Bribery Perceptions
Last week Transparency International (“TI”) released its Bribe Payers Index (see here). The index “ranks 28 of the world’s largest economies according to perceived likelihood of companies from these countries to pay bribe’s abroad.” TI’s data is derived from a survey of approximately 3,000 business executives worldwide. The executives were asked for each of the 28 countries with which they have a business relationship with (for example as supplier, client, partner or competitor) “how often do firms headquartered in that country engage in bribery in this country.”
Among the key findings in the index are that “companies from China and Russia were viewed as the most likely to pay bribes” and that “perceptions of the frequency of foreign bribery by country and business sector have on average seen no improvement since the last Bribe Payers Index published in 2008.”
As to China and Russia, the TI report states “it is of particular concern that China and Russia are at the bottom of the index.” The report states as follows. “Given the increasing global presence of businesses from these countries, bribery and corruption are likely to have a substantial impact on the societies in which they operate and on the ability of companies to compete fairly in these markets.”
As noted in this prior post, China recently passed an “FCPA-like” law, as did Russia as noted in this post.
In terms of perception of bribery by companies, the U.S. ranked a rather dismal 10th, behind Netherlands, Switzerland, Belgium, Germany, Japan, Australia, Canada, Singapore and the United Kingdom. Even though the U.S. clearly leads the world in enforcement of its anti-bribery law, the survey seems to suggest that ad hoc enforcement action of the FCPA is not having – at least in the minds of the survey participants – a meaningful deterrent effect in reducing instances of improper payments.
Another Enforcement Action Involving Chinese Design Institutes
Yesterday, the SEC issued (here) an administrative cease and desist order as to Watts Water Technologies, Inc. (“Watts”) and Lessen Chang concerning violations of the FCPA’s books and records and internal control provisions. Watts designs, manufactures, and sells water valves and related products and Chang, a U.S. citizen, was the former interim general manager of Watts Valve Changsha Co. Ltd. (“CWV”), a wholly-owned Chinese subsidiary operated by Watts and sold in 2010. According to the SEC, Watts consolidated CMV’s books and records into its financial statements and CWV’s revenues accounted for approximately 1% of Watts’ gross revenues.
According to the SEC, “CWV produced and supplied large valve products for infrastructure projects in China” – projects “mostly developed, constructed, and owned by state-owned entities” that routinely retained “state-0wned design institutes to assist in the design and construction” of projects. According to the SEC, “employees of CWV made improper payments to employees of certain design institutes … to influence the design institutes to recommend CWV valve products to [SOEs] and to create design specifications that favored CWV valve products.” According to the SEC, “the payments were disguised as sales commissions in CWV’s books and records, thereby causing Watts’ books and records to be inaccurate,” and that “Watts failed to devise and maintain a system of internal accounting controls sufficient to prevent and detect the payments.” According to the SEC, Chang “approved many of the payments to the design institutes and knew or should have known that the payments were improperly recorded on Watts’ books as commissions.” The SEC found that “CWV’s improper payments generated profits for Watts of more than $2.7 million.”
The Watts enforcement action is yet another example of an FCPA enforcement action focused on Chinese Design Institutes. Previous enforcement actions include Rockwell Automation (here), ITT (here), and Avery Dennison (here).
In the order, the SEC found that “Watts failed to implement adequate internal controls to address the potential FCPA problems posed by its ownership of CWV – a subsidiary that sold its products almost exclusively to SOEs.” The SEC noted that “although Watts implemented an FCPA policy in October 2006, Watts failed to conduct adequate FCPA training for its employees in China until July 2009.” As to Chang’s role, the SEC stated that “Chang approved commission payments to CWV sales personnel that he knew included payments to design institutes.” According to the SEC, “Chang also knew that Watts’ management in the U.S. was unaware of the CWV [sales policy that generated the commission payments] that facilitated the improper payments and he resisted at least one attempt by several of his colleagues at Watts China to have the policy translated and submitted to Watts’ senior management for approval.” The SEC stated that “Chang’s resistance to efforts to have the Sales Policy translated and submitted to Watts’ management in the U.S. was a cause of Watts’ internal control violations, since it prevented the parent company from discovering the improper payments.”
Based on the above conduct, Watts agreed to pay approximately $3.8 million (2.8 million in disgorgement, $820,000 in prejudgment interest and a $200,000 civil monetary penalty). Chang agreed to pay a $25,000 civil monetary penalty.
