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The Dilution Of FCPA Enforcement Has Reached A New Level With The SEC’s Enforcement Action Against Oracle

Yesterday,the SEC announced (here) a Foreign Corrupt Practices Act books and records and internal controls enforcement action against Oracle Corporation.

With the enforcement action, the dilution of FCPA enforcement has reached a new level.   The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors.  It is common for large multi-national companies to have hundreds, if not thousands, of distributors.  Because of this, audits Oracle was held liable for not conducting are not practical or cost-effective absent red flags suggesting improper conduct. The SEC did not allege any such red flag issues.  In fact, the SEC alleges that Oracle’s Indian subsidiary “concealed” and kept “secret” the conduct from Oracle.  Congress did not intend for the FCPA’s books and records and internal control provisions to be a strict liability statute.  The SEC used to recognize this.  However, it no longer does as once again demonstrated by the Oracle action.

In reading the Oracle action, I was reminded of a 1981 speech by Harold Williams (Chairman of the SEC) regarding the FCPA books and records and internal control provisions.  See here for the prior post.  Williams stated that the provisions are not “independent unrestrained mandate[s] to the Commission to establish novel or unprecedented corporate recordkeeping standards.”  Williams further stated as follows.  “Depending on the circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”

Back to the SEC’s enforcement action against Oracle.

The SEC complaint (here) states in summary fashion as follows.

“This matter involves violations of the books and records and internal controls provisions of the FCPA by Oracle Corporation.  From 2005 to 2007, certain employees of Oracle’s Indian subsidiary Oracle India Private Limited (“Oracle India”) secretly ‘parked’ a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement.  These Oracle India employes structured more than a dozen transactions so that a total of around $2.2 million was held by the Company’s distributors and kept off Oracle India’s corporate books.  The Oracle India employes would then direct its distributor to disburse payments out of the unauthorized side funds to purported local ‘vendors.’  Several of the ‘vendors’ were merely storefronts that did not provide any services.  Oracle failed to accurately record these side funds on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent improper side funds in violation of the FCPA, which requires public companies to keep books and records that accurately reflect their operations.”

Specifically, the SEC complaint states as follows.

“On approximately 14 occasions related to 8 different government contracts between 2005 and 2007, certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin in side funds. Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties. At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, purportedly for marketing and development expenses. Some of the recipients of these payments were not on Oracle’s approved local vendor list; indeed, some of the third parties did not exist and were merely storefronts.  Because the Oracle India employees concealed the existence of the side fund, Oracle did not properly account for these side funds. These funds constituted prepaid marketing expenses incurred by Oracle India and should have been recorded as an asset and rolled up to Oracle’s corporate books and records. These marketing expenses should then have been reflected in the income statement once they were used. Instead, the parked funds were not reflected on Oracle India’s books and were not properly recorded as prepaid marketing expenses. This incorrect accounting in turn affected Oracle’s books and records.  Between 2005 and 2007, government customers paid Oracle India’s distributors at least $6.7 million on these sales, with Oracle receiving approximately $4.5 million in revenue, resulting in about $2.2 million in funds improperly ‘parked’ with the Company’s distributors.”

The SEC further alleged as follows.

“Oracle lacked the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds.  For example, Oracle knew distributor discounts created a margin of cash from which distributors received payments for their services.  Before 2009, however, the company failed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure.  In addition, although Oracle maintained corporate policies requiring approvals for payment of marketing expenses, Oracle failed to seek transparency in or audit third party payments made by distributors on Oracle India’s behalf.  This control would have enabled Oracle to check that payments wer made to appropriate recipients.”

Based on the above conduct, the SEC charged Oracle with FCPA books and records and internal controls violations.

In the SEC’s release, Marc Fagel (Director of the SEC’s San Francisco Regional Office) stated as follows.  “Through its subsidiary’s use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use.  It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds.”  As noted in the release, without admitting or denying the SEC’s allegations, Oracle consented to the entry of a final judgment ordering the company to pay a $2 million penalty and permanently enjoining it from future books and records and internal control violations.  The release further states as follows.  “The settlement takes into account Oracle’s voluntary disclosure of the conduct in India and its cooperation with the SEC’s investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its FCPA compliance program.”

