Assistant Attorney General Breuer’s Unconvincing Defense Of DPAs / NPAs
Last week in this speech before the New York City Bar Association, Assistant Attorney General Lanny Breuer defended the DOJ’s frequent use of NPAs and DPAs. See here for video of the speech.
This post first contains excerpts of Breuer’s speech and then comments on it and the issues raised.
Breuer began his speech as follows. “Over the past three-and-a-half years, the Department of Justice has entered into dozens of DPAs, and non-prosecution agreements, or NPAs. I’ve heard people criticize them and I’ve heard people praise them. What I’m here to tell you, is that, along with the other tools we have, DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe. Though the U.S. Supreme Court blessed the concept of corporate criminal liability over 100 years ago – in New York Central Railroad Company v. United States – until roughly 20 years ago, we had only the blunt instrument of criminal indictment with which to attack corporate crime. Prosecutors faced a stark choice when they encountered a corporation that had engaged in misconduct – either indict, or walk away. In the 1990s, however, the government began doing something new: agreeing to defer prosecution against the corporation in exchange for an admission of wrongdoing, cooperation with the government’s investigation, including against individual employees, payment of monetary penalties, and concrete steps to improve the company’s behavior. And, over the last decade, DPAs have become a mainstay of white collar criminal law enforcement. The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts. Companies now know that avoiding the disaster scenario of an indictment does not mean an escape from accountability. They know that they will be answerable even for conduct that in years past would have resulted in a declination. Companies also realize that if they want to avoid pleading guilty, or to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance. Our prosecutors are sophisticated. They know the difference between a real compliance program and a make-believe one. They know the difference between actual cooperation with a government investigation and make-believe cooperation. And they know the difference between a rogue employee and a rotten corporation.”
Breuer further stated as follows. “One of the reasons why deferred prosecution agreements are such a powerful tool is that, in many ways, a DPA has the same punitive, deterrent, and rehabilitative effect as a guilty plea: when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing, agree to cooperate with the government’s investigation, pay a fine, agree to improve its compliance program, and agree to face prosecution if it fails to satisfy the terms of the agreement. All of these components of DPAs are critical for accountability. Perhaps most important, whether or not a corporation pleads guilty … or enters into a DPA with the government, the company must virtually always publicly acknowledge its wrongdoing. And it must do so in detail. This often has significant consequences for the corporation, and it prevents companies from explaining away their resolutions by continuing to deny that they did anything wrong.”
Breuer concluded as follows.
“To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”
“When the only tool we had to use in cases of corporate misconduct was a criminal indictment, prosecutors sometimes had to use a sledgehammer to crack a nut. More often, they just walked away. In the world we live in now, though, prosecutors have much greater ability to hold companies accountable for misconduct than we used to – and the result has been a transformation in the culture of corporate compliance. In appropriate circumstances, large corporations, such as Siemens AG, must plead guilty for their crimes. In other cases, because the company has gone to extraordinary lengths to turn itself around, for example, or provided the government with extensive cooperation, a deferred prosecution agreement or non-prosecution agreement may be the best resolution. No matter what, individual executives and employees must answer for their conduct. And, perhaps most important of all, companies know that they are now much more likely to face punishment than they were when our choice was limited to indicting or walking away. Overall, this state of affairs is better for companies, better for the government, and better for the American people.”
*****
Let’s probe the two reasons why the “old” system, in which the DOJ either brought criminal charges or didn’t, seems to trouble Breuer.
First, he stated as follows. “Prosecutors faced a stark choice when they encountered a corporation that had engaged in misconduct – either indict, or walk away.” There is absolutely, positively nothing wrong with this choice. Bringing criminal charges against person (natural or legal) should not be easy. It should be difficult. Our founding fathers recognized this as a necessary bulwark against an all powerful government. There is no legal or policy reason warranting a change from such a fundamental and long-lasting principle.
Second, Breuer, without specifically mentioning the prosecution, carries forward the Arthur Anderson effect that has guided DOJ policy for over a decade ((i.e. the notion that indicting a company will result in a corporate death sentence). Breuer stated as follows. “I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake.” However, as highlighted in this recent guest post, Gabriel Markoff recently debunked the Arthur Anderson effect as factually false.