How did Watts’ general counsel learn that Chinese Design Institutes could present FCPA risk? According to the SEC, by reading its prior enforcement action against ITT. The SEC states as follows. “In March 2009, Watts’ General Counsel learned of a Commission enforcement action against another company that involved unlawful payments to employees of Chinese design institutes. Because Watts’ senior management in the U.S. knew that CWV’s customers included [SOEs], Watts implemented anti-corruption and FCPA training for its Chinese subsidiaries. This training took place starting in the Spring of 2009. In July 2009, following FCPA training sessions for certain management of Watts China, Watts China’s in-house corporate counsel became aware of potential FCPA violations at CWV through conversations with CWV sales personnel who were participating in the training. Shortly thereafter, the in-house lawyer notified Watts’ management in the U.S. of the potential violations. On July 21, 2009, Watts retained outside counsel to conduct an internal investigation of CWV’s sales practices. Watts’ outside counsel subsequently retained forensic accountants to assist with the investigation. On August 6, 2009, Watts self-reported its internal investigation to the staff. As the internal investigation progressed, Watts shared the results of the investigation with its outside auditors and the staff through periodic reports, and undertook” remedial measures.
Under the heading “Watts’ Remedial Measures” the SEC stated as follows. “Since July 2009 when the conduct was discovered, Watts has taken the following remedial steps. At the start of its internal investigation, Watts directed all of its sales and finance employees at CWV and Watts China to stop all payments of any kind to SOEs. While the internal investigation was ongoing, Watts eliminated commission-based compensation at CWV to ensure that no further improper payments were made by CWV sales personnel and disclosed the internal investigation in its August 7, 2009 Form 10-Q. In addition, Watts retained additional outside counsel to draft and implement enhanced anti-corruption policies and procedures, including an enhanced Anti-Bribery Policy, a Business Courtesy Policy designed to ensure that any payments made to customers comply with the FCPA, an enhanced Travel and Entertainment Expense Reimbursement Policy for its Chinese subsidiaries, and enhanced intermediary due diligence procedures. In conjunction with its internal investigation, Watts conducted a worldwide anti-corruption audit. As part of its anti-corruption audit, Watts conducted additional FCPA and anti-corruption training for Watts China and the company’s locations in Europe, conducted a risk assessment and anti-corruption compliance review of Watts’ international operations in Europe, China, and any U.S. location with international sales, and conducted anti-corruption testing at seven international Watts sites, including each of the manufacturing and sales locations in China. In an effort to ensure FCPA compliance and training going forward, Watts contracted with an online global training organization to provide regular anti-corruption training and hired a Director of Legal Compliance, a new position that reports to Watts’ General Counsel regarding issues under the Code of Conduct and Anti-Bribery Policy.”
Question of the day – should payments made without U.S. management knowledge at a Chinese subsidiary constituting less than 1% of overall revenue result in a company conducting a worldwide review of its operations?
Recent Disclosures Raise Many Questions
Deere & Co., Goldman, Pfizer, News Corp, Parametric Technology, Bruker, Diebold, Watts Water Technologies, 3M Corp. The flurry of public company disclosures of FCPA inquiries (some new, some merely updates) in recent days raise many questions.
Has the increase in FCPA enforcement done anything to deter future FCPA violations?
Why in this era of increased FCPA compliance does there seem to be more, not less, FCPA inquiries? Does effective compliance reduce FCPA scrutiny or does effective compliance uncover more FCPA issues? If the latter, does that argue in favor of a compliance defense?
If every company hired FCPA counsel to do a thorough review of its world-wide operations would – given the enforcement agencies theories of interpretation – 50% of companies find technical FCPA violations? 75%? 95%? If the answer is any one of these numbers is that evidence of how corrupt business has become or is that evidence of how unhinged FCPA enforcement theories have become?
Other than plaintiffs’ firms representing certain investors in (some would say opportunistic) securities class actions or derivative claims, do investors even care about these disclosures?
What do these recent disclosures – involving companies in diverse industries operating in diverse countries – say about the FCPA itself? Is it working? Does it need reform?
Ponder these questions while browsing the latest disclosures.
Goldman
From the company’s August 9th 10-Q:
“[The company] and certain of its affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SEC’s short sale rule, algorithmic and quantitative trading, futures trading, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices, compliance with the U.S. Foreign Corrupt Practices Act and the effectiveness of insider trading controls and internal information barriers.”
As noted in this prior post, Goldman’s FCPA scrutiny relates to its relationship with Libya’s sovereign wealth fund.
Pfizer
The company stated as follows in its August 11th 1o-Q:
“The Company has voluntarily provided the DOJ and the U.S. Securities and Exchange Commission (SEC) with information concerning potentially improper payments made by Pfizer and by Wyeth in connection with certain sales activities outside the U.S. We are in discussions with the DOJ and SEC regarding a resolution of these matters. In addition, certain potentially improper payments and other matters are the subject of investigations by government authorities in certain foreign countries, including a civil and criminal investigation in Germany with respect to certain tax matters relating to a wholly owned subsidiary of Pfizer.”
News Corp.
News Corp.’s FCPA exposure has been detailed in several prior posts (see here for instance) and in the company’s August 10th 8-K it stated as follows.
