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The 193 Meanings of “Foreign Official”

By most measures, there are 193 countries in the world.

According to the 11th Circuit’s recent “foreign official” ruling (see here), the FCPA’s key “foreign official” element can have 193 different meanings.

As previously highlighted, the key language from the opinion is as follows.

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. […] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.

To decide if the government ‘controls’ an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.

[…]

We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

In sum, the key concepts according to the 11th Circuit in analyzing whether a seemingly commercial enterprise is in fact an “instrumentality” of a foreign government such that its employees are “foreign officials” are control and function.

Yet how is a business organization competing in good-faith in the global marketplace supposed to find answers to these concepts?

The 11th Circuit thinks it will be easy as the court stated:

“We think it will be relatively easy to decide what functions a government treats as its own in the present tense by resort to objective factors, like control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity finances are treated as part of the public fisc.  Both courts and businesses subject to the FCPA have readily at hand the tools to conduct that inquiry (especially because the statute contains a mechanism by which the Attorney General will render opinions on requests about what foreign entities constitute instrumentalities.”

However, is it really that easy?

I trouble to envision a general counsel or chief compliance officer of a company charged with approving expenditures of things of value in connection with a business purpose (and let’s face it, companies do this all the time in the global marketplace as to certain customers and prospective customers) ever finding answers to certain issues identified by the 11th Circuit as being relevant.

The 11th Circuit’s suggestion to the contrary is somewhat comical.  Does the 11th Circuit envision the following?

  • General Counsel / Chief Compliance Officer:  Pardon me Company A, can you tell me how your principals are hired and fired?
  • General Counsel / Chief Compliance Officer:  Excuse me Company B, but do your profits go directly into the government fisc?  A follow-up if I may – does the government subsidize your operations?  And if so, for how long?

As to the FCPA’s Opinion Procedure program, seemingly lost on the 11th Circuit is that it often takes months for a business organization to receive an answer from the DOJ.  For this reason, among others, the FCPA Opinion Procedure program has been routinely criticized.  As noted in the OECD’s 2010 review of FCPA enforcement:

“So far, the FCPA Opinion Procedure has been used very little by the private sector to obtain DOJ advice on prospective transactions. […] The non-governmental participants in the on-site meetings cited several reasons for the infrequent use of the Opinion Procedure. For instance, legal and private sector representatives felt that the Opinion Procedure is only useful in limited situations where the prospective fact situation is narrow and not going to change. They also find that the response time, which is 30 days after the request is complete, is too long in certain situations, such as entering joint ventures and mergers and acquisitions, where a company normally needs to make decisions relatively quickly. […] The most pervasive concern of the private sector representatives was that availing themselves of the Opinion Procedure could expose them to potential enforcement actions by the DOJ, as well as provide competitors with information about their prospective international business activities.”

Moreover, a significant irony of the 11th Circuit’s resort to foreign characterization and treatment of a seemingly commercial enterprise is that the DOJ itself has rejected this approach in issuing opinions under the FCPA Opinion Procedure program.

For instance in Release 94-01 the Requestor disclosed that its “foreign attorney has advised that under the nation’s law, the individual [at issue] would not be regarded as either a government employee or a public official.”  However, the DOJ stated that “the foreign attorney’s opinion is not dispositive” and the DOJ “considered the foreign individual to be a ‘foreign official’ under the FCPA.”

Even the 11th Circuit noted that it will be a “difficult task – involving divining subjective intentions of a foreign sovereign, parsing history, and interpreting significant amounts of foreign law – to decide what functions a foreign government considers core and traditional.”  Moreover, the 11th Circuit recognized “there may be entities near the definitional line for ‘instrumentality’ that may raise a vagueness concern.”

Yet, the end-result of the 11th Circuit’s decision is that “foreign official” – a key element of the FCPA – may mean 193 different things.

Some may be thinking that this entire post has been wasted ink because the meaning of “foreign official” matters only to those intent on engaging bribery. Such a position is off-base as the meaning of “foreign official” matters for a number of reasons as will be explored in a future post.

Checking In With Richard Alderman

Richard Alderman is the former Director of the United Kingdom Serious Fraud Office (“SFO”).  Since leaving the SFO in April 2012, Alderman has remained active in anti-corruption projects.

In this Q&A, Alderman discusses certain of these projects and offers insight on the following issues:  the current international enforcement climate including multi-jurisdictional issues; voluntary disclosure; DPAs; and a compliance defense.

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In April 2012, you left the SFO.  What have you been doing since?

I have been working with some international institutions and NGOs dealing with anti-corruption on the front line. This is what I wanted to do because I had met a number of individuals who inspired me. Recent examples are the Convention on Business Integrity in Nigeria and an initiative by the Egyptian Junior Business Association aimed at the vibrant SME sector in Egypt. I have also had the privilege of meeting individuals involved in the radical transformation of the procurement practices of Moscow City Council.

