perhaps your nation will one day be praised in an OECD Report for its “high level” of enforcement activity.

The “Executive Summary” of the Report states, among things:

That, since Phase 2 (see here and here) “U.S. enforcement has increased steadily and resulted in increasingly significant prison sentences, monetary penalties and disgorgement. Increased enforcement was enabled by the good practices developed within the U.S. legal and policy framework, including the dedication of resources to specialised units in the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI) and the Securities and Exchange Commission (SEC).”

[…]

“The U.S. has investigated and prosecuted cases involving various business sectors and various modes of bribing foreign public officials. In addition, it has been conducting proactive investigations, using information from a variety of sources and innovative methods like plea agreements (PAs), Deferred Prosecution Agreements (DPAs), Non-Prosecution Agreements (NPAs), and the appointment of corporate monitors. Vigorous enforcement and record penalties, alongside increased private sector engagement, has encouraged the establishment of robust compliance programmes and measures, particularly in large companies, which are verified by the accounting and auditing profession and monitored by senior management. Less is known of the effect increased FCPA enforcement has had on small- to medium-sized enterprises (SMEs), which is an issue shared by all Parties to the Convention.”

“Ways in which implementation of the Convention could be made more effective have also been identified. For instance, the Working Group recommends that the U.S., in its periodic review of its policies and approach on facilitation payments, consider the views of the private sector and civil society… The evaluation also recommended the consolidation and summarisation of publicly available information on the application of the FCPA, including information regarding the affirmative defence for reasonable and bona fide expenses. This could be especially useful for SMEs. Similarly, given that the U.S. authorities are increasingly enforcing the FCPA by using DPAs and NPAs, the Working Group believes that transparency and public awareness of these measures could be enhanced if the U.S. made public, where appropriate, more detailed reasons on issues such as why a particular type of agreement is used, the choice of an agreement‘s terms and duration, and how a company has met the agreement‘s terms. The Working Group also recommends that the U.S. ensure that the overall limitation period applicable to the foreign bribery offence is sufficient to allow adequate investigation and prosecution.”

The Introduction to the Report, under the heading “Cases involving the bribery of foreign public officials,” states:

“The United States has investigated and prosecuted the most foreign bribery cases among the Parties to the Anti-Bribery Convention. From 1998 to 16 September 2010, 50 individuals and 28 companies have been criminally convicted of foreign bribery, while 69 individuals and companies have been held civilly liable for foreign bribery. In addition, 26 companies have been sanctioned (without being convicted) for foreign bribery under non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs). Sanctions have also been imposed for accounting misconduct and money laundering related to foreign bribery.”

“These cases have resulted in increasingly significant penalties. From 1998 to 2003, the maximum monetary sanctions levelled against a company in an FCPA case were USD 2.5 million. Since then, 23 companies have received monetary sanctions in excess of USD 10 million. In one case, monetary sanctions totalling USD 800 million were ordered against a single company. In 2010, an 87-month sentence was imposed against an individual in an FCPA case. Since 2004, over USD 1 billion in foreign bribery proceeds have been recovered through disgorgement actions. The SEC also obtains civil penalties in addition to DOJ criminal fines. In the first 9 months of 2010 alone, the SEC obtained over USD 404 million in disgorgement, interest and civil penalties from thirteen companies and eight individuals. Representatives of the private sector told the evaluators that these increasingly heavy sanctions combined with the increased number of prosecutions against companies and individuals have significantly raised the FCPA‘s profile. They are also felt to be the main reason why many companies have taken steps to improve their anti-bribery measures, internal controls, books and records, and compliance systems.”

[Note – the above referenced 87-month sentence of Charles Jumet is misleading. Elsewhere in the Report it states: “In a recent case, a defendant was sentenced to 87 months in prison for FCPA violations.” Fact check – Jumet pleaded guilty to two counts – conspiracy to violate the FCPA and making false statements to federal agents. The false statements portion of his sentence was 20 months. Thus, Jumet’s “FCPA” sentence was 60 months – not 87 months]