It is typical for the DOJ and SEC to announce FCPA enforcement actions on the same day.  Thus, the absence of a parallel DOJ enforcement action as to the alleged conduct at issue suggests that there will be no DOJ enforcement action, a good result given the SEC’s allegations and for the reasons stated above.

However, it may be premature to conclude that Oracle’s FCPA scrutiny is over.  As noted in this prior post, in September 2011, the Wall Street Journal reported that the DOJ was investigating “whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”

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The SEC’s enforcement action against Oracle  is not the first time distributor margin payments have served as the basis of an FCPA enforcement action.  See here for the 2005 enforcement action against InVison, specifically the Thailand allegations.  However, in that action the SEC alleged that the company was aware of the “high probability” that the margin was being used for improper purposes.

A Law Much Broader Than Its Name Suggests

The Foreign Corrupt Practices Act is a law much broader than its name suggests.  Many FCPA enforcement actions are not foreign in nature and many do not involve allegations of corruption.  In the words of the late Gary Coleman – “whatcha talkin bout” (see here).

What I am talking about is the FCPA’s books and records and internal control provisions.

During Congressional investigation, deliberation and consideration of the foreign corporate payments problem in the mid-1970’s, Congress was surprised to learn that existing corporate record-keeping and internal control provisions were deficient to fully capture the domestic and foreign corporate payments that surfaced.  The following exchange between Senator Proxmire, Roderick Hills (Chairman, SEC) and Stanley Sporkin (Director of Enforcement, SEC) during a 1976 hearing is instructive.

Senator Proxmire:  “[Y]ou stress the fact that … the corporate abuses were accompanied by false or inadequate corporate books and records and that most of the cases involved illegal or improper domestic and foreign payments.  Does such falsification of corporate books and records constitute a violation of SEC’s laws or regulations and do they constitute criminal violations?

Hills:  I can’t say in all cases.

Sporkin:  There is no provision that prohibits just what you stated.

Sporkin:  There is no provision that provides, with respect to the kinds of companies we are talking about, that that could be a violation of law.

Senator Proxmire:  Well, then, it would seem to me that maybe we ought to consider, as the legislative body for our Government, making it a violation of the law.”

Although the SEC wanted no part in enforcing what would become the FCPA’s anti-bribery provisions, the SEC insisted that any legislation directly addressing foreign corporate payments be supplemented by books and records and internal control provisions.  Chairman Hills stated as follows.  “I admit that [the provisions make] for dull reading, but these proposals will provide the teeth to assure that problems of this nature are brought to appropriate levels of corporate management and recorded in a manner that makes it far easier for us to discover them.”

Even with the enforcement agencies aggressive and broad theories regarding the FCPA’s anti-bribery provisions, the provisions nevertheless are (as a matter of law) narrowed by elements such as “foreign official” and “obtain or retain business.”

Not so, with the FCPA’s books and records and internal control provisions.  They are among the most generic substantive legal provisions one can find and state as follows.

Issuers shall –

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer [the books and records provisions]; and

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that – (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences [the internal control provisions].”

As evident from these provisions, enforcement actions can result where the conduct at issue is not foreign and in the absence of corruption allegations.

Case in point are two recent FCPA enforcement actions that you likely never heard about because they are what I have called “non-FCPA FCPA enforcement.”

Recently, the U.S. Attorneys Office (E.D.N.Y.) announced (here) a criminal complaint against FalconStor Software, Inc. alleging that the company conspired to pay more than $300,000 in bribes to executives of J.P. Morgan Chase Bank, N.A.  to obtain over $12 million in electronic storage licencing contracts. FalconStor was also charged with conspiring to falsify its corporate books and records to cover up the bribery scheme.  According to the DOJ, “the bribes, including the grants of the stock options and restricted shares, were recognized in FalconStor’s books and records, but were falsely recorded as “compensation to an advisor” or as “employment bonuses.”   The SEC also brought an action against FalconStar (see here) charging, among other things, violations of the FCPA’s books and records and internal control provisions.  In its complaint (here) the SEC alleged, among other things, that the grants of restricted stock and options to various recipients in the bribe scheme were inaccurately characterized on the company’s books and records as consultant or advisor payments for bona fide services, when in fact no bona fide services were provided.  The SEC also alleged that several of the expenses were disguised as compensation expenses on the company’s books and records and that other expenses of many of the bribes were reflected on books and records as sales promotion expenses and entertainment expenses.