How do you see the current international corruption enforcement scene?

We have moved on from where we were a few years ago when there were only a few states that took action in these cases. Examples of issues now are-

  • How do we deal with the interests of the different states that want to enforce the law?
  • What will be the impact of more enforcement by demand states (including demand states that are also supply states)?
  • When will law enforcement agencies uncover and prosecute corrupt companies that have no intention of complying with global rules?
  • How do we get the proceeds of settlements back to the demand states?
  • Can a system of incentives be devised to reward companies with top quality anti-corruption systems?

In current enforcement era, multiple sovereigns may have jurisdiction over the same alleged conduct.  What issues do you see regarding multi-jurisdictional enforcement?

This is becoming a key issue. I prepared a detailed report for the UNCAC conference in Panama in November 2013 that covered these and other issues.

Companies are undoubtedly at risk here. If we look at violations first, different states can prosecute for the same violation. The company’s only protection is the principle of double jeopardy but this is interpreted in different ways in different states. For example it is not an issue for the US because the US does not recognise foreign convictions and acquittals for this purpose.

This will become a particular issue when one of the enforcing states is the demand state. Why should such a state be prevented from taking action in its own courts because of a resolution elsewhere? We can expect national sovereignty issues.

Companies can also seek to exclude a state with a wide concept of double jeopardy by reaching a settlement with another state and then pleading double jeopardy in the first state. I have seen this.

The issue also arises with asset forfeiture. I do not understand how multiple states can confiscate the same asset or profit. Once the money has been paid to law enforcement somewhere then any further disgorgement is actually a criminal fine.

What about global settlements?

I am very much in favour of these. I know from my own experience that they are very difficult to bring about. The international mechanisms in Article 47 of UNCAC and Article 4(3) of the OECD Convention should be used to discuss how the different enforcing states should work together and how a global settlement should be structured. Neither mechanism has yet been used for this purpose but they are available. Enforcing states will be nervous but these mechanisms will be vital as more and more states start to enforce the law.

Do the recent Libor settlements have any implications for global settlements in corruption cases?

These settlements have been very remarkable. A UK prosecutor cannot however enter into such an agreement if there are criminal pleas in the UK. This is because the senior judge in the Innospec case said that it was wrong for the SFO to discuss the penalty to be paid by the company even if the penalty was subject to the overall approval of the court.

One consequence of the new UK DPA system is that the UK enforcing authority can enter into these discussions if what is being discussed is a DPA rather than a traditional prosecution. It will be up to the judge to decide if this is the right way forward.

The result is that UK prosecuting authorities will not be able to participate in global settlements in the future unless there is a DPA approved by the court. I see this as an issue that will be increasingly important in the UK.

Do you still favour corporate self-reporting of conduct that could implicate bribery and corruption laws?

Yes. I remain a keen supporter of self-reporting. This has however become more difficult for companies. There are two main reasons. These are-

  • No enforcing state has set out its policy on when it will refer the self-report to another state.  A company considering a self-report therefore has to think about the other states that may see the report (and whether employees are at risk). We need a proper understanding of what enforcing states should do. This needs to be publicly available and agreed by the UN and the OECD.
  • Even if the report is not passed to another state, that other state is likely to see media reports of the resolution and the admissions made by the company and decide to start its own action. There is an increasing risk of these follow up cases.

Should companies carry out their own investigations when alerted to alleged instances of improper conduct?

My experience is that major global companies take these allegations very seriously and want to see what happened. There is an issue about whether the company should self-report immediately or whether it should carry out some preliminary work to satisfy itself that there is something in the allegation. The expectations of enforcing authorities can vary here. My view has always been that the company should be satisfied first that there is something that requires detailed investigation.

I am in favour of companies carrying out their own investigations with agreement from the enforcing state about scope, milestones and regular updates. I know that some enforcing states will also want to carry out their own independent investigation. I understand the reasons for this but it means that the authority is spending its scarce resource on a case where the company is willing to cooperate and not on the more difficult cases where the company has no intention of self-reporting and cooperating. As I see it there is too little action by enforcing authorities in finding such companies and dealing with them.

Recently the U.K. adopted DPAs.  How do you feel about DPAs and what are the issues as you see them?  What issues do you see regarding DPAs?

I have always been in favour of DPAs as one tool available to prosecutors. My experience was that the UK was in a poor position in global cases with international resolutions with the traditional criminal justice tools. I saw two main advantages of DPAs. These are-

  • They can form part of a system of incentives to encourage companies to self-report and cooperate and to improve compliance.
  • They enable prosecutors to discuss global resolutions without contravening the Innospec case.

