Should There Be A Difference?
Organization A has employees spread across a wide geography. Its employees are trained on the legal rules and requirements relevant to their jobs. Yet despite the organization’s best training efforts and its committment to compliance and ethics, certain employees fail to conduct themselves according to the training and thus violate the law. Organization A, as an entity will not be held accountable, the organization will not be forced – based on the isolated employee’s conduct – to conduct a thorough review of its entire operations, and will not have a compliance monitor imposed on it.
Organization B has employees spread across a wide geography. Its employees are trained on the legal rules and requirements relevant to their jobs. Yet despite the organization’s best training efforts and its committment to compliance and ethics, certain employees fail to conduct themselves according to the training and thus violate the law. Organization B, as an entity will be held accountable, the organization will be forced – based on the isolated employee’s conduct – to conduct a thorough review of its entire operations, and will likely have a compliance monitor imposed on it.
Organization A is the Department of Justice in the Lindsey FCPA enforcement action. (See here for the prior post on Judge Matz’s order vacating the verdicts and dismissing the indictment based on prosecutorial misconduct)
Organization B is a typical multinational company involved in an FCPA enforcement action.
Should there be a difference?
The UK Bribery Act: Engagement With Companies And Compliance Effects
Today’s post is from Richard Alderman (Director of the U.K. Serious Fraud Office).
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The UK Bribery Act: Engagement With Companies And Compliance Effects
By Richard Alderman (Director, SFO)
In the months since the UK Bribery Act came into force on July 1st 2011, there is one question that I have probably been asked more than any other: what are we actually doing under the Act at the SFO?
In part, people are asking me this because of recent comments by some observers, suggesting that the SFO will be under intense pressure to go out and secure convictions very quickly under the new legislation – and that this means we’ll be out there hunting for easy targets.
That is a fairly easy claim to deal with. Easy targets are easy to find. We could go out and find half a dozen cases very quickly that we could probably investigate and prosecute through the criminal justice system, possibly by Christmas.
The SFO’s approach: Finding the Difficult Cases
But is this really what most people want to see? In my view, many people would regard the SFO as taking a rather lazy and unreflective approach if we pursued easy ‘quick wins’ rather than the really difficult and more serious cases. Also, I know which type of cases our staff would prefer to investigate – and it is definitely the more challenging ones.
So, what are we doing? The plain answer is that we’re actively looking for cases to take up – but these cases are the difficult ones. For example, we have been examining the activities of a number of foreign companies with a UK business presence who are involved in bribery in other countries.
We have found a number of these. But what we are looking for in particular is evidence that they have undermined ethical UK businesses. If they have not, then although there may be a technical Bribery Act offence, it is not the type of case where I would want to use our scarce resources, or take up the valuable time of UK courts and juries.
So we have seen instances of bribery involving foreign companies where we have decided not to take them forward for a full investigation, because we cannot see that a UK company lost out. Other authorities might choose to take action, but it is not a priority for the SFO.
However, there are other cases where we have found potential damage to UK companies and their employees. It is still early days – but I can confirm that we are looking at some cases to see whether or not to start using our compulsory powers.
I am under no illusions about the difficulty of these cases. Getting the evidence and getting people before a UK jury will be incredibly difficult. Investigations will be complex, and we will need to make full use of international co-operation and the SFO’s own powers. But make no mistake, these cases are a high priority for us.
Compliance Effects
Aside from questions about our approach to actions under the Bribery Act, a further area of interest is in our view of its compliance effects on companies. Experience shows that laws – and especially new laws – have an enforcement effect as well as a compliance effect, and that the latter of these is often larger.
In the specific context of the Bribery Act itself, a particular question that arises is whether the Bribery Act without an adequate procedures defence would have had the same compliance effects as the Act with adequate procedures. In other words, is it the Bribery Act itself – or the adequate procedures defence specifically – that has resulted in its compliance effects?
It is still early days for the Bribery Act – and it is difficult to answer these questions in detail without hard research into what companies are doing internally in response. However, looking at what US corporations are telling us, they have realised that being compliant under the FCPA does not automatically mean that they are Bribery Act compliant.
This is a message that professional services firms have been trying to hammer home with their clients whether in the UK, US or elsewhere for some time now. I believe it is getting through and that corporations are going on to take action in response. The likelihood is that those Boards that are more committed to good corporate governance will take notice, but if companies wish to ignore it then that is ultimately their choice. They should not be surprised though if the SFO takes a close interest in them. They should also not be surprised if they find that other corporations become less willing to do business with them. I believe they will suffer commercially if they do not have an anti-corruption culture.