Breuer is clearly troubled, with good reason, by traditional notions of corporate criminal liability. However, rather than seek substantive solutions to this issue, either on a statute by statute basis (such as a compliance defense to the FCPA – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”) or more comprehensively, Breuer instead defends an alternate reality that is equally problematic.
Use of NPAs and DPAs to resolve alleged corporate criminal liability presents two distinct, yet equally problematic public policy issues.
The first is that such vehicles, because they do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence. On this issue, Breuer states in his speech that “when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing.” This is a false statement. While the standard NPA and DPA templates do contain a section concerning acceptance of responsibility, the acceptance is as to conduct and alleged facts, not actual legal charges.
The second is that such vehicles, because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action (for more on this issue, see “The Facade of FCPA Enforcement – here), often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law. Breuer essentially admitted as such in his speech when he stated as follows. “[Companies] know that they will be answerable even for conduct that in years past would have resulted in a declination.”
Thus, use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.
The alternate reality that Breuer defends is defined by the absence or practical absence of judicial scrutiny of many DOJ enforcement theories. Thus, by supporting use of DPAs and NPAs, Breuer is advocating an enforcement climate that insulates DOJ’s enforcement theories from judicial scrutiny in all but the rarest of circumstances. It is not hard to see why the DOJ favors such a system. Such a system makes its job easier and places the DOJ in the role of prosecutor, judge and jury all at the same time. Former Attorney General Alberto Gonzales rightly observed as follows. “In an ironic twist, the more that American companies elect to settle [through DPAs and NPAs] and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.” (See here for the prior post).
In short, Breuer’s defense of DPAs and NPAs was unconvincing. The Assistant Attorney General is clearly troubled by traditional notions of corporate criminal liability. However, rather than seek substantive solutions to this issue, Breuer instead defended an alternate reality that is equally problematic. This alternative reality benefits the DOJ, benefits the private bar, but harms other stakeholders and undermines the rule of the law and justice.
*****
In his speech, Breuer also supported the premise underlying an FCPA compliance defense when he stated as follows. “Companies also realize that if they want … to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance.” In my “Revisiting a Foreign Corrupt Practices Act” article (here), I demonstrate that despite the DOJ’s institutional opposition to an FCPA compliance defense, the DOJ already recognizes a de facto FCPA compliance defense albeit in opaque, inconsistent, and unpredictable ways. Breuer’s statement once again demonstrates the truth of this position. However, unpredictable de facto defenses have no place in a justice system based on the rule of law. Thus, an FCPA compliance defense accomplishes, among other things, the policy goal of removing factors the DOJ already considers in assessing corporate criminal liability from the opaque, inconsistent, and unpredictable world of DOJ decision making towards a more transparent, consistent and predictable model.
Add Alberto Gonzalez To The List Of Former High-Ranking DOJ Officials Who Support An FCPA Compliance Defense
In my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (Wisconsin Law Review – here), I highlight that against the backdrop of the DOJ’s current institutional opposition to an FCPA compliance defense, there is growing chorus of former DOJ officials who support a compliance defense. This group includes a former Attorney General (Michael Mukasey), a former Deputy Attorney General (Larry Thompson), a former Chief of the DOJ’s FCPA Unit (Joseph Covington), and former high-profile corporate crime prosecutor (Andrew Weissmann).
Add another former Attorney General to the list.
In a May speech (here) to the Lawyers for Civil Justice, Alberto Gonzalez (Attorney General 2005-2007) stated as follows. “I do not support bribery, but I support reforms to the FCPA that adds a compliance defense and a willfulness requirement for corporate criminal liability.”
On this topic, Gonzalez stated, for instance, as follows.
“I think that companies have an obligation of due diligence and should have in place a strong compliance program – particularly when doing business in countries where corruption is routine and expected. Companies cannot purposefully remain ignorant. The question is how much do they have to do? I think if the company follows the DOJ Principles of Prosecution: 1) makes a voluntary disclosure of wrongdoing, 2) if there was no participation in the illegal conduct by senior management, 3) if there is full cooperation with the government, including providing evidence and information against employees, officers, directors, and agents of the company, 4) if the company implements remedial measures to prevent future violations, including disciplining culpable employees, implementing internal controls, and improving anticorruption training, and 5) if the company has in place a strong compliance program before the alleged behavior happened, then I question the fairness in going after the company for the unknown violations by an agent in a foreign land.” (emphasis added).
