The Holder Memo and FCPA Enforcement
Attorney General Eric Holder recently issued a memo (here) regarding “Department Policy on Charging and Sentencing.”
There is little that is new is this memo; in fact Holder states that the purpose of the memo is “to reaffirm the guidance” provided by Title 9 of the U.S. Attorneys’ Manual, Chapter 27″ (see here) – a manual which has “guided federal prosecutors” for “nearly three decades.”
Nor is there anything FCPA specific in the memo.
Yet the memo, and the broad pronouncements Holder makes, call into question whether several recent Foreign Corrupt Practices Act enforcement actions contradict the guidance the Attorney General has reaffirmed.
In the memo, Holder states – “persons who commit similar crimes and have similar culpability should, to the extent possible, be treated similarly.”
Under the law, “persons” include both individuals and business entities, including corporations.
However, as explored in this post, a two-tiered justice system has seemingly developed in FCPA enforcement.
Certain corporations in certain industries, most often selling certain things to certain customers, can seemingly violate the FCPA’s anti-bribery provisions with very little consequence. In fact, with increasingly frequency, such companies are not even charged with FCPA antibribery violations and/or may not even have to plead guilty to anything. See here for the recent Daimler, here for the recent BAE, and here for the Siemens “bribery, yet no bribery” enforcement actions.
On the other hand, the DOJ seeks long prison sentences for individuals such as Charles Paul Edward Jumet, who make payments that pale in comparison to the payments made by the above corporations. In doing so, the DOJ usually trots out its get tough language (i.e. “bribery isn’t just a cost of doing business overseas [… but] a serious crime that the U.S. government is intent on enforcing”).
The Holder memo also states “in accordance with long-standing principle, a federal prosecutor should ordinarly charge ‘the most serious offense that is consistent with the nature of the defendant’s conduct, and that is likely to result in a sustainable conviction.”
Again, reference is made to the Daimler, BAE, and Siemens enforcement actions.
In Daimler, the DOJ release (here) notes that Daimler “brazenly offered bribes in exchange for business around the world” and that Daimler “saw foreign bribery as a way of doing business.” Yet, Daimler was not charged with FCPA anti-bribery violations. In fact, Daimler was not required to plead guilty to anything as it received a deferred prosecution agreement.
In BAE, the DOJ’s criminal information (here) alleges that “BAE provided substantial benefits to one KSA (Kingdom of Saudi Arabia) public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.” The indictment alleges that BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.” Yet, BAE was not charged with FCPA anti-bribery violations.
In Siemens, the DOJ release (here) states, among other things, that for “much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens.” Yet, Siemens was not charged with FCPA anti-bribery violations.
It is difficult to reconcile the charging decisions in these recent enforcement actions with the language of the Holder memo.
As to sentencing, the Holder memo states – “in a typical case” the appropriate sentence should be reflected by the “applicable guidelines range, and prosecutors should generally continue to advocate for a sentence within that range.”
Apparently, neither Siemens and Daimler were “typical” cases, because in both enforcement actions the DOJ advocated for a sentence significantly below the guidelines range.
In Siemens, the guidelines range (see here) was $1.35 billion – $2.7 billion. However, the ultimate DOJ fine was $448.5 million. Siemens did not voluntarily disclose the conduct at issue, nevertheless, the DOJ gave Siemens greater sentencing credit than allowed for under the guidelines because the guidelines calculation was “incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.” For more on Siemens’ fine, see here and here.
In Daimler, the guidelines range (see here) was $116 million – $232 million. However, the ultimate DOJ fine was approximately $94 million. Again, Daimler did not voluntarily disclose the conduct at issue, nevertheless, the DOJ gave Daimler greater sentencing credit allowed for under the guidelines. The DOJ stated, “indeed, because Daimler did not voluntarily disclose its conduct prior to the filing of the whistleblower lawsuit, it only receives a two-point reduction in its culpability.” However, the DOJ “respectfully submit[ed] that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.”
As demonstrated above, three of the DOJ’s most high-profile FCPA or “FCPA like” enforcement actions seemingly contradict many of the guiding principles in the Holder memo.