In this context, we take differing views of compliance by SMEs and large corporates. We are aware that SMEs – unlike their larger counterparts – often lack the time, resources and readily-available, expensive professional advice needed to move quickly into compliance. So we are taking a more consultative approach to compliance by SMEs, and accept that they may take longer to get there.
The Act’s Impact on our Engagement with Companies
This leads neatly into a further theme that is especially relevant to our approach to the Bribery Act, but also touches on our work under other pieces of legislation: our commitment to engaging with companies. In general, we are finding that engagement is a more effective tool with bribery and corruption under the Bribery Act than it has been in the past with fraud.
On reason for this is that, for a successful prosecution under the UK’s previous bribery and corruption legislation, we had to prove that there was a ‘controlling mind’ at Board level behind the activities. Under the new Act, the key question is whether the Board has put effective structures in place to prevent bribery from taking place. If a company has not done this, and has significant operations in the UK, we can prosecute it for bribery and corruption by any of its employees anywhere in the world.
This is a big change. One effect is that prosecution of fraud is now out of line with bribery and corruption, since to prosecute a company for fraud we still need to prove that people at a senior level knew the fraudulent activity was taking place. Another effect is that acquirers who take over a business, and then discover that suspected bribery and corruption has been (and probably still is) taking place in it, are more likely to come forward, self-report and engage with us.
They are encouraged to do this by an awareness that we will take a pragmatic approach, quite possibly by letting them conduct their own internal investigation and then report the findings to us so we can take a balanced view on further action. They know that their demonstration of goodwill in initially disclosing their suspicions to us will be taken into account.
Our Broader Approach to Intelligence and Proactive Engagement
More broadly, we constantly monitor and review intelligence and other information relating to the activities of corporations within our jurisdiction. This comes to us in all sorts of ways – including suspicious activity reports to the UK’s Serious Organised Crime Agency (SOCA) and increasingly from whistle-blowers contacting our new SFO Confidential hotline. We also receive a lot of information from our international partners, from individuals across the world and indeed from picking up press reports.
With every piece of information, we need to assess whether there is something here that justifies SFO action. It’s a vital decision, and so we have a rigorous internal process for it, including making a number of enquiries to test the information before deciding formally whether to launch an investigation. We need to be as sure as possible that there is something there that justifies us in taking on the case.
When we do decide to do something, our approach can take a number of different forms. In some cases we contact the corporation involved, and say we believe they have a problem and would they like to come and see us. Most – but not all – do come in for that discussion, where we encourage them to agree to undertake an internal investigation and present the findings to us in due course. This makes obvious sense for the corporation, and several have agreed to this.
The Downside of Non-Cooperation
Of course, some corporations may not be interested in a discussion with the SFO – in which case we can carry on doing what we need to do. However, this does mean the corporation has passed up its opportunity for the maximum degree of mitigation and flexibility on our part. I regard this as a short-sighted and misguided approach, but of course that’s a matter for them.
In other cases we think that approaching the corporate is not appropriate – perhaps because of the size and systemic nature of the alleged corruption, the involvement of very senior people, or the potential for evidence to be destroyed. In that sort of case we may well decide to proceed quietly with our investigation. So the first that the corporate will know of our interest is likely to be when we arrive at its door with search warrants – the worst possible outcome for any business.
This is why we encourage companies to be rigorous in looking at allegations they receive internally about instances of corruption. Senior management should be asking hard questions about these – and should have a robust risk assessment process in place to provide as much reassurance as possible. If companies do not police themselves in this way, then the possibility that the SFO will need to take action is all the greater.
DOJ Guidance – Better Late Than Never, But Will It Matter?
The FCPA’s 1988 amendments required that the Attorney General, “after consultation with the [the SEC], the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with [the anti-bribery provisions] would be enhanced and the business community would be assisted by further clarification” of its various provisions. Among other things, Congress requested that the Attorney General consider issuing guidelines as to “general precautionary procedures [companies] may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy …”.