I know that the FCPA Professor has expressed considerable public opposition to DPAs. I agree that they need to be transparent and that the judges have to be fully involved. I also agree that we still need to see the traditional full prosecution with debarment in suitable cases. This could be where the company is systemically corrupt and has no intention of abandoning corruption. I want to see more of these cases being pursued by enforcing states.

The full prosecution should be part of the toolkit of the prosecutor. There should be other tools for other types of case. It is notable that the only states that have made a sustained attack on corporate corruption over the years have either not used traditional prosecution or have used it sparingly and have also used alternatives. This is significant although it seems to me to be insufficiently appreciated.

Should corporate compliance be a defence to a bribery or corruption offense or merely mitigate the potential fine and penalty amount?

I remain in favour of the compliance defence. The Bribery Act offence is an excellent model in this area. I have seen how much impact this had on companies and the scale of the improvement made in their anti-corruption work. There are a number of other states that have compliance as a defence.

There is however an issue that is going to be increasingly relevant in those states that have compliance as a defence. The public wants to see the offence produce results in terms of criminal convictions. So far there do not appear to be any in the states with a compliance defence. There will be a question about whether compliance as a defence is right or whether the US approach with compliance as mitigation is to be preferred because of the results achieved. We can expect a lot more on this. It may be one of the issues to be considered in the recently announced UK review of the effectiveness of the enforcing institutions.

You have talked publicly about sanctions and incentives for companies as it relates to bribery and corruption offenses.  Can you elaborate on this issue?

Alternatives to traditional prosecution together with self-reporting and cooperation are important incentives in the area of violations. There is though a wider issue that is not sufficiently recognised and discussed. This is whether there should be more general incentives to companies that have brought about an excellent standard of anti-corruption compliance.

There was a Recommendation by the OECD in 2009 encouraging states to look at public procurement, licenses, aid funding and export credits as a way of recognising companies with the highest standards of anti-corruption. There has been little progress on this although a few states have introduced some initiatives.

I am very much in favour of this. For example the citizens of a state will benefit if a company that meets very high standards is successful in a public procurement exercise and companies with a poor anti-corruption approach are not. If those companies with a poor record decide that they have to reform then that is a benefit to everyone.

I see this as one of the key issues in anti-corruption that will become increasingly prominent in the coming years. It has great potential to make a difference.

11th Circuit “Foreign Official” Decision – Perspective Including As To The Court’s Flawed Reasoning

Previous posts here, herehere, here and here have highlighted various aspects of the 11th Circuit’s recent “foreign official” decision in U.S. v. Esquenazi (the first time in FCPA history that an appellate court has directly addressed the enforcement theory that employees of alleged state-owned or state-controlled enterprises can be “foreign officials” under the FCPA).

This post contains additional perspectives and highlights the 11th Circuit’s flawed reasoning.  For purposes of this post, knowledge of the court’s opinion and the facts and circumstances underlying the case are presumed.  As previously disclosed, I served as a pro-bono expert to the defendants’ pro bono counsel in the 11th Circuit appeal and was previously engaged as an expert by defense counsel in prior “foreign official” challenges.

For starters, it is important to understand what was not at issue in the 11th Circuit appeal and what was at issue.

What was not at issue is whether the FCPA should be a comprehensive anti-bribery statute such as the U.K. Bribery Act.  Congress could have passed a comprehensive anti-bribery statute in 1977 – as well as when the FCPA was amended in 1988 and 1998 – and could still pass a comprehensive anti-bribery statute today if it chooses.  However, it is undisputed that Congress has not done so and the FCPA’s anti-bribery provisions are qualified in many ways, including as pertinent to the 11th Circuit appeal, through the category of recipients of the alleged improper payments.

What was not at issue was whether the 11th Circuit’s decision would have any practical effect on corporate compliance programs. The bulk of commentary regarding the 11th Circuit decision has been written by law firms writing for corporate audiences and I agree that the 11th Circuit decision has little practical impact on corporate compliance programs because risk-adverse business organizations were already structuring compliance policies and procedures to the DOJ and SEC’s enforcement theory that employees of SOEs were “foreign officials.”  Such corporate positions were not evidence of the validity of the enforcement agency position for the same reason that the trending corporate position of eliminating facilitation payments is not evidence that the FCPA’s express facilitation payment exception is invalid.

Rather what was at issue in the 11th Circuit appeal was the basic and fundamental principle of ensuring – when the government marshals its full resources against individuals and deprives the individuals of their liberty – that each element of the charge alleged is being applied consistent with Congressional intent in enacting the statute.  After all, the DOJ and SEC should only enforce a law that Congress passed.