“In July 2011, the Company announced that it would close its publication, News of the World, after allegations of phone hacking and payments to police. As a result of these allegations, the Company is subject to several ongoing investigations by U.K. and U.S. regulators and governmental authorities, including investigations into whether similar conduct may have occurred at the Company’s subsidiaries outside of the U.K. The Company is fully cooperating with these investigations. In addition, the Company has admitted liability in a number of civil cases related to the phone hacking allegations and has settled a number of cases. The Company has taken steps to solve the problems relating to News of the World including the creation and establishment of an independent Management & Standards Committee, which will have oversight of, and take responsibility for, all matters in relation to the News of the World phone hacking case, police payments and all other connected issues at News International Group Limited (“News International”), including as they may relate to other News International publications.”
Parametric Technology Corp.
In a new disclosure, the company stated as follows in its August 10th 10-Q:
“In the third quarter of 2011, we identified certain payments by certain business partners in China that raised questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with our business policies. We are conducting an internal investigation and have voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. We are unable to estimate the potential penalties and/or sanctions, if any, that might be assessed in connection with this matter. If we determine that the replacement of certain employees and/or business partners is necessary, it could have an impact on our level of sales in China until such replacements are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue.”
Bruker Corp.
In a new disclosure, the company stated as follows in its August 9th 10-Q:
“The Company has received certain anonymous communications alleging improper conduct in connection with the China operations of its Bruker Optics subsidiary. In response, the Audit Committee of the Company’s Board of Directors initiated an investigation of those allegations, with the assistance of independent outside counsel and an independent forensic consulting firm. The investigation is ongoing and includes a review of compliance by Bruker Optics and its employees in China with the requirements of the Foreign Corrupt Practices Act (“FCPA”) and other applicable laws and regulations. To date, the investigation has found evidence indicating that payments were made that improperly benefit employees or agents of government-owned enterprises in China. The Company voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. It is the intent of the Audit Committee and the Company to cooperate with both agencies in connection with any investigation that may be conducted in this matter. In 2010, the China operations of Bruker Optics accounted for less than 2.5 percent of the Company’s consolidated net sales and less than 1.0 percent of its consolidated total assets. The internal investigation being conducted by the Audit Committee is ongoing and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations do provide for potential monetary penalties as well as criminal and civil sanctions in connection with FCPA violations. It is possible that monetary penalties and other sanctions could be assessed by the Federal government in connection with this matter. The nature and amount of any monetary penalty or other sanctions cannot reasonably be estimated. We have not recorded any provision for monetary penalties related to criminal and civil sanctions at this time.”
Diebold Inc.
In its August 8th 10-Q the company stated as follows.
“The Company’s global Foreign Corrupt Practices Act (FCPA) review remains on schedule with no material developments during the three months ended June 30, 2011: During the second quarter of 2010, while conducting due diligence in connection with a potential acquisition in Russia, the Company identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the FCPA, particularly the books and records provisions of the FCPA. As a result, the Company is conducting an internal review and collecting information related to its global FCPA compliance. In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation over the past several years which may also potentially implicate the FCPA. The Company’s current assessment indicates that the transactions and payments in question to date do not materially impact or alter the Company’s consolidated financial statements in any year or in the aggregate. The Company’s internal review is ongoing, and accordingly, there can be no assurance that this review will not find evidence of additional transactions that potentially implicate the FCPA. The Company has voluntarily self-reported its findings to the SEC and the DOJ and is cooperating with these agencies in their review. The Company was previously informed that the SEC’s inquiry has been converted to a formal, non-public investigation. The Company also received a subpoena for documents from the SEC and a voluntary request for documents from the DOJ in connection with the investigation. The Company expects to complete its internal review of these matters by the end of 2011. Once the Company completes its internal review, it will begin discussions with the SEC and the DOJ to resolve this matter. At this time, the Company cannot predict the results of the government investigations and therefore cannot estimate the potential loss or range of loss it may incur with respect to these investigations or their potential impact on the consolidated financial statements. Future resolution of these matters with the DOJ and SEC could result in a material impact to the Company’s consolidated financial statements.”
Watts Water Technologies Inc.
In an August 3rd 8-K filing, the company provided this update:
“In the second quarter of 2011, the Company recorded income of $0.05 per share in discontinued operations related to a reserve adjustment for the previously disclosed FCPA investigation. The adjustment reflects management’s best estimate of a possible charge in connection with this matter based on ongoing discussions with SEC staff. There is no definitive agreement for resolution of this matter at this time.”
3M Company
In an August 4th 10-Q filing, the company provided this update:
“On November 12, 2009, the Company contacted the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities. The Company also contacted certain affected government agencies in Turkey. The Company retained outside counsel to conduct an assessment of its policies, practices, and controls and to evaluate its overall compliance with the Foreign Corrupt Practices Act, including an ongoing review of our practices in certain other countries and acquired entities. The Company continues to cooperate with the DOJ and SEC and government agencies in Turkey in the Company’s ongoing investigation of this matter. The Company cannot predict at this time the outcome of its investigation or what regulatory actions may be taken or what other consequences may result.”
