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“The Shadow Lengthens”

[Late yesterday the DOJ announced this [1] $88 million FCPA enforcement action (the 12th largest of all-time in terms of settlement amount) against Marubeni Corporation – the same company that resolved a $55 million DOJ FCPA enforcement action in 2012 (see here [2] for the prior post) involving Bonny Island, Nigeria conduct.  Yesterday’s FCPA enforcement action against Marubeni involving the Tarahan power plant project in Indonesia is not a surprise.  In this [3] April 2013 post regarding the FCPA enforcement action against current and former Alstom employees in connection with the same project, I sniffed out the details and accurately connected the dots to Marubeni.  A future post will go in-depth as to yesterday’s Marubeni enforcement action when original source documents become available]

I have long called for abolition of non-prosecution and deferred prosecution agreements in the FCPA context.  (See previous posts here [4], here [5]here [6], and here [7] for instance).  In short, and as noted in the prior posts, use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues as well as other issues.  (See “The Facade of FCPA Enforcement [8]“).

As noted in this [9] previous post, in May 2012 the Center for Legal Policy Research at the Manhattan Institute released this [10] dandy report titled “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements.” Authored by James Copland, the report stated in pertinent part as follows:

“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”

Recently, Copland and a co-authored followed up with this [11] dandy report titled “The Shadow Lengthens:  The Continuing Threat of Regulation by Prosecution.”  In pertinent part, the Executive Summary states:

“The last ten years have seen the emergence of a new approach to business regulation and prosecution of wrongdoing in the United States. The U.S. Department of Justice now regularly enters into “deferred prosecution” or “non-prosecution” agreements (DPAs or NPAs) with large corporations, in which companies are paying billions of dollars in fines annually without trial. These agreements are presented as steps short of prosecution of corporations, a step that might drive firms into bankruptcy and disrupt their economic sectors. At the same time, a good case can be made that these agreements suffer from a lack of transparency. Questions naturally arise as to whether attorneys working for the federal government, with minimal to no judicial oversight, are best positioned to change significantly the business practices of individual companies and, indeed, entire industries.

Businesses prefer to enter into DPAs or NPAs rather than face trial, even when the costs of such arrangements are severe, because of the significant capital-market pressures stemming from criminal inquiries (including depressed stock prices and impaired credit) as well as the statutory and regulatory consequences flowing from indictment or conviction—for example, exclusion from government reimbursement or contracts, or the retraction of government licenses vital to a company’s operation. Prosecutors, in turn, prefer to avoid the risk and cost of trial as well as the potentially severe collateral consequences that indictment or conviction can impose on corporate stakeholders, including employees and creditors, as witnessed in the collapse of the large accounting firm Arthur Andersen following its 2002 federal indictment—which was ultimately set aside by the U.S. Supreme Court.

Thus, such arrangements have become commonplace, so much so that they might be characterized as a “shadow regulatory state” over business. The federal government has reached 278 DPAs and NPAs with businesses since 2004, with ten of the Fortune 100 companies operating under such agreements just since 2010. Although the federal government entered into only 17 DPAs and NPAs from 1993 through 2003, it entered into 66 in just the last two years, in which almost $12 billion in total fines and penalties were imposed. Companies in the finance and health-care sectors have been particularly likely to wind up under such agreements, with the finance sector accounting for 13 DPAs and NPAs and the health-care sector accounting for 8 of them in 2012–13. The reach of federal prosecutorial agreements has not stopped at America’s shores: the Department of Justice has asserted authority over hosts of foreign businesses—in some cases, for alleged conduct occurring completely outside the United States.

DPAs and NPAs are notable in that they impose terms on companies that go beyond the fines or incarceration normally associated with criminal punishment and because they go beyond requiring that the companies correct the specific practices alleged to be violations of the law. Instead, these agreements often call for major changes in firms’ internal processes of many types—from training to human resources—based on the apparent assumption that absent such changes, wrongdoing will be more likely to recur.

[…]

In many cases, the alleged predicate offenses underlying DPAs or NPAs involve ambiguous facts or strained or novel interpretations of law—interpretations that have remained untested in court, given companies’ pronounced pressure to settle. In addition, DPAs and NPAs regularly cede to prosecutors the sole discretion to determine whether companies are in breach of the agreement’s terms, without judicial oversight or the possibility of appeal.”

One of the NPAs highlighted in the recent report is the Ralph Lauren Corporation.  Citing to, among other sources, prior FCPA Professor posts, the report states:

“The Ralph Lauren [NPA] also highlights the broad scope of federal FCPA enforcement, in which the executive branch is arguably holding companies to account for activities exempted from Congress’s statute, with minimal prospects for judicial review.”

The report also rightly notes:

“Congress’s intent in enacting the FCPA was clearly to deter American companies from buying foreign influence on a large scale – but not to police all foreign bribes potentially paid by U.S. businesses.  Given the powerful incentives that businesses have to enter into DPAs and DPAs, however, federal prosecutors have broadly interpreted the FCPA’s scope – and limited its express exemption – effectively insulting it from judicial review.”

To learn more about Congressional intent in enacting the FCPA, see “The Story of the Foreign Corrupt Practices Act [12].”