Notwithstanding what was at issue in the 11th Circuit appeal, some have suggested:

“For those who challenged the government’s legal interpretation of the term “instrumentality,” they need to pick and choose better places to challenge the FCPA and the government’s enforcement  program.”

Given what was at issue in the 11th Circuit appeal, as well as the other “foreign official” challenges, you will not find me apologizing one iota for my involvement in these cases or my “foreign official” declaration that partly served as a basis for the challenges.

Moreover, notwithstanding the 11th Circuit decision, let’s not forget the ultimate outcome of the other enforcement actions in which “foreign official” was challenged.

  • A federal court judge granted, at the close of the DOJ’s case, John O’Shea’s motion for acquittal and found him not guilty of all substantive FCPA charges.  In this post, O’Shea’s lawyers opine that the “foreign official” issue played a role in the ultimate outcome of the case.
  • In the Carson “foreign official” challenge, “foreign official” issues moved to the jury instructions and the judge issued a pro-defendant jury instruction concerning “knowledge of status of foreign official” (see here for the prior post).  Soon thereafter, the DOJ offered – what can only be described as lenient plea deals – that the risk adverse defendants accepted and the DOJ never had to prove its case.
  • In the Lindsey Manufacturing enforcement action, the judge ultimately dismissed (see here) the case after finding numerous instances of prosecutorial misconduct.  Although the prosecutorial misconduct was seemingly unconnected to “foreign official” issues, post-trial motions concerning, among other things, “foreign official” issues were pending at the time of dismissal.

One final big-picture point before highlighting the 11th Circuit’s flawed reasoning.

In the minds of some, the “foreign official” issue has now been “resolved” and “settled.”  To this, I respond:  can anyone name another instance in which a key element of an important law is deemed “resolved” or “settled” because of one appellate court decision?

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The 11th Circuit recognized that the plain meaning of the word “instrumentality” in the FCPA only provides a partial answer as to its plain meaning and thus the court turned to “other tools to decide what instrumentality means in the FCPA.”

However, the court’s decision lacks any discussion of two statutes – one passed before the FCPA (the Foreign Sovereign Immunities Act) and one passed after the FCPA (Dodd- Frank, Section 1504) that explicitly contain the term instrumentality as well as SOE concepts.

It is a basic maxim of statutory construction that all terms in a statute are presumed to have distinct meaning and the 11th Circuit itself stated “it is a cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word.”

However, the 11th Circuit dodged the salient question – if instrumentality was viewed by Congress to encompass SOEs, then why do statutes passed before the FCPA, as well as after the FCPA, explicitly contain the term instrumentality as well as SOE concepts?

If Congress believed the term “instrumentality” to encompass SOEs without an express definition saying so, then both FSIA and Dodd-Frank contain redundant terms which itself violates a basic maxim of statutory construction that statutes are presumed not to contain redundant terms.  Indeed, where a particular element is explicitly set out in one statute, but it is not likewise set out in the statute at issue, courts presume that Congress did not intend to include that element in the statue at issue.

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The court also examined the “broader statutory context” of the term “instrumentality” and examined the FCPA’s 1998 amendments and legislative history related thereto relevant to “foreign official.”  However, the court’s decision lacks any discussion of the FCPA’s enacting legislative history relevant to “foreign official” and thus violates another maxim of statutory construction that enacting legislative history governs the meaning of a statutory term, not subsequent legislative history.

Here, the 11th Circuit recognized that it was skating on thin ice when it stated as follows.  “Although we generally are wary of relying too much on later legislative developments to decide a prior Congress’ legislative intent, the circumstances in this case cause us less concern in this regard.”  Indeed, the court even cited a Supreme Court decision stating that “the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one.”

Nevertheless, the court stated as follows.

“This is not an instance in which Congress merely discussed previously enacted legislation and possible changes to it.  Rather, Congress did make a change to the FCPA, and it did specifically to ensure that the FCPA fulfilled the promise the United States made to other nations when it joined the [OECD] Convention.  The FCPA after those amendments is a different law, and we may consider Congress’s intent in passing those amendments as strongly suggestive of the meaning of ‘instrumentality’ as it exists today.”

The 11th Circuit’s rationale for consulting post-enactment legislative history, but not enacting legislative history, is not persuasive.  Perhaps most important, the 1998 FCPA amendment to “foreign official” did not even concern the “department, agency, or instrumentality” prong of the “foreign official” definition.  Rather the 1998 amendment to “foreign official” merely added those associated with “public international organizations” to the definition of “foreign official.”

As detailed in my “foreign official” declaration, the salient points from the FCPA’s enacting legislative history are as follows.