Another instance of a recent FCPA enforcement action you likely heard little about was against Gold Standard Mining Corp. and certain of its executives.  As noted in this SEC release, the SEC alleged that, between 2009 and 2011, Gold Standard filed numerous reports about its purported Russian gold mining operations that were materially false and misleading in various respects.   Among other things, Gold Standard represented that it had acquired a Russian gold mining company known as Ross Zoloto Co., Ltd. (“Ross Zoloto”), but did not inform investors that it had agreed to allow the prior owner of Ross Zoloto to keep profits from existing operations or of issues surrounding Russian government registration or approval of the business combination.  Among other things, in the complaint (here) SEC alleged as follows.  “Gold Standard failed to devise and maintain a system of internal accounting controls. For example, Gold Standard did not have a means to verify the amount of gold produced; it did not have a means to determine the costs of producing the gold that was sold; it did not maintain records of inventory; it did not have independent access to Ross Zoloto’s bank statements and transactions; and it did not have a method for accessing the Russian accounting system used by Ross Zoloto or to close the books quarterly and create trial balances. It did not have copies of accounting policies or methods used to create the Russian accounting records to enable any U.S. accountants it retained to be able to convert the Russian accounting records accurately into financial statements in conformance with GAAP.   As the chief executive officer of Gold Standard, Zachos knowingly or recklessly failed to implement a system of internal controls at Gold Standard…”.

Such instances of non-FCPA FCPA enforcement actions as noted above (and numerous other examples could be cited as well) raise the question – do companies view the FCPA books and records and internal control provisions holistically or through the narrow window of foreign operations and anti-bribery risk assessment?  Do companies with a low FCPA bribery risk profile nevertheless provide training and adequate compliance resources to purely domestic FCPA books and records and internal control issues?  If not, why not?  Is too much focus in the FCPA space devoted to foreign corrupt practices and not enough focus on the more generic books and records and internal control provisions?

After all, the FCPA is a law much broader than its name suggests.

For Your Listening Enjoyment

On June 5th, the American Bar Association Criminal Justice Section and the ABA Center for Continuing Legal Education in cooperation with Dorsey & Whitney & LLP and Pepper Hamilton LLP sponsored a program titled “The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases:  Time to Reevaluate?”

I was pleased to participate along with John Buretta (Deputy Assistant Attorney General,  Criminal Division, Department of Justice);  Charles Cain (Deputy Chief, FCPA Unit, Securities and Exchange  Commission); France Chain (Senior Legal Analyst,  Anti-Corruption Division, OECD);  Stanley Sporkin; and Eric Bruce (Partner,  Kobre & Kim  LLP).  The program was moderated by Thomas Gorman (Partner,  Dorsey & Whitney LLP) and Frank Razzano (Partner,  Pepper Hamilton LLP).

An audio version of the 90 minute program can be downloaded here.  Below is a breakdown of topics discussed along with the approximate minute mark(s) of the discussion.

4 – 11 minutes – Eric Bruce (defense counsel in the Africa Sting case) provides an inside view of the case.

11 – 13 minutes – discussion of 78dd-3 jurisdictional issues, including in the Africa Sting case

13 – 19  minutes – discussion of various issues including corporate FCPA resolutions, whether the DOJ is more of a regulator than prosecutor in FCPA cases, and the DOJ’s view of the Africa Sting cases including whether it learned anything from the cases

19 – 24 minutes –  Stanley Sporkin weighs in as to the origins of the FCPA’s books and records and internal control provisions, says that the DOJ was hunting in the wrong place in the Africa Sting cases and says that FCPA enforcement needs to get back to the basics of “blocking and tackling”

25 – 30 minutes – discussion of the “foreign official” issue in which the DOJ says that “no one really conveys that they are confused” about what “foreign official” means

30 – 38 minutes – discussion of facilitation payments and whether the enforcement agencies have ignored this statutory exemption

38 – 41 minutes – I raise the question of whether the FCPA has morphed into an all-purpose corporate ethics or governance statute and discussion regarding what is the best way to expand the FCPA – through charging decisions or through Congressional action