With Attorney General Holder now re-affirming these principles, it will be interesting to see if future FCPA enforcement actions comply more closely with these principles or if the future holds more facade enforcement actions.
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Speaking of Attorney General Holder, while most of us were enjoying the Memorial Day barbeque, he was delivering remarks at the OECD Conference in Paris. See here for a copy of his remarks.
Congressman Towns Is Asking The Right Questions
One interesting, surprising, and controversial aspect of FCPA enforcement is that the U.S. government remains a lucrative customer for many FCPA violators, including some of the most egregious violators.
Last December, on the one-year anniversary of the record-setting Siemens enforcement actions, I ran this post – “Siemens … The Year After.”
Among other things, the post noted that in the year since resolution of the Siemens FCPA matter, the U.S. government continues to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”
Using www.recovery.gov, the post then identifies many of the hundreds of government contracts awarded to Siemens’ business units with funds made available from the American Recovery and Reinvestment Act, the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009.
These contracts have been awarded by the following government agencies: Department of Defense, Department of the Air Force, Department of the Army, Department of Transportation, Department of Health and Human Services, Department of Energy, Department of Commerce, Department of Housing and Urban Development, and the General Services Administration. According to Recovery.gov, even the DOJ (i.e. the same government agency that prosecuted Siemens for a pattern of bribery the agency termed “unprecedented in scale and geographic scope”) awarded a Siemens business unit a contract funded with stimulus dollars. Because these are just government contracts awarded with stimulus money, they represent merely the tip of the iceberg.
Siemens is not alone.
In February, BAE settled “FCPA-like” charges. Since the enforcement action, the company has been inking contracts with U.S. government agencies left and right.
Last week it was a $10.7 million contract with the U.S. Army (see here). The week before it was a $5.5 million contract and a $10 million contract with U.S. government agencies (see here and here).
Numerous other FCPA violators could be listed as well.
Against this backdrop, Congressman Edolphus Towns (D-NY), Chairman of the House Committee on Oversight and Government Reform, is asking the right questions.
In a May 18th letter to Attorney General Eric Holder (see here) the Committee expresses its concern “that settlements of civil and criminal cases by DOJ are being used as a shield to foreclose other appropriate remedies, such as suspension and debarment, that protect the government from continuing to do business with contractors who do not have satisfactory records of quality performance and business ethics.”
The letter specifically mentions Kellogg, Brown & Root (KBR), including its 2009 FCPA enforcement action (see here and here).
The letter notes that “remarkably, neither the criminal [FCPA] conviction” nor KBR’s other legal woes “have precluded KBR from continuing to receive new government contracts.”
The letter then correctly notes, as detailed above, that “KBR does not appear to be an isolated example of this inconsistent policy whereby DOJ pursues fines and criminal sanctions for illegal actions by government contractors, yet the negotiated resolution of these cases does not have any effect on the company’s eligibility to continue to receive new contracts. In fact, an agreement by DOJ to intervene on the company’s behalf in any collateral proceedings, such as suspension and debarment, is a staple of deferred prosecution agreements.”
The letter continues:
“This type of clause, in which DOJ agrees to take the company’s side in suspension and debarment proceedings, has become standard and continues to this day. In a settlement just last month in which Daimler paid $185 million to settle criminal and civil charges that it violated the Foreign Corrupt Practices Act, DOJ “agrees to cooperate with Daimler” “[w]ith respect to Daimler’s present reliability and responsibility as a government contractor.” (See here for the Deferred Prosecution Agreement – para 21).
The letter concludes by the Committee asking for answers to the following questions by May 28th.
1. Does DOJ consider resolution of charges to foreclose action by other government agencies to suspend or debar companies from contracting?
2. In view of the fact that suspension and debarment is not a penalty, but is an important means for government agencies to protect themselves from unscrupulous and poorly performing contractors, please provide a detailed explanation of whether the Justice Department believes it is in the government’s best interest to continue to award contracts to those with a record of violations of law.
3. Does DOJ consult with federal government contracting authorities when entering into settlement agreements with companies that compete for government contracts?
4. Identify all instances in which DOJ officials intervened in a suspension and debarment proceeding on behalf of government contractors since 2005 and explain the basis for the DOJ intervention.