  • During its multi-year investigation of foreign corporate payments that preceded enactment of the FCPA, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities.
  • In certain of the competing bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOEs. These bills were introduced in both the Senate and the House during both the 94th (1975-76) and 95th (1977-78) Congresses.
  • An American Bar Association committee informed the Chair of the House subcommittee holding hearings on these bills that the definition of “foreign government” in these bills, specifically the portion of the definition referring to “a corporation or other legal entity established or owned by, and subject to control by, a foreign government” was “somewhat ambiguous.” The American Bar Association committee suggested a “more precise definition of this aspect of the definition of ‘foreign government’ and proposed the following language: “a legal entity which a foreign government owns or controls as though an owner.
  • Despite being aware of SOEs, despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs, Congress chose not to include such definitions or concepts in S. 305, the bill that ultimately became the FCPA in December 1977.

The above points have never been disputed in any of the “foreign official” challenges.

Rather, the DOJ argued that because SOEs were discussed during the legislative debate, Congress must therefore have intended to include SOEs in the definition of the “instrumentality” even though there is no explicit reference in the thousands of pages of legislative history for this position.  The logic of the DOJ’s position would mean that Congress must have intended, despite the lack of explicit reference in the thousands of pages of legislative history, to include commercial bribery within the scope of the FCPA because there was much reference during the legislative history to commercial bribery payments.

In short, the 11th Circuit’s reasoning was flawed because in consulting legislative history the court consulted the wrong legislative history.  The correct legislative history, the enacting legislative history, says what it says and the salient points from my “foreign official” declaration have never been disputed.

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The 11th Circuit’s reasoning is further flawed by the inference in the court’s opinion that the FCPA’s 1998 amendments fully conformed the FCPA to the OECD Convention and, because of this, the FCPA must include SOEs because the OECD Convention does.

This is plainly false.

For starters, and as detailed in my “foreign official” declaration, it is clear that Congress was informed and understood that the 1998 amendments would not fully conform the FCPA to the OECD Convention.  Rather, the OECD Convention was described as “closely modeling” the FCPA; being “very similar” to the FCPA; being “largely consistent” with the FCPA; and “closely tracking” the FCPA.

For this reason, the 11th Circuit’s statement that Congress amended the FCPA in 1998 to “implement[…] the Convention’s mandates” is false.

Indeed, this was previously recognized in U.S. v. Kay where both the trial court and appellate court rejected the DOJ’s position that the FCPA captured payments to secure an “improper advantage” because the OECD Convention captured such payments.

The trial court decision stated:

“The OECD Convention had asked Congress to criminalize payments made to foreign officials ‘‘ ‘in order to obtain or retain business or other improper advantage in the conduct of international business.’’ . . . Congress again declined to amend the ‘‘obtain or retain business’’ language in the FCPA . . . . Congress did not insert the ‘‘improper advantage’’ language into the ‘‘obtain or retain business’’ provision of the FCPA.”

Although the Fifth Circuit overruled the trial court’s decision granting the defendants’ motion to dismiss, the appellate court likewise stated as follows concerning the FCPA’s 1998 amendments:

“When Congress amended the language of the FCPA, however, rather than inserting ‘any improper advantage’ immediately following ‘obtaining or retaining business’ within the business nexus requirement (as does the Convention), it chose to add the ‘improper advantage’ provision to the original list of abuses of discretion in consideration for bribes that the statute proscribes.’’

Even thought the U.S. signed the OECD Convention, the Convention was not self-executing.  Rather the Convention encouraged parties to “take such measures as may be necessary to establish that it is a criminal offense under its law for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official …”.

The notion that the FCPA changed in 1998, in the absence of specific implementing legislation as to specific elements, because of generic references to the OECD Convention is false and has previously been rejected by the Fifth Circuit.  In short, the OECD Convention was not self-executing and it is black letter law that if a treaty is not self executing it is not the treaty, but the implementing legislation, that is the law of the land.

Yet, the 11th Circuit suggested that because the “only change to the definition of ‘foreign official'” in the 1998 amendments was to add “public international organizations,” that “this seems to demonstrate that Congress considered its preexisting definition already to cover” employees of alleged SOEs.

For the reasons stated above in terms of the FCPA’s enacting legislative history, this suggestion is off-base and not supported by any explicit statement in the FCPA’s voluminous enacting legislative history.

The inference in the 11th Circuit’s decision is that the FCPA changed – presumably through a process of osmosis – because the U.S. signed the OECD Convention.  Taking the court’s rationale to its logical conclusion, does the FCPA no longer have an express facilitation payment exception because the Convention does not?  Does the FCPA no longer apply to payments made to political parties because the Convention does not?  Congress surely did not change through osmosis the scope and meaning of the FCPA on these issues despite its generic references to the Convention in the 1998 amendments.