Deere & Co.
In addition to the above disclosures, the Wall Street Journal Corruption Currents, among others, reported this week that Deere & Co. “received an inquiry from regulators last month regarding payments made in Russia and nearby countries.” In a statement, Deere stated as follows. “On July 25, 2011, Deere received a request from the SEC that it voluntarily produce documents relating to Deere’s activities, and those of third parties, in certain foreign countries. Deere is cooperating with the SEC’s requests.”
House Hearing – Overview and Observations
Representative James Sensenbrenner (R-WI) today chaired a hearing of the House Judiciary Committee, Subcommittee on Crime, Terrorism, and Homeland Security titled “Foreign Corrupt Practices Act.” (See here for the video).
This post provides a chronological overview of the hearing as well as observations.
Compared to the Senate’s FCPA hearing in November 2010 (see here for the prior post) today’s hearing (approximately two hours) was much more contentious. For instance, during the hearing Chairman Sensenbrenner noted that FCPA enforcement has become a “considerable windfall for the federal government” and he concluded the hearing by telling Greg Andres (DOJ) that it “would behoove the DOJ to realize that the statute needs updating” and that those on the Committee will be drafting a reform bill.
The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980’s in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business.
There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals most notably clarifying the FCPA’s definition of “foreign official” / “instrumentality” and exploring an FCPA compliance defense. In fact, John Conyers (D-MI), who appeared most supportive of the current state of FCPA enforcement, stated he would support such reform proposals. The DOJ supports neither of these proposals.
Other issues explored in the hearing included prosecutorial discretion and DOJ declination decisions – including a request that the DOJ provide further information as to its declination decisions.
What happens next is a good question.
It seems like an FCPA reform bill will soon be introduced and hearings as to the specifics of such a bill may occur. Whether such a bill can get out of committee for full consideration by the House, and whether similar bills will be introduced in the Senate, is the open question. Politically, any FCPA reform efforts are likely, because of the topic at issue, to attract substantial opposition – including opposition that is less than informed as to the actual issues.
It bears noting that the last time Congress enacted significant FCPA amendments, the process took eight years and the statute was amended, not through a stand-alone bill, but through Title V, Subtitle A, Part I of the Omnibus Trade and Competiveness Act of 1988.
Opening Statement of Chairman Sensenbrenner
Sensenbrenner began by noting that when Congress passed the FCPA in 1977 the “world was a different place.” In response to slush funds and secret payments to foreign governments that adversely affected U.S. foreign policy, Congress passed the FCPA and the law “sent a strong signal.” (For an overview of the facts and circumstances motivating Congress to pass the FCPA – see here).
Sensenebrenner next observed that thirty-four years later, the world has turned upside down, China is a power, the nature of overseas business has changed, and many countries have some state-control over business.
Sensenbrenner noted that there has been a dramatic increase in FCPA prosecution and that last year approximately 1/2 of all DOJ criminal penalties were in FCPA cases (see here for the DOJ release) – a dynamic he called a “considerable windfall for the federal government.”
In touching upon themes similar to when Congress held substantive FCPA hearings in the mid-1980’s, Sensenbrenner placed the increase in FCPA enforcement in the context of the current economic downturn. Indeed a theme throughout the hearing was that the current state of FCPA enforcement may be harming U.S. business interests.
Sensenbrenner stated that “FCPA prosecutions should be effective and fair,” but also “predictable” so that the “rules of the road are clear” so that “business can start moving again.”
In closing his opening statement, Sensenbrenner stated that the Committee was well-suited to examine the impact of the FCPA and to ask hard questions – such as whether the FCPA was succeeding in its mission or hurting job creation.
Opening Statement of Ranking Member Scott
Robert Scott (D-VA) next made an opening statement. Scott summarized the reform proposals including providing greater clarity to the “foreign official” definition. As a potential compliance affirmative defense, Scott observed that companies are spending substantial sums – millions of dollars in some cases – on FCPA compliance – a result he indicated may often result in “overcompliance” because companies would rather be “safe than sorry.” Scott stated that “punishing those companies and individuals who are operating in good faith runs counter to the basic tenets of fairness and justice.” He also indicated that successor liability “runs counter” to a system of justice that should only punish the guilty party.
In closing, Scott said that effective enforcement of the FCPA is “crucial” and he applauded aggressive enforcement of the law. At the same time, Scott noted the necessity of periodically reviewing laws to make sure “they remain fair and just.”
Opening Statement of John Conyers
John Conyers (D-MI) also made an opening statement. After a few sentences about unemployment figures and the Obama administration, Conyers asked the following question: will somebody explain to me how 140 cases in 10 years is “overly aggressive prosecution.”