These are all the right questions to ask of the DOJ.
I’ve noted in numerous other posts (and elsewhere) that DOJ’s deterrance message will not fully be heard until an FCPA violator is debarred from receiving lucrative government contracts.
For a copy of the Committee’s news release (see here).
Is the FCPA a Government Cash Cow?
Last December, I noticed this piece which discussed the increase in FCPA enforcement. One reason, according to the authors (including a former assistant director of the Division Enforcement of the SEC) – “governments will keep pursuing corrupt business practices for one very simple reason–it’s lucrative.”
Interesting point isn’t it?
If one were to calculate the “rate of return” / “return on investment” in a typical Foreign Corrupt Practices Act enforcement action it would be enormous. Most FCPA enforcement actions result from corporate voluntary disclosures whereby company counsel deliver to the prosecutors three-ring binders of the relevant documents and witness interview memos from the internal investigation and otherwise cooperate. Thus, it does not take much in terms of government resources to prosecute a typical FCPA enforcement action which typically leads to multi-million dollar fines and penalties.
Where does this money go?
Straight to the U.S. treasury.
Say what you want about the SFO’s BAE enforcement action, but at least a portion of that money went to the alleged “victims” of the wrongful conduct prosecuted – the people of Tanzania. (See here).
The suggestion that one of the reasons for the rise in FCPA enforcement is because it is a lucrative cash cow for the government would seem not to be dispelled by comments made this week in an American Lawyer article “Here Comes the Payoff Police” (here) by a former high-ranking DOJ FCPA official. The comment that caught my attention is this:
“The government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”
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Here are some other tidbits that caught my eye this week.
More Pre-Enforcement Action News
It used to be that FCPA enforcement actions made the news. Now, it’s pre-enforcement action. Alcatel-Lucent (here) stay tuned it’s coming. Technip (here) stay tuned it’s coming. Panalpina (here) stay tuned it’s coming.
Add to the list Pfizer and Johnson & Johnson. See here for the Main Justice piece.
FCPA Unit in S.F.
As detailed here and elsewhere, the SEC’s San Francisco branch office has a new unit devoted exclusively to the FCPA. “The fact that we have a significant presence of companies in Silicon Valley who do business internationally, specifically in Asia, makes us well-suited for addressing these kinds of issues,” said Tracy L. Davis, the assistant regional director in charge of the new San Francisco unit. “That’s one of the reasons why San Francisco is a particularly good location for an FCPA unit.”
A good weekend to all.
The FCPA and Reputational Damage
Nearly every FCPA presentation one sees or hears seems to talk about collateral sanctions which flow from an FCPA enforcement action, including the reputational harm companies “suffer” when disclosing FCPA issues or settling FCPA enforcement actions.
But is it true?
Do companies that disclose FCPA issues or settle FCPA enforcement actions actually suffer any reputational damage?
For companies, reputation is traditionally measured by stock price performance and business revenue.
Do companies that disclose FCPA issues or settle FCPA enforcement actions have a decrease in stock price or lose business?
How does one even measure such an issue?
Stock price movement upon the market first learning of a potential FCPA issue? Stock price movement upon settlement of an FCPA enforcement action? Something in between? Business revenue during the period of uncertainty (i.e. from disclosure to settlement)? Business revenue in the year after settlement of an FCPA enforcement action?
Whatever the metric, the answer to whether companies suffer reputational damage upon disclosing an FCPA issue or settling an FCPA enforcement action seems to be inconclusive.
That was the conclusion of a January 2009 study by Nera Economic Consulting (see here). Among other things, the study concluded that “the extent of the fallout from the relatively recent trend of increased FCPA enforcement actions remains uncertain.” For some companies “there was no statistically significant price reaction” yet for other companies there was a “negative price reaction.”
The below examples also seem to support the inconclusive answer.