42 – 50 minutes – discussion of compliance issues and how best to reward corporate compliance as well as the recent Garth Peterson / Morgan Stanley case in which I pose to the DOJ and the SEC the question of whether the outcome would have been any different if the FCPA had a formal compliance defense

50 – 55 minutes – discussion of miscellaneous issues including transparency in enforcement, cooperation issues and self-reporting

55 – 67 minutes – further discussion of compliance issues, including whether a compliance defense would be a “race to the bottom” or a “race to the top,” whether there is a Washington D.C. beltway view on FCPA compliance, and whether the increase in FCPA enforcement is doing anything to properly incentivize business conduct

67 – 71 minutes – discussion of whether there is any practical difference in the corporate liability standards in the U.K. Bribery Act and the FCPA

72 – 76 minutes – further discussion of the Africa Sting cases

77 – 79, 83 – 86 minutes – DOJ responds to a question regarding FCPA guidance, including timing and specifics

80 – 83 minutes – discussion as to whether it is acceptable not to self-report if the company otherwise implements a variety of internal remedial measures

87 – 89 – once again the issue of whether the DOJ has learned anything from the Africa Sting cases

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If you are aware of other FCPA video or audio programs and would like to provide a similar annotation as to issues, please consider this an open invitation to do a guest post as many could benefit.

Reasonable

I recently discovered the awesomeness of word clouds.  A word cloud is a graphical representation of word frequency in a source text.  Word clouds can be a fun and informative learning device.  The word cloud for the FCPA’s anti-bribery provisions is here and the word cloud for the FCPA’s books and records and internal control provisions is here.  (Both word clouds – as well as future FCPA-related word clouds I create – can be found on the Resources tab of this website).

A quick glance at the FCPA books and records and internal controls word cloud demonstrates that the term “reasonable” is the most prominent term in these provisions.  Yet, reviewing SEC FCPA enforcement actions you would hardly know as the agency seems to have, in many cases, converted the books and records and internal control provisions into strict liability provisions.  See here for a prior post and for an extended discussion see here – “The Facade of FCPA Enforcement” (pages 976-981).  Common verbiage in SEC FCPA enforcement actions includes generic statements that the parent company issuer failed to implement effective internal controls or that problematic payments in distant subsidiary books and records were consolidated with the issuer’s for purposes of financial reporting and that therefore the parent company issuer is liability.

The dominance of “reasonable’ in the FCPA books and records and internal control provisions, as demonstrated by the word cloud, is a good opportunity to revisit this prior post which details comments by Harold Williams (Chairman of the SEC) in 1981 as to the then infant FCPA.  Terming his statements as official Commission policy, Williams stated as follows.

“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s  specified objectives. ‘Reasonableness,’ a familiar legal concept, depends on an  evaluation of all the facts and circumstances.”  […] “Private sector decisions implementing these statutory objectives are business decisions. And,  reasonable business decisions should be afforded deference. This means that the  issuer need not always select the best or the most effective control measure.  However, the one selected must be reasonable under all the circumstances.”

As to the “degree of exactitude” Williams stated as follows. “I turn first to the question of whether the Act’s text or purpose mandates that business records and controls conform to a standard of absolute exactitude or that a company’s control system meet some absolute ideal. The answer is ‘no.’ Both of the Act’s accounting provisions, it should be noted are modified by the key term ‘reasonable.’ […] In essence, therefore, the Act does provide a de minimus exemption, though not in absolute quantitative terms.”  Williams further stated as follows. “Reasonableness, as a standard, allows flexibility in responding to particular facts and circumstances. Inherent in this concept is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.”

In a sign of just how much FCPA enforcement has changed, Williams stated as follows in his speech. “If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”

In another sign of just how much FCPA enforcement has changed, William stated as follows. “… [D]epending on the
circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”

In concluding this portion of his speech, Williams stated as follows. “The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”

As to the SEC’s enforcement policy, Williams concluded his remarks as follows. “The genius – and challenge – of [the FCPA’s accounting provisions] , it should be remembered, is their reliance on private sector decisionmaking – rather than specific federal edicts – to address an area of public concern. The Act’s eventual success or failure will, therefore, depend primarily upon business’s response. The Commission’s obligation, in turn, is to provide a regulatory environment in which the private sector can address these issues meaningfully and creatively. In this regard, we must encourage public companies to develop innovative records and control systems, to modify and improve them as circumstances change, and to correct recordkeeping errors when they occur without a chilling fear of penalty or inference that a violation of the Act is involved.”