Conyers did indicate in his opening statement that he does support certain FCPA reform proposals. As to clarification of “foreign official,” Conyers said he can “support this one” because it can create a problem when those subject to the FCPA do not have a clear understanding of who a “foreign official” is. Conyers also said that he can support the addition of a compliance defenses so that companies can fight imposition of criminal liability if individual employees and agents circumvent compliance measures. Conyers did not support other FCPA reform proposals – such as limiting successor liability, limiting parent company liability for acts of foreign subsidiaries, and adding a wilful mens rea requirement for corporations.
Statement by Greg Andres
Greg Andres (Deputy Assistant Attorney General) next delivered an opening statement. His prepared statement can be found here.
Among other things, Andres noted that DOJ’s FCPA prosecutions involve “systemic long-standing bribery schemes” not the payment of single bribe payments of nominal sums.
Andres specifically cited the Daimler AG and Siemens FCPA prosecutions to support this point. However, the irony is that neither of these FCPA enforcement actions involved FCPA anti-bribery charges against the parent company or any related individual prosecutions.
As to a potential FCPA compliance defense, Andres stated that the DOJ already considers a company’s pre-existing compliance policies and procedures pursuant to the Federal Principles of Prosecution of Business Organizations (see here).
As to providing guidance, Andres noted that the DOJ’s goal “is not simply to prosecute FCPA cases” and that senior DOJ officials often speak publicly on the FCPA and highlight relevant considerations and practices companies should adopt. Andres also discussed the DOJ’s FCPA Opinion Procedure program (see here for more).
In closing, Andres stated that DOJ is proud of its enforcement record and that it looks forward to working with Congress.
Statement by Michael Mukasey
Former Attorney General and current Debevoise & Plimpton partner Michael Mukasey next delivered an opening statement on behalf of the U.S. Chamber of Commerce. See here for his prepared statement.
Mukasey began by noting that no one favors bribery and that while the FCPA indeed does have merit, “more than 30 years of experience” with the law demonstrates that it can be improved.
His testimony focused on two of the Chamber’s FCPA reform proposals: clarifying the definition of “foreign official” and “instrumentality” and amending the FCPA to include a compliance defense.
As to the later, Mukasey observed that statutory guidance can be found in Title VII of the Civil Rights Act which provides for something akin to a compliance defense. Mukasey stated that “dozens, if not hundreds of cases are resolved under this compliance defense” and that the defense reduces discrimination by encouraging employers to have robust compliance systems.
As to “foreign official,” Mukasey referenced the recent judicial opinions on this issue (see here and here for the prior posts), yet noted that the judges did very little to clarify the limits of the “foreign official” issue other than say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a “foreign official” varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it “impossible” for companies to determine in advance who is a “foreign official” thereby increasing uncertainty and barriers to U.S. business. According to Mukasey, “majority ownership is the most plausible threshold” for whether a state-owned or state-controlled enterprise constitutes a foreign government “instrumentality.”
Statement by George Terwilliger
George Terwilliger (White & Case) next delivered an opening statement. See here for his prepared statement.
Terwilliger opened by stating that he favors “fair enforcement of sensible corruption statutes” and that “leveling the playing field” is essential. He noted that the DOJ and SEC are “realizing their enforcement goal of driving companies into far greater compliance,” but also noted the less desirable effects of stepped-up enforcement. He spoke of the “hidden effect” of foregone business opportunities because of FCPA enforcement concerns and noted that the current state of enforcement may hurt job creation.
According to Terwilliger, the “hidden costs” of FCPA enforcement are the result of uncertainty and that companies sometimes forego deals, take a pass on certain projects and withdraw from other projects – not because such companies are necessarily risk averse – but because of the risk-reward ratio in this current FCPA enforcement environment.
Terwilliger proposed a further FCPA reform proposal related to successor liability and that is a statutory safe harbor provision during which an acquiring company could be shielded from FCPA liability for a defined time period post-closing. During this post-closing period, the acquiring company would undertake a thorough review of the target’s business operations and have the opportunity to self-disclose any FCPA issues to the enforcement authorities.
Statement by Shana-Tara Regon
Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers) next testified. See here for her prepared statement.
She observed that given the general lack of judicial scrutiny over FCPA enforcement, the FCPA says whatever essentially the DOJ says it means and that the FCPA has, in many instances, become a strict liability statute “in ways that those who created the FCPA could never have envisoned.”
Regon stated that NACDL does not advocate bribery and similarly stated that advocating for reform is not akin to advocating for bribery. Her testimony was focused on two reform proposals – clarifying the definition of “foreign official” and strengthening the mens rea requirement for corporate offenses. She stated that the FCPA is “emblematic of the general problem of overcriminalization” and that FCPA enforcement has several “unintended consequences” including over-compliance.
During the hearing, Global Financial Integrity (see here for yesterday’s post) tweeted as follos: ” This group of witnesses is such a sham. All three non-DOJ witnesses spewing disingenuous pro-#bribery #AmChamb talking points #FCPAHearing.” (See here).