“These cases come to the authorities‘ attention through a myriad of means. A significant number (but not the majority) of investigations result from voluntary self-reporting by companies. Other sources include corporate securities filings; suspicious activity reports from financial institutions; the media, including keyword searches of the Internet; whistleblowers, employees, customers, competitors, and agents; qui tam and civil complaints; referral from other U.S. government agencies, including overseas embassies; international financial institutions such as the World Bank; reports through a “hotline” email address and website; and information from foreign states, including requests for mutual legal assistance (MLA). A recent case resulted from an undercover sting operation. Investigations also originate from research and traditional law enforcement operations to determine where corruption may exist. The U.S. utilizes statistics that it compiles and information obtained in prior and current FCPA cases to identify trends and patterns of behaviour that warrant investigation. The U.S. also conducts industry sweeps, which are targeted investigations focusing on a particular industry or market. The U.S. believes that the use of such proactive tools keeps its regulators ahead of trends and allows them to combat corruption in a timely fashion. The U.S. did not provide statistics on the sources of investigations, due to the need to protect investigative sources and methods, but confirms that no one source accounted for a majority.”

“These FCPA enforcement figures are expected to increase in the near future. Presently, the United States has more than 150 criminal and 80 civil ongoing FCPA investigations. [a footnote states “many are parallel criminal and civil investigations of the same alleged conduct”] The U.S. authorities recently announced new initiatives including investigations of specific industries (“targeted sweeps” or “industry-wide sweeps”) and an increased emphasis of prosecuting natural persons in addition to companies. These efforts will likely lead to more prosecutions and convictions.”

Under the heading “Recent trends in investigating and prosecuting FCPA violations,” the Report states, among other things, as follows:

“Allegations of FCPA violations come from a variety of sources. This part of the report canvasses a few of the most important sources. According to the DOJ, voluntary disclosures are the source of a significant proportion of investigations, although not the majority.”

[…]

“… companies consider it in their interest to be co-operative, and seem willing to settle more often than not when they have voluntarily disclosed. While some companies self-report violations of the FCPA, some companies do not. Representatives of companies in the extractive industry explained that it is very common for a company to uncover one discrete violation of the FCPA and voluntarily disclose it, following which the DOJ or SEC asks the company to look further to see if the conduct is pervasive and occurring in other places. In some cases, the conduct is pervasive and is fully investigated by the DOJ and SEC. In other cases, the conduct is limited in scope and no additional violations are uncovered. Some companies may find this very cumbersome and expensive, and try to settle the case without a full investigation. However, the DOJ and SEC advise that they require companies to complete their investigations before finalising settlement discussions.”

[…]

“Proactive investigative steps by the DOJ and SEC, such as industry-wide sweeps, can also produce information that leads to enforcement actions. In November 2009, an industry-wide investigation into the pharmaceutical industry was announced by Assistant Attorney General, Lanny Breuer. An investigation into the medical device industry has also been discussed publicly. The Oil-for-Food cases involved a sweep of companies that paid kickbacks to the Iraqi Government during the United Nations Oil-for-Food Programme. The sweep was very effective and more than fifteen companies have been charged to date.”

“Such investigations may be commenced by sending “sweep letters” requesting co-operation from industry members on a voluntary basis. If a company chooses to not respond to such a letter, the DOJ and SEC consider whether a subpoena should be issued to compel the production of relevant documents and the testimony of individuals. Recently, the SEC announced that it will be conducting more industry-wide sweeps. Investigations of this kind enable the DOJ and SEC to develop specialised expertise identifying illegal conduct and conducting prosecutions involving various industries. In addition, due to the cross-connections between various members of the same industry, an investigation into one company can produce leads about other companies, including those in the supply-chain.”

“More traditional sources of allegations also continue to be useful, such as anonymous whistleblower reports. Such reports are often received from current and former employees, competitors, and others, and are analysed by the FBI to ensure their veracity. The DOJ provides a “hotline” to report anonymously directly to the FCPA Unit. The SEC also has a hotline and a detailed process for analysing tips, complaints and reports of FCPA violations.”

[…]

“[Mutual Legal Assistance] requests from foreign jurisdictions also provide a basis for allegations, although to a lesser extent than other sources.”

“United States embassy staff are also important sources of information about FCPA violations. The DOJ cited examples of full-blown investigations that were launched due to information provided by an embassy and referrals from State Department and Commercial Services branches. In one of these investigations, the embassy stayed involved throughout.”

As to Dodd-Frank’s whistleblower provisions, the Report states:

“The U.S. authorities believe that in light of this new legislation, reporting violations of the FCPA is likely to increase.”