In his speech, Gonzales also offered this perspective from his time as Attorney General.
“Because of the increased American business activity overseas, we made a conscious decision during the Bush Administration to allocate more time and resources to FCPA enforcement. And we quickly discovered two important truths. One, the FCPA gives prosecutors tremendous discretion in defining its scope, and, thus, tremendous leverage in charging decisions. Two, corporations do not like to be investigated by the Justice Department or the SEC for violations of the FCPA. It’s bad for business. So, these cases often settled, charges were dropped in exchange for either nonprosecution or deferred prosecution agreements. In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the Act, the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”
For more on this dynamic, see my 2010 article “The Facade of FCPA Enforcement” (Georgetown Journal of International Law – here).
Further Thoughts On A Compliance Defense
The day after Labor Day has always seemed like a second New Year. In that spirit, let’s kick off the “new year” with further thoughts on a compliance defense.
For starters, I am pleased to share (here) the published version of my scholarship “Revisiting a Foreign Corrupt Practices Act Compliance Defense.” The published version in the Wisconsin Law Review (compared to the draft released last January) contains additional reasons and rationale for why the FCPA ought to be amended to make a company’s pre-existing compliance policies and procedures, and its good-faith efforts to comply with the FCPA, relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures.
In other developments relevant to a compliance defense and of particular note, a Senior Investigations Counsel with the SEC’s FCPA Unit published an article (here) in Standford’s Journal of Law, Business & Finance arguing that “the United States should adopt a compliance procedures defense for the FCPA similar to the adequate procedures defense under the Bribery Act.” The typical “I am not speaking on behalf of the SEC” disclaimers applied to Jon Jordan’s article, but it is hard to ignore calls for reform from a current SEC official who spends his days investigating FCPA issues.
As noted in this previous post, William Jacobson (former assistant chief of DOJ FCPA enforcement and current co-general counsel and chief compliance officer at Weatherford International Ltd.) has joined the growing chorus of former high-ranking DOJ officials calling for reform. The FCPA Blog recently (here) called for a revival of Jacobson’s plan for recognizing a company’s pre-existing FCPA compliance policies and procedures. While I agree with much of what Jacobson says, I disagree that the solution to this important issue is non-binding DOJ policies and procedures. I also disagree that a trigger for recognizing a company’s pre-existing FCPA compliance policies and procedures should be, as Jacobson suggests, a company’s voluntary disclosure to the enforcement agencies.
Over the summer, Alexandra Wrage (President of Trace International) compiled a list of antibribery and anticorruption resources (here) for in-house counsel to consult in developing and implementing compliance programs. Separately, Transparency International announced here its “Assurance Framework for Corporate Anti-Bribery Programs” with the goal of “provid[ing] benchmarks in the form of control objectives for use by enterprises in designing and evaluating their anti-bribery programmes in anticipation of independent assurance.” Ought not these quality resources and the benchmarking factors they contain matter other than in the opaque world of enforcement agency discretion?
Also over the summer, Ben Heineman (former General Electric Company senior vice president-general counsel and current senior fellow at Harvard) wrote here that “federal enforcement authorities should give much more systematic credit to effective corporate compliance programs when making decisions about criminal prosecutions …”.
In this post concerning a compliance defense, Michael Volkov states that my proposal to have compliance incorporated into the FCPA as an element of a bribery offense, the absence of which the DOJ must establish to charge a substantive bribery offense is “unprecedented.” This is not true. Such a concept is not unprecedented as several peer countries, as noted in my Revisiting article, have adopted this approach in their FCPA-like laws. Volkov returned to the issue of compliance in this post arguing that “one alternative which is not discussed very often is to increase the benefit for an effective corporate compliance program under the US Sentencing Guidelines.” Perhaps the Sentencing Guidelines could be tweaked, but revising non-binding guidelines that are only implicated after liability has been established is not a comprehensive solution to the issue.