Following the 1988 Congressional mandate, the DOJ did issue a formal notice inviting all interested persons “to submit their views concerning the extent to which compliance with [the anti-bribery provisions] would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines.” However, the DOJ stated that “only 5 responses were received, and 3 of the responses were to the effect that guidelines were unnecessary” and based on this information it declined to issue FCPA compliance guidelines envisioned by Congress. In July 1990, the DOJ stated as follows. “After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”
A Dialogue Worth Having
This previous post discussed U.K. plans to introduce U.S.-style corporate plea bargains, including deferred prosecution agreements. Among other things, the post mentioned an October 17th meeting with U.K. prosecutors at Pinset Mason’s London office.
thebriberyact.com summarizes the meeting and nicely frames the issues here and here. The post states as follows. “We think that the need for DPA legislation is obvious. Its absence has often been remarked upon by the Director of the SFO and for very good reason. It is a serious hole in the UK law. Its absence has a chilling effect on the attempts to ensure that ethical attitudes become a permanent feature of corporate life in all companies, be they International, SME or small.”
Others have shared their views on whether the U.K. should adopt U.S. style alternative resolution vehicles and, if so, how.
Thomas Fox at the FCPA Compliance and Ethics Blog (here) believes “that the ability to enter into a DPA is a powerful tool that advances the interests of prosecutors, the judiciary and the public.” Fox states that “the primary reason for both the prosecution and a company which violates the Bribery Act entering into a DPA is certainty.”
Ross Parlane of McGuire Woods writing at The Bribery Library (here) states as follows. “There are a number of benefits to be gained from giving UK prosecutors the power to negotiate DPAs. Certainly the cost and time involved in investigating offences would be significantly reduced, which is good news for the public purse. Further, a well negotiated DPA that gives proper attention to remediation (e.g. through monitoring) as well as to punishment, has the potential to effect a permanent positive change in the culture of an organisation.” Yet Parlane states (and identifies) that “there are a number of tricky issues that need to be resolved before the use of deferred prosecution agreements can be adopted in the the U.K.”
Michael Volkov, writing at thebriberyact.com (here) notes that “for UK policymakers, the balance between judicial review and prosecutorial discretion is one which has to be resolved before any new policy can be enacted.”
Let me contribute to the dialogue by posing this question. Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement – the first two options being prosecute vs. not prosecute?
If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. Seems like a reasonable result. In other words, no need for the third option in such a case.
On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. Seems like a reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures?
Because the FCPA does not have an adequate procedures / compliance defense (at least not yet), the same analysis does not apply.
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In other recent U.K. developments, last week the SFO announced (here) that two former Innospec executives were charged. Dennis Kerrison, the former CEO of Innospec Ltd., was charged with “an allegation of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Government of Indonesia as inducements to secure, or as rewards for having secured, contracts from the Government of Indonesia.” Paul Jennings, the former CEO of Innospec, is accused of “two allegations of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Governments of Indonesia and Iraq as inducements to secure, or as rewards for having secured, contracts from those Governments.”
Earlier in the week, the SFO also announced (here) that David Turner, a former business unit director of Innospec Ltd., was charged with “alleged offenses of conspiring to make corrupt payments to public officials in Indonesia and Iraq to secure contracts for Innospec Ltd. for the supply of its products.”
Both Jennings (here for the prior post) and Turner (here for the prior post) previously settled SEC FCPA enforcement actions based on the same core set of conduct.
As with the SFO’s recent case against Victor Dahdaleh (see here for the prior post), the recent Innospec related enforcement actions are not Bribery Act enforcement actions.
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Sure, it’s Halloween and all, but the FCPA reform debate (see here) is getting a little silly don’t you think?
Off-Target
As detailed in this prior post, in September the Open Society Foundation released “Busting Bribery: Sustaining the Global Momentum of the Foreign Corrupt Practices Act” (here). The white paper was in response to the October 2010 white paper “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act” (here) released by the Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce. Authored by David Kennedy (Professor of Law, Harvard Law School) and Dan Danielsen (Professor of Law, Northeastern University School of Law), Busting Bribery stated that “the Chamber proposes to change the [FCPA] in ways that would substantially undermine the possibility for successful enforcement of America’s anti-bribery commitments” and that the “Chamber’s proposed amendments would also set back decades of progress in the global struggle against corruption.”