Chairman Sensenbrenner reserved his questions for the end and next called on various Representatives present.
Q&A Session
Tom Marino (R-PA) asked Andres (DOJ) about the DOJ’s top enforcement obstacle.
Andres stated that because FCPA violations focus on conduct abroad, the DOJ often needs to rely on MLAT requests which can take longer. He noted that the DOJ is in favor of extending the FCPA’s statute of limitations given that it generally takes a long time to investigate FCPA cases. Andres further stated that while there is much discussion as to the increase in FCPA enforcement, this discussion often “fails to recognize the size and magnitude of the problem.”
Robert Scott (D-VA) next asked Mukasey whether the compliance defense proposed was a total defense or an affirmative defense. Mukasey stated that the proposal was for an affirmative defense and that where there is a proved violation of the FCPA, the question should then become whether the company had a compliance mechanism in place reasonable designed to detect and prevent the conduct. Mukasey noted that this issue may be an “uphill climb” for a company, but that the FCPA ought to at least allow a company to pursue such a defense.
Scott next asked Mukasey about the mens rea reform proposal for corporate liability. Mukasey seemed to be advocating a corporate liability standard similar to the (soon to be old) U.K. standard and the current Canada law standard when he stated that a company should only be held liable if someone in a “policy making position” was involved in or condoned the improper activity.
Scott next asked Andres (DOJ) the general question of whether any de minimis cases have ever been brought by the DOJ. Andres stated “no,” the DOJ has never prosecuted “cup of coffee, lunch, taxi-ride type of cases” and he further stated that because of the FCPA’s corrupt intent element and the affirmative defense for reasonable and bona fide business expenditures, it is an open question as to whether such facts even violate the statute.
Even so, Andres stated that the DOJ is opposed to creating a de minimis exception to the FCPA because small, recurring payments can amount to significant bribery. He stated that the amount of the bribe is not the relevant consideration, rather the intent of the bribe is and that all bribery is inappropriate. Andres said that all the talk of taxi-ride payments and meals being in violation of the FCPA “is not reflected in our enforcement actions.”
Taxi-cabs were a recurring issue throughout the hearing. Mukasey stated, in response to a question, that the taxi-cab example is real and that when “nervous counsel” found out that a company may have paid a “foreign official’s” taxi-cab fare, the company disclosed the conduct to the DOJ and the DOJ requested that the company investigate its entire relationship with the “foreign official.” Mukasey stated that this investigation cost the company approximately $200,000, no violation was found, and that the company could have used this money for something more beneficial than conducting in investigation as to these facts.
Louie Gohmert (R-TX) next stated that those subject to the FCPA “ought to have a clear enough line” so that people don’t have to think “is it or isn’t it a bribe” to make this payment. Gohmert said that Congress can define bribery so that companies “can have a clear line” so that a company does not have to spend $200,000 to figure out whehther paying for a cab is an FCPA violation. Gohmert then made an interesting observing that the FCPA allows a “young prosecutor” or an “FBI agent seeking to make a name for himself” the opportunity to pursue all sorts of enforcement actions and that enforcement then ends up being more aggressive than it should be.
Gohmert next asked Andres (DOJ) as follows: why should a company be prosecuted if a company has a compliance program set up according to the standards set forth in Chapter 8 of the U.S. Sentencing Guidelines (see here). Gohmert stated that if a company has done everything it can do, it seems like a strict liability standard if the company is prosecuted because of the act of an employee acting contrary to the company’s policy. Andres stated that the DOJ “does not prosecute companies based on the acts of a single, rogue employee.”
Rather, Andres stated that the DOJ looks at how pervasive was the conduct or whether the conduct involved a high-ranking employee. Andres specifically stated that the DOJ opposes consideration of an FCPA compliance defense. He stated that DOJ already seriously considers compliance programs in its charging decisions, along with other factors such as cooperation and voluntary disclosure.
Andres called a potential compliance defense “novel” and one that is not “well-defined.” He said that such a defense could lead to “paper compliance.” He also referenced the U.K. Bribery Act (which does contain such a compliance defense) yet stated that this defense is not yet in effect and thus there is no precedent to analyze to see whether such a defense is effective.
Given that the DOJ frequently takes FCPA enforcement position that are “novel,” are not “well-defined,” and are not supported by precedent, Andres response on this issue was less than convincing.
In closing, Andres stated that an FCPA compliance defense could “create a loophole” and allow for some bribery to occur. He called such a potential defense “novel and risky” and said that the “time is not right to consider it.”
The floor next returned to John Conyers (D-MI). He stated that ignorance of the law is no excuse and wondered why in the case of bribery does there need to be a de minimis rule. He stated that “corporations have more lawyers than anybody else” and “why do they need to know” how low the bribery threshold should be. He said that “they don’t deserve to know that.”