Last month, (see here) Hewlett-Packard Co.’s (HP) Moscow offices were raided in connection with an investigation focusing on whether company executives made millions in payments to the prosecutor general of the Russian Federation to secure contracts. It was front page news in several publications, including the Wall Street Journal. This week HP (see here) disclosed second quarter results (the same quarter the issue surfaced). The results … stellar. “Second quarter net revenue of $30.8 billion, up 13%, or $3.5 billion, from a year earlier.” HP’s Chairman and CEO said “HP had an exceptional quarter with strong performance across every region,” – “we’ve built the best portfolio in the industry, and our customers are responding. We’re winning in the marketplace, investing for the future and confident in the enormous opportunity that lies ahead.” What about the company’s performance in Russia? Even better. The HP release notes “revenue from outside of the United States in the second quarter accounted for 66% of total HP revenue, with revenue in the BRIC countries (Brazil, Russia, India and China) increasing 25% while accounting for 10% of total HP revenue.”
Front page press coverage of HP’s potential FCPA issues seems to have had no affect on the company’s reputation when viewed through the prism of financial performance.
What about Siemens?
In the 365 days after the Siemens enforcement action, Siemens outperformed its competitors and received mounds of new business from the U.S. government, including taxpayer funds from the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009 (see here). This despite the fact (according to DOJ statements) that Siemens engaged in a pattern of bribery “unprecedented in scale and geographic scope” and for much of Siemens operations around the world “bribery was nothing less than standard operating procedure.” Siemens surely paid a hefty fine/penalty amount, but did its reputation suffer? It would appear not.
What about BAE?
When the BAE “FCPA-like” enforcement action was announced, the company’s stock rose. Since the February 2010 enforcement action, the company has been inking contracts with the U.S. and U.K. governments (the prosecuting governments) left and right. This week it was a $10.7 million contract with the U.S. Army (see here). Last week it was a $5.5 million contract and a $10 million contract with U.S. government agencies (see here and here). Throw in a recent £111 million contract from the UK’s Ministry of Defence (see here) and one would be justified in concluding that it matters very little if a company is caught engaging in bribery and corruption.
However, just when one is set to reach such a conclusion, along comes a company like Avon. Last month, the company shares dropped 8% upon news that its previously disclosed FCPA issues appear to have escalated. (see here, here and here). It sure looks like Avon’s reputation (viewed through the prism of its stock price) has suffered because of the FCPA escalation.
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Somewhat “on topic” is the recent news that Daimler AG, after a 17 year listing on the New York Stock Exchange, has decided to delist. Purely coincidence that this delisting is occuring approximately one month after Daimler resolved its FCPA case?
Daimler agreed to enter into a deferred prosecution agreement for conspiring to violate the FCPA’s books and records provisions and knowingly falsifying books, records and accounts, provisions which only apply to “issuers”.
(The DOJ’s allegations as to Daimler also allege use of U.S. bank accounts and U.S. entities – an independent basis by which a foreign company like Daimler can become subject to the FCPA). For more on the Daimler enforcement action (see here and here).
Q & A With Martin Weinstein
Martin Weinstein (here) is a “dean” of the FCPA bar. Much of my early understanding of the FCPA came as a direct result of working with Martin on FCPA investigations and enforcement actions. I also have Martin to thank for several of the stamps in my passport.
Below is a Q & A exchange with Martin in which he talks about the FCPA’s early years, the current state of enforcement, and suggestions for change.
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Q: As a 1984 law school graduate did you have any exposure to the FCPA? Describe your first exposure to the FCPA?
A: When I was in law school, I never heard of the Foreign Corrupt Practices Act and didn’t even know that it existed until around 1991. I was an Assistant U.S. Attorney, and a witness I was interviewing mentioned to me that she thought that some payments had been made to an Egyptian government official. I remember turning to the investigating agent who was with me and saying, “isn’t there a statute somewhere that prohibits this?” That was my first exposure to the Foreign Corrupt Practices Act.
Q: You were lead DOJ counsel in the Lockheed case in the mid-1990’s. Generally describe this matter, how it was resolved, and whether resolution of this case, if brought in 2010, would look any different?
A: I was the lead counsel in the Lockheed case that was resolved in the mid-1990’s, specifically January 1995. It was, by all accounts, the first really serious corporate case brought in the then 20 year history of the Foreign Corrupt Practices Act. In that case, the company actually was indicted, and the allegations involved payments to a member of the Egyptian Parliament to obtain a contract through which the Egyptian Air Force would buy three C130 aircraft from Lockheed. There were two individuals also charged. The cases against all three defendants (the company and the two individuals) were resolved before trial, in the company’s case, literally days before the jury was to be selected.