The above comments by Williams are even more significant when one considers that the FCPA Williams was speaking about in 1981 did not contain the good faith compliance provisions added to the FCPA’s books and records and internal control provisions in 1988.

Those provisions currently state as follows.

“Where an issuer […] holds 50 per centum or less of the voting power with respect to a domestic or foreign firm, the [FCPA’s books and records and internal control provisions] require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls consistent with [the provisions]. Such circumstances include the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of [the provisions].

In short, the FCPA’s books and records and internal control provisions focus on reasonable.  Are the SEC’s enforcement theories as to these provisions reasonable?

SEC Chairman Schapiro’s FCPA Responses

As noted in this prior post, on June 30th, Senator Mike Crapo (R-ID) sent SEC Chairman Mary Schapiro a letter requesting answers to a number of FCPA related questions.  In this September 23rd letter, SEC Chairman Schapiro responds.

Chairman Schapiro begins as follows.  “Contuined strong enforcement of the FCPA sends the message that American companies operating abroad will not pay bribes as a ‘cost of doing business.’  The deterrence message of the Commission’s FCPA enforcement program incentivizes companies to self-assess and update their compliance and internal controls – all of which benefits companies’ operations overall and provides greater transparency to investors.  While I certainly appreciate and share your concerns about the costs of FCPA compliance in certain circumstances, I believe that the risks to investors and costs to companies posed by outdated or weak FCPA compliance measures are equally significant.”

Compliance Defense?

As to a potential FCPA compliance defense, Chairman Schapiro began by stating a common enforcement agency response … we already consider compliance.   She stated as follows.  “The Commission, in deciding whether to approve the filing of an FCPA enforcement action against a public company, already considers as one mitigating factor whether the company’s compliance program was reasonably designed and operated in a manner to detect and prevent FCPA violations.”  “Similarly,” Chairman Schapiro stated, “companies facing FCPA inquiries can obtain credit for cooperation under the Commission’s new Cooperative Initiative, in which cooperation is defined to include, among other factors, having reasonable internal controls and compliance measures.”    Given the above, Chairman Schapiro states that “it seems unnecessary – and even counterproductive – to recognize a formal affirmative defense for having such a program, given that there are at least three significant costs associated with such a defense.”

Chairman Schapiro then identifies the following three issues.

“First, the reasonableness of a compliance program is best measured not by how it exists on paper, but by how it operates in practice.  Consequently, the ease with which an employee was able to circumvent anti-corruption controls is some evidence – not sufficient evidence, but some evidence – that internal controls were insufficient.  The Commission would not want to be foreclosed from bringing FCPA charges under those circumstances, since holding companies accountable for weak internal controls incentivizes companies to create a robust FCPA compliance environment.”

“Second, providing an affirmative defense for reasonably designed compliance programs could allow companies to retain ill-gotten gains.  A company could engage in bribery or other corrupt behavior, obtain a benefit from such conduct (i.e. securing lucrative contracts), and yet not disgorge its ill-gotten gains.  Enabling companies to retain proceeds generated from the payment of bribes would disincentivize those companies from adopting rigorous anti-corruption programs.”

“Third, sanctioning corrupt behavior sends a strong message of general deterrence to all similarly situated companies that there is a high financial and reputational cost to be paid if they bribe foreign officials.  There is often no substitute for the deterrent impact of financial and reputational sanctions, which prevent improper behavior from becoming ingrained as just another ‘cost of doing business.’  That deterrence message likely would be diluted if such an affirmative defense was adopted.”

“Foreign Official”?

According to Chairman Schapiro, the FCPA “sufficiently defines the term foreign official.”  She stated as follows.  “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.  In addition, Commission and Department of Justice enforcement actions also provide guidance on the meaning of ‘foreign official’ in various contexts.  Finally, companies with a strong compliance culture have policies prohibiting all bribery in order to send a clear corporate message that such practices are not condoned.”

SEC Guidance?