Conyers also conducted the most contentious Q&A exchange of the hearing with Regon. Conyers asked – “give me some examples of overcriminalization of the FCPA.” He repeatedly interrupted Regon and asked “just give me some examples” “give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization.” Conyers stated, “only 140 cases have been brought in 10 years -that averages 14 cases a year – is that overcriminalization to you?” Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occured.
Ted Poe (R-TX) next launched into a criticism of China. He said that “China, through its government, follows a systematic philosophy of corruption” and that China will “do anything in the world to get their way” including stealing from the U.S. and paying bribes. He suggested that “any means necessary” is the Chinese way to get business. “We on the other hand,” Poe stated, “believe in the rule of law.” Poe stated that the “Chinese are effective in their philosophy” and he observed that he just returned from Iraq where he learned that Chinese companies are going to rebuild Iraqi’s oil system and that he suspected money changed hands in order to get this business.
Poe, a former prosecutor, next said that it “disturbs” him when we give DOJ prosecutors too much discretion. Poe said that he was not advocating loosening the standards, but he did prefer “absolute certainty” about what is a violation of the FCPA as “opposed to too much discretion” by the DOJ on what something means and whether it is a bribe.
Judy Chu (D-CA) next asked Andres a series of questions allowing him to further articulate how the DOJ takes into consideration a company’s compliance program and how compliance expectations are stated in public documents such as Chapter 8 of the Sentencing Guidlines and the OECD Guidelines. (See here). Andres further stated that there are situations where the DOJ does not pursue an enforcement action because of a variety of factors, including a company’s pre-existing compliance program, even if these instances are not made public because the DOJ does not issue a press release. Asked by Chu for reasons why FCPA enforcement has expanded, Andres stated that the “problem is as big as it has ever been” and that “at least one reason” for the increase in enforcement is the result of SOX whereby companies have an obligation to test its internal controls – tests that often uncover FCPA issues that are then often disclosed to the DOJ.
Hank Johnson (D-GA) next asked Regon about prosecutorial discretion and whether it is fair to say that the “looser the law the more prosecutorial discretion and the narrower the law the less prosecutorial discretion.” Regon stated that if the DOJ means what it says (i.e. that it targets only explicit instances of bribery and that it does not prosecute based on the actions of rogue employees), then the DOJ should not mind less prosecutorial discretion. Johnson next launched into an unusual statement about illegal crime (blue-collar crime) and legal crime (white collar crime in the sense that prosecutions of white collar crime tend to be less vigorous). Johnson said he was bothered by the fact there has not been much prosecutorial activity as to white collar crime, he said this “seems kind of fishy” and that some “folks are getting off the hook for legal crime.”
Sandra Adams (R-FL) next asked Andres whether the DOJ has a definition of “foreign official” or “instrumentality.” Andres said, in addition to the statute, there are now several decisions by district courts that further “amplified” the definition of foreign official. Andres stated that DOJ does not support a change to the definition of “foreign official” or “instrumentality.”
Adams next Andres several pointed questions about DOJ declination decisions and whether such decisions are published or transparent. Andres stated that this is a difficult area for the government because the DOJ does not want to “penalize a company or individual investigated by not prosecuted.”
I’ve argued before (see here for the prior post) that the DOJ should publish its declination decisions in a manner similar to its FCPA Opinion Procedure decisions. Given that most declination decisions would seem to follow disclosure by a company of FCPA scrutiny (in its SEC filings), Andres’s rationale for not making declination decisions public is less than convincing.
Adams asked – in the last year, how many instances of FCPA conduct have been disclosed to the DOJ where no enforcement action resulted. Andres did not offer any specific number, but retreated to the FCPA Opinion Procedure and noted that if a company ever has a question about the FCPA, it has the ability to ask the DOJ and the DOJ is obligated to give an opinion.
Adams next asked Andres whether the DOJ is defining what the law means. Andres said that “everyone of these cases is negotiated with experienced defense counsel” and that counsel has “ample opportunity” to address any issues concerning the DOJ’s enforcement.
Mukasey then answered that while resolved FCPA enforcement actions make for interesting case studies, such resolutions are not binding in other cases.
Before her time expired, Adams requested that the DOJ provide the Committee with more detail as to its declination decisions, including the DOJ’s reasons and rationale for why enforcement actions did not result. Chairman Sensenbrenner then followed up and said DOJ’s responses will be made part of hearing record.
Shelia Jackson Lee (D-TX) next asked Andres how many attorneys and staff are assigned to FCPA enforcement. He stated that the DOJ’s FCPA unit, includes a core unit in D.C. of 15 to 20 enforcement attorneys and that assistance in trials is given by local prosecutors. Jackson Lee asked “is this an excessive amount” and Andres said “certaintly not in light of the size and magnitude of the bribery problem … it is significant.” Jackson Lee next received a tutorial from Andres as to the FCPA’s jurisdiction over foreign companies.
