Top Menu

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.

“A Tip A Day”

According to Joe Palazzolo’s recent post in Corruption Currents (a Wall Street Journal blog), “a person familiar with the matter” said the SEC “has been receiving at least one tip a day about potential foreign bribery violations” pursuant to Dodd-Frank’s new whistleblower provisions.

Whether those tips turn into enforcement actions will be the question.

As I noted in this prior post, my guess is that the new whistleblower provisions will have a negligible impact on FCPA enforcement.

Speaking generally on Dodd-Frank’s whistleblower provisions (i.e., not just in terms of the FCPA) SEC Chairman Mary Schapiro had this to say (see here) in September 30th testimony before the Senate Committee on Banking, Housing, and Urban Affairs:

“Staff in the Division of Enforcement, with assistance from other divisions and offices, is actively working to draft implementing regulations for the whistleblower program. Pending the issuance of these regulations (due no later than 270 days after the date of enactment of the Act), the staff has been and will continue to be able to receive whistleblower complaints. Also, information for potential whistleblowers has been posted on our website. Already, since the passage of the Act, we have seen a slight uptick in the number of tips and complaints received, and, more importantly, an uptick in the quality of complaints.”

As noted in Schapiro’s testimony, “the first report to Congress on the whistleblower program will be provided on October 30, 2010.”

For more on Dodd-Frank’s whistleblower provisions see here.

DOJ, SEC Receive FCPA Training

The Department of Justice and the Securities and Exchange Commission enforce the Foreign Corrupt Practices Act.

It is thus a bit strange that the DOJ and SEC are receiving FCPA training.

Yet, piecing together information from two prominent law firm event calendars (see here and here) that is exactly what is occuring today in Washington D.C. at the SEC headquarters.

Described as a “joint FCPA training program” for the DOJ, SEC, and FBI and the “SEC’s FCPA Boot Camp” the speakers appear to include a who’s who of the FCPA defense bar.

What prompted this training session? What is the full agenda of topics? What type of questions will DOJ and SEC personnel ask?

Inquiring minds want to know.

Inquiring minds may also wonder – is it proper for the DOJ and SEC to receive training from lawyers and law firms that are frequent “adversaries” in FCPA enforcement actions?

The event is not included on the SEC’s event calendar (see here), but DC readers may want to show up at the SEC’s headquarters today and say “I’m here for the FCPA training” to see what happens.

If anyone has information or insight as to this event, please leave a comment.

A few other DOJ / SEC items of interest to pass along.

Make Your Voice Heard

According to this release, the SEC is seeking public comment on various sections of the recently enacted Dodd-Frank financial reform package. The SEC will post all submissions on SEC’s Internet Web site. As noted in the release, “members of the public who wish to submit official comments on particular rulemaking initiatives should submit comments during the official comment period that starts with the notice of the initiative published in the Federal Register.” (emphasis added).

To learn more about Section 922’s whistleblower provisons, see here and here. To learn more about Section 1504’s Resource Extraction Issuer Disclosure provisions see here.

The Revolving Door Continues to Revolve

Some of you, I know, think it is no big deal when a DOJ prosector enforces a law one day and then the next day defends clients against enforcement of that same law.

Others of you, I know, think that this is an important public policy issue worthy of discussion.

Whatever your persuasion, it should be noted that yet another DOJ attorney with FCPA responsibilties has left government service for a private law firm to engage in an FCPA practice.

According to this Main Justice story, Steven Fagell, Assistant Attorney General Lanny Breuer’s deputy chief of staff, is leaving the DOJ to return to Covington & Burling LLP (Breuer’s previous employer), the firm he worked at prior to joining the DOJ in January 2009. Main Justice reports that “as a member of the Criminal Division’s senior leadership team, Fagell served as a counselor to Breuer and worked on a broad range of issues including the Financial Fraud Enforcement Task Force and the Foreign Corrupt Practices Act.” According to Tim Hester, Covington’s managing partner, Fagell is expected to work on FCPA matters at the firm (see here).

For other recent movement betweent the DOJ and the FCPA bar see here, here and here.

Former SEC FCPA Enforcement Attorney Critical of SEC’s Recent Veraz Networks Inc. Enforcement Action

Richard Grime is a former high-ranking SEC FCPA enforcement attorney. While at the SEC, Grime “played a prominent role in the Commission’s FCPA program, spoke at FCPA conferences, and participated or supervised many of the Commission’s FCPA cases. He also worked closely with the Department of Justice on countless parallel investigations.” (See here).

Grime is currently a partner at O’Melveny & Myers LLP and is listed as the lead author of this recent release regarding the SEC’s recent enforcement action against Veraz Networks Inc.

The Veraz enforcement action was discussed in this prior post. Among other things, I noted in the post that the Veraz enforcement action contributes to several pillars of what I have been calling the facade of FCPA enforcement. In short, one pillar is the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action, I stated. Another pillar discussed is the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action, I stated given that the enforcement action (like so many) is based on the SEC’s theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

Grime and his co-authors strike the same themes in the release.

Among other things, Grime and his co-authors state that the SEC “complaint discloses little information about the specifics of the alleged misconduct” and “the complaint is remarkably ambiguous about the substance of the alleged violations.”

According to Grime and his co-authors:

“The complaint refers to ‘gifts,’ ‘illicit payments,’ and ‘questionable expenses,’ but provides little useful insight as to the surrounding circumstances or even the value of some of the alleged gifts and payments. Similarly, the complaint does not state how the company recorded the payments or how the records were inaccurate.”

Why does this matter?

As Grime and his co-authors note: “given that there are few FCPA court opinions, the SEC should seek through these settled complaints to fully explain the facts underlying its actions and how those facts violate the law.”