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Throughout the “foreign official” challenges, the DOJ advanced the argument that a decision contrary its position (i.e. that employees of SOEs are not “foreign officials”) would result in the U.S. being out of compliance with its OECD Convention obligations.

This has been a red-herring argument all along.  Another another U.S. law, the Travel Act, which the DOJ has often used in connection with FCPA enforcement actions, can capture payments outside the context of “foreign officials” and is capable of capturing payments to SOE officials as contemplated by the OECD Convention.

Moreover, the DOJ’s position ignores the fact that courts in other OECD Convention countries have concluded that employees of alleged SOEs are not “foreign officials.”  (See here for a previous guest post regarding the issue in Korea).

Nevertheless, the 11th Circuit accepted the DOJ’s red herring argument and incorrectly concluded that it was “constrained to interpret ‘instrumentality’ under the FCPA so as to reach the types of officials the United States agreed to stop domestic interests from bribing when it ratified the OECD Convention.”  Elsewhere, the court stated that to interpret instrumentality to exclude SOEs “would put the United States out of compliance with its international obligations.”

Neither statement is true.

The U.K. Enters The Facade Era

In my 2010 article “The Facade of FCPA Enforcement,” I warned that this was going to happen.

Under the heading “why the facade of FCPA enforcement matters,” I noted, among other things, the “increasing frequency by which other nations are modeling enforcement of their own bribery laws on U.S. enforcement methods and theories” and stated that “these methods and theories, unless addressed and corrected here in this country, will continue to be replicated elsewhere, perhaps leading to a global facade of enforcement.”

Today, the U.K. formally enters the facade era as deferred prosecution agreements become available to U.K. prosecutors.  (See here and here for relevant documents recently released by the Serious Fraud Office (SFO) and Crown Prosecution Service (CPS)).

To anyone who values the rule of law, reading these documents is truly distressing and I imagine Sir William Blackstone (the famed English jurist best known for his Commentaries on the Laws of England) has flipped in his grave.

Why did the U.K. adopt DPAs?

In short, the SFO and CPS tell us that doing things the old-fashioned way (i.e. proving a criminal violation in an adversarial system) is too difficult and takes too long.  The SFO Director’s language on this issue is blunt as he states that “one of the principal purposes of DPAs is to bring resolution to cases of corporate criminality more quickly.”

The U.K.’s justification for DPAs is really quite sad as ease and efficiency are not concepts normally associated with the rule of law and justice.  Yet, when politicians and civil society groups are clamoring for more prosecutions this is the end result.

Before highlighting certain troublesome features of the U.K.’s new system, it is important nevertheless to recognize the following.

When the U.K. was considering its approach, it rejected U.S. style non-prosecution agreements and stated that such agreement

 “[Are] unsuitable for the constitutional arrangements and legal traditions in England and Wales.  We have concluded that [NPAs] are not suitable for this jurisdiction due to their markedly lesser degree of transparency, including the absence of judicial oversight.”  (See here for the prior post).

Moreover, even though the U.K. is adopting DPAs, the DPA regime is most certainly different from the U.S. regime in that the U.K. regime contemplates active and early involvement by the judiciary.

U.K. DPAs will be used to resolve a variety of corporate criminal actions, not just actions under the Bribery Act.  My opposition to the U.K. adopting DPAs has been limited to application to Bribery Act offenses (see here for my prior submission to the U.K. Ministry of Justice as well as prior posts here, here and here).  The questions I posed have never been answered.

“Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement (the first two options being prosecute vs. not prosecute)? If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. This seems like a just and reasonable result and there is no need for a third option in such a case. On the other hand, if a corporate does not have adequate procedures (thus demonstrating a lack of commitment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. This seems like a just and reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures? I submit the answer is no and urge the MoJ to reject use of DPAs in the Bribery Act context.”

For years, I have been highlighting how the DOJ picks and chooses which aspects of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions it chooses to follow.  When the DOJ wants to justify a position it is taking and feels like the OECD Convention supports this position, the DOJ cites to the OECD Convention.  However, when the DOJ is acting inconsistent with the OECD Convention, it simply ignores the Convention.

For instance, OECD Convention Article 5, under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”  Every time the DOJ enters into an NPA or DPA and justifies its decision through reference to potential collateral consequences that may result to a particular company, the DOJ is considering the “identity” of the “legal persons involved” in violation of Article 5.

The U.K.’s Code of Practice for DPAs does the same thing.