The company agreed to plead guilty to a conspiracy to violate the Foreign Corrupt Practices Act. It agreed to pay a combination of civil and criminal damages in the amount of $24.8 million, which was twice the profit of the contract they had with the Egyptian military to sell the C130 aircraft.
One of the individuals pled guilty to a lesser charge, and the other individual, a marketing manager named Suleiman Nassar, actually fled to Syria. That was one of the most interesting parts of the case for me because I visited Damascus on several occasions and negotiated directly with the government. Nassar was imprisoned in Syria on these charges, but was ultimately released and returned to the U.S. to plead guilty to violating the FCPA and became, I believe, the first person to go to jail under the FCPA.
Q: Did FCPA enforcement, during the last decade, morph into something other than what Congress intended the FCPA to address when passed in 1977?
A: The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability. I do think that the DOJ and the SEC have stayed generally true to the vision of the FCPA, which focuses on things of value, primarily money, going to foreign government officials in exchange for business.
Q: What is your biggest challenge as an FCPA practitioner? How has your FCPA practice changed over the past decade?
A: The challenges as an FCPA practitioner have mainly involved keeping up with the pace of the enforcement agencies in recent years. Whereas cases used to involve U.S. companies and their businesses in a few countries, the typical case now involves enforcement actions by multiple sovereigns involving the same company at the same time, and that makes the practice more challenging and more fascinating.
Q: What are your clients’ biggest challenges / frustrations with the FCPA or FCPA enforcement? Have these challenges / frustrations changed over the past decade?
A: I think that companies’ main frustration is that even with an outstanding compliance program and 99% of the employees maintaining strict adherence to the laws, you can still have violations which expose the entire company to extraordinarily serious penalties. I think the government has, at times, lost track of the main motivations for this statute and has become focused on the amounts of penalties, the imposition of compliance monitors, and exercising government control over what are basically private businesses. The vast majority of companies are absolutely committed to following the spirit and the letter of the FCPA, but when a company gets into trouble, the whole enterprise can be put at risk because of the conduct of a few people, and that doesn’t seem right. I worry that the government has come to see private industry through “dirty” glasses: the punishments don’t seem to fit the crimes.
Q: The FCPA was passed in 1977, amended in 1988 and also amended in 1998. Given this approximate ten year cycle, is the FCPA in need of further amendment? If so, what would the “Weinstein” amendment look like?
A: I think the Weinstein amendment would focus on the very significant issue of who is a foreign official and what constitutes a state-controlled instrumentality. There is so little guidance in this area that an amendment to the law providing clarity to companies wishing to comply is really essential. For example, after the U.K. government takeovers of certain British banks and U.S. intervention in the auto industry, did all these private businesses become state-controlled instrumentalities rendering all their employees government officials? Companies should not have to guess who is and who is not a government official.
Q: Arguably the two most egregious bribery schemes in recent years involved Siemens and BAE. In both instances, the companies were not charged with FCPA antibribery violations. What message does this send?
A: Siemens and BAE were not charged with antibribery violations largely for two different reasons. In the Siemens case and a number of other cases, charging a company with antibribery violations renders it susceptible to significant suspension and debarment risks. If the government can find suitable alternatives to antibribery charges and still tell the full story of the conduct to the public, it is really a much more just solution not to expose the company to extreme suspension and debarment risks. In BAE, I think the issue was much more one of jurisdiction, and I think the government is going to find this issue repeatedly if it continues to seek to prosecute foreign companies that have relatively little contact with U.S. interstate commerce.
Q: How can law and business schools best expose future lawyers and business leaders to the FCPA? What advice do you have for law students interesting in a future FCPA practice?
A: The FCPA has been a fantastic area in which to practice and to watch evolve. For students who are interested in the field, I think the most important thing is to learn as much as you can about U.S. criminal law and U.S. securities law and their interplay with various anticorruption laws around the world. It has become a very complicated field and I think it is safe to say the stakes for companies and individuals have never been higher.