Ben Quayle (R-AZ) next asked a question very much based on current events and that is the scrutiny of the Macau gaming industry. [Las Vegas Sands recently disclosed that it received subpoenas concerning its conduct in Macau]. Andres stated that it was not appropriate for him to comment on any ongoing investigations.
Quayle next asked Andres whethr General Motors would be considered a U.S. government “instrumentality.” Andres said that in addressing this issue, the DOJ considers government ownership or investment as only one factor. Other factors include characterization of the entity under foreign law, the purpose of the entity, and that under these factors General Motors would likely not qualify as a U.S. government “instrumentality.” Quayle next asked whether it is relevant if the government has communications with the company’s board and the government has the ability to control or influence the entity (a presumed reference to GM’s relationship with the U.S. government). Andres again stated that control and ownership is but one factor and he specifically referenced the recent Lindsey prosecution where the Mexican entity at issue was specifically addressed in the country’s constitution.
Quayle next asked Terwilliger whether he has any knowledge of companies conceding markets to foreign competitors because of the FCPA. Terwilliger stated that “conceding markets” may be a bit strong, but that American companies have become much more circumspect in dealing with foreign business opportunities because of FCPA enforcement. In particular, Terwilliger said that companies may bypass “smaller opportunities” (that might become bigger opportunities) because of the FCPA in that the cost-benefit analysis and FCPA compliance are too much to worry about.
Chairman Sensenbrenner was the last person to ask questions and he began his time by stating as follows. There is “no question in my mind that we have to bring this law up to date.” “No one is in favor of bribery, but there has to be more certainty.” Sensenbrenner said he was “a bit befuddled” by Conyer’s statement that corporations don’t deserve to know what bribery is and he stated that “everyone has a right to know what is illegal.”
Sensenbrenner’s only question (a long one at that as he basically summarized the Chamber’s FCPA reform proposals) was directed to Regon and Andres. Regon focused mostly on the corporate mens rea issue and stated that her organization is supportive of “anything Congress does” to clarify the FCPA. Tara Regon failed to see the rationale for not providing greater clarity as to the FCPA and noted that “we have many bribery statutes on the books, and some of those are written tightly and work well.”
Sensenbrenner then asked Andres – which of Regon’s suggestions do you agree with and Andres said “I don’t agree with any of them.” For instance, Andres said with the definition of “foreign official” that “one thing you need to take into consideration is that the statute covers the whole world” and that what might constitute a “foreign official” in China may be different than what constitutes a “foreign official” in Brazil or France.
Sensenbrenner grasped onto this issue and noted that this part of the uncertainty that people are complaining about.
Andres followed with two points. First, that if there is concern, companies subject to the FCPA can ask for a DOJ opinion. This only seemed to enrange Sensenbrenner further as he stated “come on, China is a communist country – they are not going to tell you what the government involvement is” in a company “they don’t have the type of disclosure we have.”
Andres second point was that the FCPA makes illegal paying a bribe and that if companies aren’t paying bribes they have nothing to fear.
Sensenbrenner then seemed to pose a question at the end of the hearing as to whether the DOJ would support an FCPA amendment that simply makee bribery (all bribery) illegal (perhaps akin to the UK Bribery Act). Sensenbrenner did not pause for Andres to respond and he (Sensenbrenner) concluded the hearing by saying “it would behoove the DOJ to realize that the statute needs updating.” Andres said that the DOJ is “more than willing to work with Congress” to which Sensenbrenner said “see you later we will be drafting a bill.”
Sensenbrenner then commented that if Andres were the general counsel of a corporation advising the CEO and everyone else, he would likely be advising the company in the “most narrow way” and “exercising the greatest amount of caution.” “As a result,” Sensenbrenner stated, legitimate business activity is not pursued and U.S. companies are put in a significant disadvantage compared to foreign companies.
Sensenbrenner then told Andres – “get the message sir and tell that to the AG.”
How Do Your Goods Get Out Of China?
A few years ago, I would have read this recent New York Times article “Weak Link in an Export Chain” and not thought much of it.
But then in November 2010 there was a $236 million joint DOJ/SEC enforcement action involving numerous companies (one I have called CustomsGate). See here for a prior post of all the enforcement actions. The enforcement actions were mostly about use of freight forwarding and logistics services, expediting delivery of goods and equipment into a country, local processing fees, express courier services, and the like.
The New York Times article is about the trucking industry in China that takes goods from the factory floor to China’s seaports. The article depicts a highly disorganized, inefficient … and yes corrupt … industry. According to the article, logistics firms usually hire small Chinese trucking companies and these companies routinely “pay bribes to ward off highway inspectors” and to “avoid heavy fines and transportation restrictions.”
The article states as follows. “Corruption is also a major problem. Chinese truck drivers say highway and port inspectors routinely demand payoffs or bribes.”
What does this have to do with “obtain or retain business?”
Point taken, yet this is the same question raised in connection with the CustomsGate enforcement actions as well. See here.
So the question remains – how do your goods get out China?