FCPA Elements

Among other elements, the Report discusses the “obtain or retain business” and “foreign official” elements of the FCPA.

“Obtain or Retain Business”

The Report states:

“One important aspect of the foreign bribery offence in the FCPA is different from the description of the offence in Article 1 of the Convention. Under the FCPA, the bribery of a foreign public official must be committed in order to assist the briber “in obtaining or retaining business for or with, or directing business to, any person‘ (known as the “business nexus test‘). In Article 1 of the Convention, the corresponding formulation is: “in order to obtain or retain business or other improper advantage in the conduct of international business.”

“Thus, unlike Article 1 of the Convention, the FCPA language does not specifically convey that the case is covered where the purpose of the bribe is to obtain or retain other improper advantage in the conduct of international business, such as obtaining an operating license or permit to operate a business, or a reduction in tax or import duty. In other words, the FCPA language might be read to only address bribes for the purpose of obtaining or retaining business per se. Reference is made to “improper advantage” elsewhere in the FCPA, but in a different context – i.e., the offences in the FCPA inter alia cover the case where the purpose of a bribe to a foreign public official is to secure “any improper advantage…in order to assist such [person/issuer/domestic concern] in obtaining or retaining business for or with, or directing business to, any person‘.”

“However, it has been the position of the United States Government throughout that the FCPA formulation is very broadly interpreted and covers in practice the kinds of advantages required to be covered by the Convention. The evaluation team notes that this position has been largely confirmed by jurisprudence, in the 2007 decision of the United States Court of Appeals in United States v. Kay.”

“In U.S. v. Kay, the Court of Appeals held that a payment to customs officials to reduce import duties on rice falls within the parameters of the “business nexus” test because when Congress enacted the FCPA it was concerned about: (1.) Bribery that leads to discrete business contract arrangements; and (2.) Payments that even indirectly assist in obtaining business or maintaining existing business operations in a foreign country. The Court of Appeals also stated that:

…bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA‘s proscription. We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It must be shown that the bribery was intended to produce an effect – here through tax savings – that would “assist in obtaining or retaining business”.”

“The decision of the Court of Appeals in U.S. v. Kay is therefore helpful, in that it clarifies that payments to, for instance, reduce import duty “could” satisfy the “business nexus test”. The United States has also successfully enforced the FCPA in cases involving similar advantages, such as payments to customs officials to import goods and materials (Helmerich & Payne; and Natures Sunshine), and payments to tax officials to reduce tax obligations, and to judicial officials for favourable treatment in pending litigation (Willbros Group). On the other hand, the clarification by the Court of Appeals leaves open the possibility that there might be cases where a bribe to a foreign public official to facilitate international business does not violate the FCPA, although it does meet the test of “other improper advantage in the conduct of international business” in Article 1 of the Convention.”

For more on U.S. v. Kay (see here and here).

The Report’s discussion of the “obtain or retain business” is noteworthy.

Why?

Because on the one hand, the Report praises the U.S.’s high level of FCPA enforcement, yet on the other hand, the Report candidly acknowledges that “the FCPA language might be read to only address bribes for the purpose of obtaining or retaining business per se.” Connecting the dots, the Report seems to suggest that the numerous FCPA enforcement actions premised on improper payments to secure foreign licenses, permits, etc. may not even be FCPA violations.

In my forthcoming article “The Facade of FCPA Enforcement” to be published soon in the Georgetown Journal of International Law, I highlight the increase in FCPA enforcement actions where the improper payments are alleged not to obtain or retain any particular business, but rather, involve customs duties and tax payments, or payments alleged to have assisted the payer in securing foreign government licenses, permits, and certifications.

I must also take issue with the sentence in the Report that suggests when the DOJ enters into a NPA (such as in Helmerich & Payne) or DPA that this is evidence of the U.S. “successfully enforcing the FCPA.” This is one of the many reasons why the “facade of FCPA enforcement” matters – because it fosters the absurd notion that privately negotiated settlements, subject to little or no judicial scrutiny, entered into in the context of the enforcement agencies possessing substantial “carrots” and “sticks” should serve as de facto case law or otherwise represent “successful” enforcement of the FCPA.