“Both the Commission and the Department of Justice have numerous mechanisms for providing guidance on FCPA matters.  Perhaps the most important guidance comes from the enforcement actions that are brought by the Commission and the Department of Justice.  The Commission uses it pleadings and accompanying public news releases to highlight and reinforce the key elements of each case.  Additionally, senior staff in the Division of Enforcement speak regularly at industry conferences and provide guidance on the FCPA program. ”

For a prior post on “prosecutorial common law” – see here.

As relevant to Chairman Schapiro’s “guidance” response, readers may be interested in my “Facade of FCPA Enforcement” article  (here) in which I discuss  the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones statements of facts or allegations or conclusory legal statements; the increasing trend of FCPA enforcement actions resolved based on untested and dubious legal theories, as well as enforcement theories seemingly in direct conflict with FCPA’s statutory provisions; and the opaque nature of FCPA enforcement and how similar enforcement actions, based on the government’s own allegations, are resolved with materially different charges and penalties.

In short, the notion that settled SEC civil complaints or administrative orders (or now SEC NPAs or DPAs or DOJ NPAs or DPAs for that matter) provide meaningful guidance or should serve as FCPA caselaw is absurd.  In my Facade article, I detail cases in which the SEC admits that the terms of an SEC settlement “do not necessarily reflect the triumph of one party’s position over the other.”  I also highlight statements from former SEC Commissioner and current Standford law professor Joseph Grundfest that, among other things, SEC complaints “typically omit mention of valid defenses and of countervailing facts or mitigating circumstances …”.  In the words of Professor Grundfest, the “natural result” of settling an SEC enforcement action “is a one-sided record in which the Commission asserts its version of the facts and the law, and the settling defendants commit not to challenge that rendition.” 

On the same general topic, albeit in the DOJ FCPA context, see this recent piece from Michael Volkov “The FCPA & Voluntary Disclosure An Engimatic Threat to Due Process” (“the Justice Department has started to cite as precedent its own decisions respecting the outer reaches of the law”).

Strict Parent Company Liability for Foreign Subsidiary Actions?

Chairman Schapiro’s response states in full as follows.  “A U.S. parent company may be liable under the FCPA for bribes paid by its foreign subsidiary in certain circumstances, such as where the parent company had knowledge of the foreign subsidiary’s bribery or where the subsidiary acted as the parent’s agent.  ‘Knowledge’ under the FCPA’s anti-bribery provisions encompasses actual knowledge, conscious disregard of, or willful blindness to the subsidiary’s illicit activities.  In addition, under agency law, an agent’s knowledge can be imputed to the principal (parent).  Accordingly, in the absence of the requisite evidence, the Commission does not charge a U.S. parent company with a violation of the FCPA’s anti-bribery provisions in connection with the foreign subsidiary’s actions.  In addition, the Commission may, based on its analysis of the particular facts and circumstances of some cases, charge the foreign subsidiary directly with violation of the FCPA’s anti-bribery provisions while separately charging the parent company with violations of the books and records and internal control provisions of the FCPA.  This is because the public company parent typically is responsible for the accuracy of the books and records of its overall operations, including those of its controlled foreign subsidiaries.  While the FCPA’s books and records and internal controls provisions do not contain a ‘knowledge’ requirement, the Commission exercises its discretion and flexibility in charging these provisions.”

For previous posts on the issue of strict liability see here and here.

Double-Dip Penalties?

Chairman Schapiro stated as follows. “The Commission and Department of Justice do not obtain duplicative penalties in FCPA cases.  Typically, the Commission will obtain monetary sanctions in the form of disgorgement (ill-gotten gains) while the Department of Justice obtains monetary sanctions in the form of penalties.  In those rare cases where both the Commission and the Department of Justice obtain penalties, the total penalty assessed against the company is no greater than it would be if either the Commission or DOJ alone obtained the penalty.”

However, DOJ penalties are calculated by reference to the advisory U.S. Sentencing Guidelines where an important factor in determining the ultimate penalty amount is value of the benefit received by the company from the conduct at issue.  

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For your viewing pleasure here – an October 5th rountable program sponsored by the Heritage Foundation on corruption, economic growth, and freedom.

For the calendars of Indianapolis area readers see here.  A luncheon address – “Compliance in a New Era of FCPA Enforcement” I am giving next Tuesday (Oct. 11th) to the World Trade Club of Indiana.   The event, sponsored by Butler University College of Business, begins at 11:30 at the downtown law offices of Baker & Daniels.

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