Section 2.7 of the Code of Practice states:

“Prosecutors should have regard when considering the public interest stage to the U.K.’s commitment to abide by the OECD Convention on ‘Combating Bribery of Foreign Public Officials in International Business Transactions’ in particular Article 5.  Investigation and prosecution of the bribery of a foreign public official should not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Yet a page later, at Section 2.8 under the heading “additional public interest factors against prosecution,” the Code of Practice sets forth the following:

“[whether] a conviction is likely to have disproportionate consequences for [an organization], under domestic law, the law of another jurisdiction including but not limited to that of the European Union …”

“[whether] a conviction is likely to have collateral effects on the public, [an organization’s] employees and shareholders of [an organization] and/or institutional pension holders.”

In other words and contrary to Article 5, the U.K., like the U.S., will take into account the identity of the legal person involved.

Notwithstanding the above, the most troubling feature of the Code of Practice concerns the evidence sufficient for U.K. prosecutors to resolve an action via a DPA.  In defending adoption of the “lower evidential test” in the Code of Practice and addressing concerns that this standard “was so easily satisfied as to have very little substance,” the SFO’s response is, in pertinent part, as follows.

“One of the principal purposes of DPAs is to bring a resolution to cases of corporate criminality more quickly.  […] If a prosecutor had to be satisfied that the evidence against an organization was sufficient to meet the Full Code Test (“Prosecutors must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction against each suspect on each charge”) without the alternative of the ‘lower’ evidential test before considering whether a DPA was in the public interest, a key purpose of DPAs, as was the express intention of parliament, would become redundant.  In order to achieve one of parliament’s key intentions in legislating for the introduction of DPAs a ‘lower’ evidential test is necessary.”

“Satisfaction of the Full Code Test, particularly in view of the well documented difficulties in proving corporate liability, would in most circumstances require a complete an full scale investigation, sometimes spanning many jurisdictions, which inevitably is time consuming and expensive.  It is not intended for there to be such an investigation before a DPA is entered into.”

This response is nothing short of laughable and truly distressing to anyone who values the rule of law.  The SFO is defending the DPA regime by saying that the old regime of proving corporate criminal liability required a complete and full scale investigation that took too long.

At the end of the day, the U.K.’s adoption of DPAs is a political response to show results.  Because this new system expands the market for legal services, you will find few opposing it.

What a sad state of affairs the U.S. has started and is now spreading across the world.

Friday Roundup

Siemens delists, former Siemens execs fail to show up, quotable, to FCPA Inc. and for the reading stack.  It’s all here in the Friday roundup.

Siemens to Delist ADRs

The record-setting 2008 FCPA enforcement action against Siemens A.G. was primarily based on the fact that the company had its shares listed on a U.S. exchange and was thus subject to the FCPA’s books and records and internal controls provisions.  (Note:  Siemens AG itself was not charged with FCPA anti-bribery violations).

I doubt – six years after the fact – that there is a cause and effect relationship here, but it is interesting nevertheless to note that last week Siemens announced that “it is planning to delist its American Depositary Receipts (ADR) from the New York Stock Exchange (NYSE).”  The company further announced that “Siemens intends to terminate its reporting obligations (deregistration) to the American Securities and Exchange Commission (SEC).”  As stated in the release:

“The goal of the delisting and deregistration is to address the change in the behavior of its investors. As a consequence processes of financial reporting are simplified and efficiency is improved. The trading of Siemens shares is nowadays conducted predominantly in Germany and via electronic trading platforms (‘over-the-counter’). Trading volume of Siemens shares in the USA is low, amounting to significantly less than 5% of its global trading volume in the year 2013.”

A delisting of course does not remove Siemens from the reach of the FCPA.  There still is the 78dd-3 prong of the FCPA, but the jurisdictional reach of it is the most restrictive found in the FCPA.

For a moment, let’s just pretend that Siemens delisting was related, in some way, to the FCPA.  If so, is this a good thing or a negative impact of the DOJ and SEC’s expansive jurisdictional theories of FCPA liability against foreign actors?

For instance, as noted in this 2010 post, approximately one month after Daimler resolved its FCPA enforcement action it decided – after 17 years on being on the NYSE to delist from the exchange.  (See here for more).

Former Siemens Execs

One way for the SEC to win its FCPA cases is when the defendants do not show up.

As highlighted here, in December 2011 the SEC filed a civil lawsuit against former Siemens executives Uriel Sharef, Herbert Steffen, Andres Truppel, Ulrich Bock, Stephan Signer, Carlos Sergi, and Bernd Regendantz.  The complaint was based on conduct concerning the Argentine prong of the 2008 Siemens enforcement action.

On the same day the enforcement action was announced, Regendatz agreed to resolve the enforcement action.  As noted in the SEC release, Regendatz “paid a €30,000 administrative fine ordered by the Munich prosecutor (equivalent to $40,000 in U.S. dollars).”

As highlighted in this prior post, when put to its burden by Steffen, Judge Shira Scheindlin dismissed the SEC’s complaint in February 2013 for lack of personal jurisdiction (an initial threshold issue not unique to the FCPA).