I have debated an FCPA compliance defense with Howard Sklar (see here). His main objection to a defense seems to be that if there is such a defense, an FCPA inquiry will turn into an investigation of the company’s overall compliance culture. For starters, how is this any different from the current enforcement environment in which the “where else” question is typically asked (see here for the prior post) and in which instances of FCPA scrutiny typically lead to world-wide reviews of a company’s operations? In addition. Sklar’s fears are overblown because a compliance defense ought to be situational. The FCPA compliance defense that passed the House in the 1980’s was situational in that it focused on specific employees engaged in specific conduct and the specific officers and employees of the company who had supervisory responsibility of the specific employees and specific conduct. Likewise, the adequate procedures defense in the U.K. Bribery Act is situational. The statutory text itself references particular instances of bribery (i.e. “such conduct”) and Ministry of Justice guidance states that “the commercial organisation will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing.” (emphasis added).
There will likely be no movement on FCPA reform until after the DOJ releases its guidance this Fall and until a new Congress begins after the elections. When reform discussion begins anew, it will be against the backdrop of a growing chorus who do not believe that the enforcement agencies adequately recognize and credit pre-existing FCPA compliance policies and procedures.
There is disagreement as to the remedy, but I believe for the reasons stated in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” that the best solution is to make a company’s pre-existing compliance policies and procedures relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures.
Friday Roundup
The guidance is coming – the guidance is coming, compliance by the numbers, checking in on Wynn-Okada, industry news, and refreshing candor. It’s all here in the Friday roundup.
Guidance
Since Assistant Attorney General Lanny Breuer announced last November that the DOJ would be issuing FCPA guidance in 2012 (see here for the prior post), approximately 25 years after Congress encouraged the DOJ to issue guidance, FCPA Inc. has been waiting patiently, and too long (see here for the prior post), for such guidance.
There have been whispers that the guidance would be released in October and this recent Wall Street Journal Corruption Currents post by Chris Matthews, citing “people familiar with the matter” confirms those whispers.
Compliance Practices By The Numbers
What percentage of the Fortune 500 have publicly available, stand-alone FCPA compliance policies and procedures? Do the policies and procedures include discussion of the FCPA’s books and records and internal control provisions? How do companies address facilitation payments? What about gift-giving?
Answers can be found in this recent article in Corporate Counsel by Ryan McConnell (Baker & McKenzie), Jay Martin (Baker Hughes) and Paula Bonavides (a University of Houston law student).
Wynn-Okada
Remember Kazuo Okada, the former business partner of Steve Wynn, accused of various FCPA violations by Wynn Resorts earlier this year? Given the nature of Wynn’s investigative report authored by former FBI Director Louie Freeh of Freeh, Sporkin & Sullivan LLP (see this prior post which provides a detailed summary of the report) it is not surprising, as noted in this Reuters article, that Okada has filed a defamation lawsuit in Japan against the casino company and its officials. According to the article, Okada is claiming $140 million in damages and he alleges that Wynn’s actions led to a decline in his company’s stock price, a decline in new business opportunities, and damaged his reputation. As noted in the Reuters article, a Wynn spokesperson said that Okada’s lawsuit is an “attempt to distract” from the real issues facing Okada and his company “as identified in the Freeh Report.”
Industry News
Speaking of Freeh, in addition to his role in the Wynn-Okada dispute, he is also known in FCPA circles for being the monitor in the Daimler FCPA enforcement action. (See here for the prior post).
As noted in this release from Pepper Hamilton LLP, the firm “and the lawyers of Freeh Sporkin & Sullivan, LLP announced the union of the legal talent of the two firms and Pepper Hamilton’s acquisition of Freeh Group International Solutions, LLC.”
Refreshing Candor
FCPA Inc. participants are of course an active group of speakers. But rarely does one find much candor in the discussions. FCPA Inc. participants often filter what they say cognizant of client issues and mindful of what the small world of enforcement agency officials will think of them. I’ve had numerous exchanges with industry participants in which a person says something insightful or provocative. I then offer up the opportunity to publish a guest post on FCPA Professor, and the person declines.
Against this backdrop, this recent transcript of the 2012 Chief Legal Officer Leadership Forum hosted by Argyle Executive Forum is a nice read in that Adam Siegel (the c0-chair of global white collar group at Freshfields Bruckhaus Deringer) speaks with refreshing candor. Siegel (here, a former federal prosecutor) states as follows.
Regarding a compliance defense.