As to the enforcement agencies’ interpretation of the key “foreign official” element, Grime and his co-authors state as follows:

“Like numerous prior cases, the SEC alleges that employees of foreign government-controlled companies are foreign ‘government officials.’ Until a court decides otherwise, the SEC and the Department of Justice will continue to broadly interpret the FCPA and companies will need to diligence the ownership and control of commercial organizations across the world to avoid running afoul of the FCPA.”

Grime and his co-authors also dish up this criticism of the Veraz enforcement action:

“By punishing Veraz for such conduct, the SEC provides little incentive for a company to voluntarily disclose misconduct, cooperate, and thereby seek leniency. It is unstated whether Veraz cooperated with the SEC investigation, but the company did disclose that it spent $3 million on the investigation. For that sum, the company presumably assisted the SEC’s investigation, but no credit (or explanation for a lack of credit) is given. The specter that even small payments will be prosecuted may drive companies to conclude that remediation without the government’s involvement is the wiser approach.”

The 1981 GAO Report

The year was 1981.

The FCPA was a mere infant – approximately 3.5 years old. Those living with it were concerned with its ambiguities and complying with it.

In March 1981, the “investigative arm” of Congress, the Government Accountability Office (GAO) released a report, “Impact of Foreign Corrupt Practices Act on U.S. Business.” (See here and here).

The report was based, in part, on a GAO questionnaire survey of 250 companies randomly selected from the Fortune 1000 list of the largest industrial firms in the U.S.

The questionnaire addressed the FCPA’s relationship to the following four areas: (1) corporate policies and/or codes of conduct, (2) corporate systems of accountability, (3) cost burdens, if any, incurred by management to comply with the act, and (4) corporate opinions regarding the (i) acts effect on U.S. corporate foreign sales, (ii) the clarity of the act’s provisions, (iii) the potential effectiveness of an international antibribery agreement, and (iv) perceived effectiveness of the act in reducing questionable payments.

The GAO also discussed the FCPA’s impact with leading public accounting firms, professional accounting and auditing organizations, professional legal associations and business and public interest groups. In addition, the GAO discussed enforcement of the FCPA with DOJ and SEC officials and examined documentation relating to enforcement activities. Also interviewed by the GAO were officials from the Overseas Private Investment Corporation, Department of Commerce, Treasury, and State.

The GAO report covers all the topics listed above. However, this post relates to the clarity of the FCPA’s provisions.

Chapter 4 of the Report is titled “Issues Surrounding the Act’s Antibribery Provisions.”

The chapter begins by noting that there is “confusion over what constitutes compliance with the act’s antibribery provisions.”

The report notes that “corporate and governmental officials have criticized the anti-bribery provisions as being ambiguous about what constitutes compliance.”

The ambiguities include confusion or uncertainty about a host of issues, including the “definition of ‘foreign official.””

At the time, the term “foreign official” specifically excluded any employee whose duties are essentially ministerial or clerical.” This exclusion was eliminated in the 1988 amendments to the FCPA. Otherwise the definition of “foreign official” the GAO report found to be ambiguous is same today – “any officer or employee of a foreign government or one of its departments, agencies or instrumentalties.” [Note -the public international organization prong was added in 1998].

The report notes:

“This definition has been criticized as unclear. Lawyers we contacted questioned whether employees of public corporations, such as national airlines or nationalized companies, are considered foreign officials. Similar questions have surfaced in countries – particularly developing countries – where there are small and frequently closely related groups, including both business and government relationships as well as families. Individuals within these groups frequently move between the private and public sectors, often without a clear distinction.”

The report then discusses the DOJ’s guidance program and begins by noting that “President Carter expressed concern over the potential effect of the act’s alleged ambiguities in September 1978 – only 9 months after its passage.” “To reduce this uncertainty, he directed the Department of Justice to give the business community guidance concerning its enforcement intentions under the act.”

The report notes that in March 1980, the DOJ implemented its “long awaited guidance program” but that the “program has yet to effectively address the ambiguities, and it is doubtful it will.”

In concluding Chapter 4 of the Report, the GAO notes:

“the act is an expression of congressional policy, and rigorously defined and completely unambiguous requirements may be impractical and could provide a roadmap for corporate bribery. On other hand, companies, whether registered with SEC or domestic concerns under Department of Justice jurisdiction, should be subject to clear and consistent demands by the Government agencies responsible for enforcing the act.”

An option the GAO recommends is that “the Justice Department, SEC, and other interested agencies […] offer legislative proposals which would amend the act to more explicitly define the antibribery provisions and [such an amendment] could cover concepts such as the definition of “foreign official.”

GAO notes “because of the importance of the act and the questions and concerns about the antibribery provisions, close congressional oversight is needed.”

Not surprsingly, both DOJ and SEC disagreed with the GAO’s findings. In its responses, the agencies attack, not the substance of the findings, but the GAO’s methodology.

The GAO report states:

“Both SEC and Justice disagree with our recommendations that they develop alternative ways to address the antibribery provisions. They contend that our statistics suggest that ambiguities in the act are not a sigifnicaint problem.”

In 1981, the investigative arm of Congress found, based on extensive study, that the FCPA’s “foreign official” element was ambiguous.

Here we are some thirty years later having the same discussion.

[Here is another interesting nugget. In June 1981, John Fedders was named to be the SEC’s Director of Enforcement, replacing Stanley Sporkin who left to become general counsel at the CIA. During a news conference, Fedders “pledged to enforce, with discretion, the Foreign Corrupt Practices Act, which he criticized as being ambiguous.” See Owen Ullmann, “Corporate Lawyer Gets SEC Enforcement Post,” Associated Press, June 29, 1981.]

Powered by WordPress. Designed by WooThemes