As to a potential FCPA compliance defense, a defense that not only the Chamber supports, Kennedy and Danielsen (the “Authors”) stated as follows in the Executive Summary. “Often seen as the least concerning of the Chamber’s proposals, the creation of an affirmative defense of ‘compliance’ to FCPA corporate criminal liability is actually potentially very dangerous. Compliance is already taken into account at every stage in the investigation and resolution of FCPA violations. In 1988, Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place. A defense of ‘adequate’ or ‘good faith’ compliance makes no sense when, as under the current FCPA, corporate criminal liability requires proof beyond a reasonable doubt that the company acted with actual knowledge and corrupt intent to influence a foreign government to gain an improper business advantage. Creating a compliance defense to knowing and intentional violations of the FCPA would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from their knowing and intentional wrongdoing.” (emphasis in original).
In the substantive section of report, the Authors stated, among other things, as follows. “… [A]n affirmative defense of ‘adequate’ or ‘good faith’ compliance is fundamentally inconsistent with the FCPA’s very high standards for corporate criminal liability which require prosecutors to prove that a company’s prohibited acts be both ‘knowing’ and ‘corruptly’ undertaken with intent.” The Authors then state that “these standards of liability were summarized in the Congressional Report on the 1988 amendments to the Act” and quote a portion of the Congressional Conference Report on the 1988 amendments as follows. “Thus, the ‘knowing’ standard adopted covers both prohibited actions that taken with ‘actual knowledge‘ of intended results as well as other actions that, while failing short of what the law terms ‘positive knowledge,’ nevertheless evidence a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to the high probability of violations of the Act.” (emphasis in original).
The Authors then continue as follows. “From these articulated and clearly-defined standards of corporate culpability under the FCPA, it becomes immediately apparent that an affirmative defense of ‘good faith’ or ‘adequate’ compliance is simply inappropriate. On the one hand, effective, ‘good faith’ compliance is logically incompatible with the requirement under the Act that violations be undertaken with ‘actual knowledge’ or a ‘conscious disregard or deliberate ignorance of known circumstances’ and the requisite ‘corrupt’ intent to induce a foreign official to misuse his official position to wrongfully obtain business or direct business to another. Any compliance program that knowingly permitted, facilitated, or consciously or deliberately turned a blind eye to corrupt, intentional violations of the FCPA must be either per se inadequate or not undertaken in good faith. On the other hand, the existence of a merely formal compliance program is irrelevant to the question of whether knowing, intentional and corrupt behavior took place. Creating a ‘compliance defense’ to knowing and intentional violations of the Act would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from having knowing and intentional wrong-doing.”
To use the Authors phrase of “immediately apparent,” what is immediately apparent upon reading Busting Bribery is how the Authors are off-target when it comes to the FCPA’s 1988 amendments as well as respondeat superior principles of corporate criminal liability.
In asserting that “Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place,” the Authors appear to assume that such was the general standard for corporate criminal liability prior to the 1988 amendments. It wasn’t.
The FCPA, as originally enacted, prohibited those subject to the law from, among other things, providing things of value to “any person, while knowing or having reason to know that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.” (emphasis added). The FCPA, as originally enacted, thus contained a third-party payment prohibition triggered by a broad “while knowing or having to reason to know” standard.
This standard was very quickly criticized by many because companies were “unsure about the degree of their responsibility for questionable payments made by their foreign agents in cases when the companies believe they have instituted reasonable safeguards.” (See GAO Report, “Impact of Foreign Corrupt Practices Act on U.S. Business” at pg. iv). U.S. Trade Representative William Brock candidly stated during a 1981 Senate FCPA hearing that “frankly, nobody knows what it means.” (See “Business Accounting and Foreign Trade Simplification Act,” Joint Hearings Before the Subcommittee on Securities and the Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing, and Urban Affairs, United States Senate, 97th Congress, First Session at pg. 63).
The FCPA reform efforts that began in 1980 and culminated in FCPA amendments in 1988 had, as a core reform proposal, revising the “reason to know” standard relevant to third-party payments. Jonathan Rose (Assistant Attorney General) stated, in connection with a 1983 House FCPA hearing, that the FCPA’s then standard of liability for third-party payments was akin to a “simple negligence standard” and “is plainly inappropriate and inconsistent with the general approach of modern criminal law to state-of-mind requirements.” (See “The Foreign Trade Practices Act,” Hearings Before the Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs, House of Representatives, 98th Congress, First Session at pg. 118).