“Foreign Official”

As to the definition of “foreign official,” the Report states:

“Due to an absence of explicit language in the definition of “foreign official” in the FCPA, two questions arise concerning the scope of the definition: (1.) Whether, in compliance with the Convention, it covers a person holding a judicial office of a foreign country‘; and (2.) Whether it covers a person exercising a public function for a foreign country, including for a…public enterprise‘ (i.e. a state-owned or controlled enterprise).”

Readers know that this second question is a frequent topic on these pages and deservingly so. It is no small matter. As I highlight in this recent article in the Indiana Law Review (here), this dubious interpretation of the “foreign official” element was at the core of 66% of 2009 FCPA enforcement actions against business entities as well as numerous individuals. And that was just in 2009. Several pre-2009 enforcement actions as well were based on the theory that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

So again, on the one hand the Report praises the U.S.’s high level of FCPA enforcement, yet on the other hand, the Report openly questions the definition of “foreign official” that was used in a significant percentage of recent FCPA enforcement actions.

The Report then contains a discussion of the Nexus Technologies case and advances the DOJ’s curious assertion that resolution of this matter (see here) validates its interpretation that employees of so-called state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

The Report states:

“Since Phase 2, there have been positive legal developments regarding the second question on the bribery of employees of state-owned or controlled enterprises, in U.S. v. Nam Quoc Nguyen, et al. (E.D. Pa., September 4, 2008), in which the District Court recently held in favour of the United States Government in a case involving allegations that the defendants bribed employees of a foreign state-owned company. The defendants argued that the definition of “foreign official” in the FCPA does not include employees of state-owned enterprises, because in order for an organisation to be considered an “agency or instrumentality” of a foreign government, it must serve a “purely public purpose”. The United States Government, citing the legislative history of the FCPA, responded by arguing that “public purpose” is only one of the many factors in determining that an organisation is an “agency or instrumentality” of a foreign government, and that Congress expressly intended to include employees of state-owned enterprises in the definition of “foreign official”.”

As I highlighted in this prior post, in its briefing in the Nexus case the DOJ specifically urged the judge, on a number of occassions, not to consider the defendant’s substantive “foreign official” argument because they were premature. The following are snippets from the DOJ’s brief: (i) “the Court need not address any of these faulty arguments at this time:” (ii) “although styled as a motion to dismiss, Defendants’ submission is instead a premature request for a ruling on the sufficiency of the Government’s evidence before any of that evidence has been presented. These arguments, which are premature at best, will be moot after presentation of the Government’s case.” (iii) “because Defendants’ arguments turn entirely on issues of fact, they are premature.”

Continuing on this issue, the Report states:

“Although the Court ruled in favour of the United States, it did not issue a written opinion, and the defendants did not file an appeal. In addition, District Court opinions are not binding on higher courts or courts of other U.S. jurisdictions. The DOJ informed the evaluators that this means the Government interpretation could be disputed again. However, the DOJ believes the argument would fail again given the FCPA‘s legislative history, and because numerous cases have been brought by the DOJ and SEC in which the definition of “foreign official” has been broadly interpreted.” This last sentence has a footnote which states: “For instance Willbros Group involved the bribery of foreign judicial officials, Siemens AG involved payments to various persons from state-owned companies, and Diagnostic Products, involved payments to doctors of state-owned hospitals. The United States explains that in each of these cases, pursuant to Federal Rule of Criminal Procedure 11, a court had to determine whether all the elements of the offence have been proven including that the receiving individual was a foreign public official.”

On this issue, the Report concludes with this “commentary”

“The evaluators welcome positive legal developments concerning the application of the definition of ‘foreign official’ in the FCPA to members of the judiciary and employees of state-owned or controlled enterprises.”

In the “Recommendations” section, the Report notes that the “Working Group will follow up the issues below, as the case-law continues to develop, to examine: […] whether amendments are required to the FCPA to supplement or clarify the existing language defining the elements of the offense of foreign bribery with regard to […] (ii) the scope of the definition of a ‘foreign public official,’ in particular with respect to […] the directors, officers, and employees of state-controlled enterprises or instrumentalties.”

NPAs / DPAs

The Report states:

“Due to their increasing importance in law enforcement actions by the DOJ, the evaluators sought information about the deterrent effect of DPAs and NPAs. The evaluators were also conscious that the SEC intends to also begin using DPAs and NPAs to encourage companies and individuals to co-operate with SEC investigators.”