“Well, the U.K. act, even though it’s perceived as being broader and worse than the FCPA, has this wonderful feature to it, which is that a corporation is legally not responsible if it had adopted adequate procedures. It’s a great argument that we can take to the business about why they ought to invest in an appropriate compliance program. It means we’re actually innocent and you’re not begging some 27-year-old – apologies to anyone in the room of that age – to exercise their enormous discretion and give the corporation and shareholders a pass because some rogue employee in Indonesia has decided that they were going to do something to hit their targets this year.”
On the increase in FCPA enforcement.
“In 2005, due to some changes in personnel and some other issues of justice, someone realized that they can use this statute more aggressively. If you think back to 2007, we had a major record in FCPA civil and criminal finds; $150 million. I think people were amazed that in that year that was what the government was able to do. Fast forward to 2010 and you’re at $1.8 billion. I mean, if any of us in this room have a business that has grown at that rate, I think we’d all be very happy and our shareholders would be delighted.”
On the global trend of increased enforcement.
“I think some of it is pressure from globalization. I think a lot of it is looking at the numbers on that chart. I think a lot of the global anti-bribery movement is driven by regulators around the world saying, Okay, a German company just paid $300 million to the U.S. That’s sort of funny to us. Where are we in this? I think there is some international pressure. There is the pressure of raising the bar, but there’s also a very cynical pressure of raising money. We’re in an economic climate today where I don’t think there’s a single government in the world that isn’t struggling to find resource. This area has emerged, again, as a money making center, which is kind of bizarre.”
*****
A good weekend to all.
Proposed Irish Bill Contains A Compliance Defense
Ireland, like the U.S. a member country of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, has an FCPA-like law.
However, as explained in this Ireland Department of Justice and Equality document “the existing law on corruption – the Prevention of Corruption Acts 1889 to 2010 – comprises several different Acts, and includes statutes dating back to the late nineteenth century.”
Thus, Ireland is in the process of revising its FCPA-like law and the purpose of the proposed Criminal Justice (Corruption) Bill 2012 “is to clarify and strengthen the law criminalising corruption by replacing and updating 7 different statutes dating back to Victorian times, so that the legislation is essentially in one statute.”
One aspect of the proposed legislation, in response to OECD criticism of existing Irish law, is to establish a “clear provision for the liability of corporate bodies for corrupt criminal acts.” The Department of Justice and Equality explains as follows. “Up to now, we have not provided specifically in statute in this area, relying instead on the common law in this regard. [The proposed law] include[s] a new provision setting out that a corporate body can be held liable where an officer or employee of the body commits a corruption offence with the intention of obtaining a business advantage for the body. It is considered that this will provide greater clarity for companies as regards their criminal liability in this regard.”
However, and this is the key point for this post, the proposed legislation, “makes provision for a defence by a body corporate to prove that it took all reasonable steps and exercised all due diligence to avoid the commission of the offence.”
Head 13, titled “Offences by Bodies Corporate and Unincorporated Bodies,” of the draft legislation (see here) provides as follows. “It is a defence to an offence … for the defendant body corporate to prove that it took all reasonable steps and exercised all due diligence to avoid the commission of the offence.”
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) I highlight several other peer countries that already have a compliance-like defense relevant to their “FCPA-like” law such as the U.K., Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, and Switzerland.
[Note: That additional OECD Convention countries do not have compliance-like defenses ,does not mean that those countries rejected such a defense. Rather, in many OECD Convention countries the concept of legal person criminal liability (as opposed to natural person criminal liability) is non-existent. Further, in many OECD Convention countries that recognize legal person criminal liability, such legal person liability can only result from the actions of high-level personnel or other so-called ‘controlling minds’ of the legal person. If a foreign country does not provide legal person liability, there is no need for a compliance defense, and the rationale for a compliance defense is less compelling if legal exposure of the legal person can only result from the conduct of high-level executive personnel or other ‘controlling’ minds of the legal person.]
In the article, I argue that, contrary to the claims of FCPA compliance defense opponents such as the DOJ, a compliance-like defense applicable to the offense of bribery of foreign officials is not novel, risky, or dangerous and that amending the FCPA to include a compliance defense would not conflict with U.S. OECD Convention obligations. In this previous post, I argued that a compliance defense is not a race to the bottom, it is a race to the top.
For more on the proposed Irish law, see this recent Irish Times article.