In 1987, the House Committee on Energy and Commerce stated, in reporting out an FCPA reform bill revising the third-party knowledge standards that the “reason to know standard under current law has been criticized as unclear” and that “some businesses interpret the standard as tantamount to “reason to suspect that an agent will pass on a bribe, or a negligence standard …”. (See Trade and International Economic Policy Reform Act of 1987, House Report 100-49 (April 6, 1987) at pg. 75). The House Report stated that “clearly such an interpretation was not intended by Congress …” and when the FCPA was ultimately amended in 1988, the relevant Conference Report, under the heading “Standard of Liability for Acts of Third Parties (Agents)” stated that the conferees intended to retain the “knowing” requirement for payments to third-parties, to delete the House bill’s reference to “reckless disregard” and to include concepts of “conscious disregard” or “willful blindness.” (See House Report No. 100-576 at 920 (1988) at pg. 919).
The third-party payment provisions were amended in 1988 (and remain the same today) to prohibit those subject to the law from providing things of value to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.” Knowledge was defined in the 1988 amendments, and still is today, as follows. “(A) A person’s state of mind is ‘knowing’ with respect to conduct, a circumstance, or a result if – (i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur. (B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such a circumstance does not exist.”
In other words, Busting Bribery constructs, as the primary foundation for opposing an FCPA compliance defense, a knowledge standard that was relevant only, and continues to be relevant only, to the FCPA’s third-party payment provisions. The FCPA, when enacted, and to this day, allows corporate criminal liability under respondeat superior principles when an employee acts within the scope of his or her duties intending to benefit, at least in part, the organization. Knowledge (however defined) of the employee’s conduct by the board, executive officers, or other high-ranking executives is not required and, at present, the organization’s pre-existing compliance policies and procedures are not relevant as a matter of law to the organization’s criminal liability.
For instance, the only time in the FCPA’s history that a corporate FCPA charge was presented to a jury was in the Lindsey Manufacturing case early this year. The relevant jury instruction (instruction 16 – entity responsibility – entity defendant – agency) stated as follows.
“To sustain the charge of conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”) or violation of the FCPA against Lindsey Manufacturing Company, the government must prove the following propositions:
First, the offense charged was committed by one or more agents or employees of Lindsey Manufacturing Company; Second, in committing the offense, the agent or employee intended, at least in part, to benefit Lindsey Manufacturing Company; and Third, the acts by the agent or employee were committed within the authority or scope of his employment.
For an act to be within the authority of an agent or the scope of the employment of an employee, it must deal with a matter whose performance is generally entrusted to the agent or employee by Lindsey Manufacturing Company. It is not necessary that the particular act was itself authorized or directed by Lindsey Manufacturing Company. If an agent or an employee was acting within the authority or scope of his employment, Lindsey Manufacturing Company is not relieved of its responsibility because the act was illegal.” (emphasis added).”
So yes, while it is true that the corrupt intent element must be met in order to convict a company of an FCPA offense, that corrupt intent element can be satisfied by singular and isolated acts of any employee, even if their conduct is in violation of pre-existing company policies and procedures. However, you would not glean this significant point from Busting Bribery because the term respondeat superior (or general concept) does not even appear in the lengthy white paper.
An FCPA compliance defense would not, as the Authors suggest, create a wholesale corporate defense to “knowing and intentional violations of the FCPA.” If the board, executives, or other senior personnel were involved in the knowing and intentional conduct at issue, a company could not rely on the compliance defense. If an employee, at any level, engaged in knowing and intentional conduct in violating of the FCPA, a company could not rely on the compliance defense unless it had in place pre-existing compliance policies and procedures reasonably designed and implemented to prevent and detect, insofar as practicable, the conduct at issue.
The notion that creating a potential compliance defense “would amount to eliminating [corporate] criminal liability under the Act all together” is simply false and off-target, as is Busting Bribery’s misleading reference to the FCPA’s 1988 third party payment revisions to support its position.
Despite its obvious shortcomings, others are championing Busting Bribery’s compliance defense rebuttal. For instance, last week Citizens for Responsibility and Ethics in Washington (CREW) issued a release (here) touting the Authors’ work and praising Busting Bribery for “thoroughly debunk[ing] the Chamber’s arguments for amending the FCPA, finding them based on ‘myth.'” See CREW’s letters to both the House (here) and Senate (here).
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How did Aaron Murphy (Latham & Watkins), an FCPA practitioner and author of “Foreign Corrupt Practices Act: A Practical Resource for Managers and Executives” react to Busting Bribery? In this twitter feed he asked – “why are professors with no apparent experience actually investigating corruption used as experts?”