As noted in this prior post, in April 2013 Uriel Sharef agreed to resolve the enforcement action by paying a $275,000 civil penalty.  (See here).

The SEC voluntarily dismissed its claims against Carlos Sergi in October 2013.

Earlier this week, on February 3rd, Truppel consented to a final judgment in which he agreed to pay a $80,000 civil penalty.

Also earlier this week, on February 4th,  Judge Scheindlin entered a default judgment as to Bock and Signer.  As part of the order, Bock was ordered to pay $937,957 (a $524,000 civil penalty, $316,452 in disgorgement, plus prejudgment interest of $97,505) and Signer was ordered to pay a $524,000 civil penalty.  The Bock and Signer settlement amounts rank first and third in terms of individual SEC FCPA settlements amounts with Ousama Naaman (approximately $877,000) ranking second.

The burning question of course is whether the SEC would have prevailed against Truppel, Bock and Signer if put to its burden of proof.  Like in Steffen, there would no doubt have been an initial threshold issue of personal jurisdiction before turning to FCPA specific jurisdictional issues.

The relevant jurisdictional allegations against Truppel were as follows.

“Truppel participated in meetings in Miami, Florida, and New York, NY, in which bribes to Argentine officials were negotiated and promised. He caused Siemens to pay, and promise to pay, millions of dollars in bribes in an effort to retain the DNI Contract. Some ofthe bribes were paid via bank accounts in the United States.”

The relevant jurisdiction allegations against Bock were as follows.

“Bock participated in a meeting in Miami, Florida, at which bribes to Argentine officials were negotiated and promised. Bock also provided false testimony in two arbitration proceedings, one of which was filed in Washington, D.C., in an effort to conceal Siemens’ corrupt payments and recover its expected profits from the DNI Contract.”

The relevant jurisdictional allegations against Signer were as follows.

“Signer authorized the payment of bribes to government officials in Argentina. Some of the bribes were paid to bank accounts in the United States.”

Quotable

As noted here OECD Secretary General Angel Gurria warned that the bribery of foreign public officials by businesses was contributing to an “erosion of public trust.”  True, but “enforcing” bribery and corruption laws through resolution vehicles not subjected to judicial scrutiny and otherwise inconsistent with rule of law principles (see here for my recent article) also contribute to an “erosion of public trust.”

Gurria also reportedly stated:  “corporations need to stop bribing public officials, and that is going to help recover public trust and legitimacy, that is going to help markets work.”

In all due respect, this is just such a naive way to view the problem of bribery and corruption.

I like what Alexandra Wrage (President of Trace International) said here:

“Whether they’re stating it expressly or acting on it quietly, governments are using corporations as their primary tool to reduce international bribery. They alarm companies with vast fines and terrify individuals with substantial prison sentences with the hope of ending the payment of bribes because they cannot, in most cases, do much of anything about those demanding them. This is not inappropriate. Companies are regulated, subject to laws and answerable to shareholders. The worst offenders demanding bribes, on the other hand, do so with impunity, hiding behind sovereign immunity and, often, their own, complicit local law enforcement. Abacha. Suharto. Marcos. Duvalier. It’s a longstanding tradition, still thriving in many countries today. U.S. and some European law enforcement agencies have been extraordinarily successful, with fines in the United States now counted in the billions of dollars and other jurisdictions promising to catch up soon. While these efforts have done more than anything else to reduce bribery, they have yet to convince us that companies are both the sole source and solution of all international corruption — and that’s insupportable. […] The simple reality is that there are just some things that companies can’t do about corruption.”

See here and here for further reasons why Gurria’s statement is off-base.

To FCPA Inc.

Weil Gotshal announced that Adam Safwat, most recently the Deputy Chief in the DOJ’s Fraud Section where he worked on – among other things – FCPA enforcement actions – has joined the firm.  According to the release, “with several years of senior level experience in the DOJ, as well as experience as a former federal prosecutor, [Safwat] brings a deep understanding of criminal and regulatory enforcement to the Firm, including with regard to corporate securities fraud and Foreign Corrupt Practices Act investigations.”

Reading Stack

A handy-dandy “Master List of Third Party Corruption Red Flags” courtesy of the FCPAmericas Blog.

For your viewing enjoyment, the recent program at Fordham Law School “China and the Foreign Corrupt Practices Act:  Challenges for the 21st Century.”

For your viewing enjoyment, Senator Elizabeth Warren talking about an issue discussed in last week’s Friday roundup regarding JPMorgan.

I’ve written before about “offensive use” of the FCPA, but I am still trying to figure out the purpose of this press release.

*****

A good weekend to all.

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