“It seems quite clear that the use of these agreements is one of the reasons for the impressive FCPA enforcement record in the U.S. However, their actual deterrent effect has not been quantified; although the DOJ hears anecdotally from companies that their use has made FCPA compliance high priority.”

The Report states:

“DPAs are technically subject to judicial review and approval, but most judges do not appear to scrutinise DPAs. Unlike a DPA, an NPA does not involve the court.”

“Although DPAs and NPAs have existed since 1993, their use has grown dramatically in recent years. Since 2004, the annual average number of DPAs and NPAs entered into by the DOJ has grown from less than 5 to over 20 and a high of 38 in 2007. In FCPA cases, DPAs and NPAs were not used until 2004. Since then, they have been used in 30 out of 39 concluded criminal enforcement actions against companies.”

“Explanations for this phenomenon vary. The dramatic increase occurred shortly after the prosecution and collapse of the accounting firm Arthur Andersen which led to thousands of jobs lost. Avoiding such collateral consequences of prosecution is generally cited as why DPAs and NPAs are used. In FCPA cases, factors such as the protection of employees and shareholders also play a role, according to U.S authorities. The U.S. authorities also believe that companies often prefer to resolve matters through DPAs and NPAs in lieu of going to court and undergoing a potentially lengthy process and resulting press scrutiny. As well, the DPAs and NPAs in FCPA cases generally cite factors such as the defendants‘ co-operation and self-reporting of the crime as the reasons for the agreement. These agreements are thus used as an incentive for voluntary disclosure and co-operation. The U.S. authorities also use DPAs and NPAs to resolve cases quickly. Finally, FCPA cases usually involve obtaining evidence from foreign countries, which can be time-consuming and unsuccessful. DPAs and NPAs can be used to secure a company‘s co-operation and obtain overseas evidence where the MLA process is cumbersome or unavailable.”

“In January 2010, the SEC announced that it would begin using co-operation agreements, DPAs and NPAs in FCPA cases. A co-operation agreement is similar to a plea agreement in criminal proceedings. An individual or company must provide substantial assistance to an SEC investigation and co-operate fully and truthfully. In return, the SEC Enforcement Division agrees to make certain recommendations to the Commission, such as the individual or company should receive credit for co-operating. DPAs and NPAs require the company or individual to co-operate fully and truthfully, and to agree to comply with prohibitions and/or undertakings. DPAs also require the company or individual to admit to or not contest certain alleged facts. NPAs are available only in “limited and appropriate circumstances”. All three types of agreements require the company or individual to agree to toll the statute of limitations. The SEC has not yet used one of these agreements, given that the policy to use them was adopted only recently.”

In the “commentary section” the Report states:

“The evaluators note that PAs, DPAs, NPAs and the appointment of corporate monitors are an innovative method for resolving cases, and has evolved into an important feature of the U.S. criminal justice system, which has helped to enable a high level of enforcement activity. These measures have been used extensively in FCPA cases, especially in recent years. Guidance exists on the use of these agreements. Some private sector representatives would like more guidance but the U.S authorities disagree.”

“A useful compromise may be for the DOJ and the SEC, where appropriate, to make public in each case in which a DPA or NPA is used, more detailed reasons on the choice of a particular type of agreement, and the choice of the agreement’s terms and duration; and the basis for imposing monitors. The DOJ already does so for PAs through sentencing memoranda. Greater transparency on these issues would add accountability and enhance public confidence in the DOJ’s and SEC’s enforcement of the FCPA. Making public this information would also raise awareness of how these agreements enhance foreign bribery enforcement efforts.”

As to “recommendations” the Report states:

“Regarding the use of NPAs and DPAs, the Working Group recommends that the United States:

a. Make public any information about the impact of NPAs and DPAs on deterring the bribery of foreign public officials [..]; and

b. Where appropriate, make public in each case in which a DPA or NPA is used, more detailed reasons on the choice of a particular type of agreement; the choice of the agreement‘s terms and duration; and the basis for imposing monitors […]”.

As noted in the OECD release:

“The United States will make an oral follow-up report on its actions to implement certain key recommendations of the Working Group after one year. The United States will further submit a written report to the Working Group within two years, which will be the basis of a publicly available evaluation by the Working Group of the United States’ implementation of the recommendations.”

Stay tuned for more.

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