“The Shadow Lengthens”
[Late yesterday the DOJ announced this $88 million FCPA enforcement action (the 12th largest of all-time in terms of settlement amount) against Marubeni Corporation – the same company that resolved a $55 million DOJ FCPA enforcement action in 2012 (see here for the prior post) involving Bonny Island, Nigeria conduct. Yesterday’s FCPA enforcement action against Marubeni involving the Tarahan power plant project in Indonesia is not a surprise. In this April 2013 post regarding the FCPA enforcement action against current and former Alstom employees in connection with the same project, I sniffed out the details and accurately connected the dots to Marubeni. A future post will go in-depth as to yesterday’s Marubeni enforcement action when original source documents become available]
I have long called for abolition of non-prosecution and deferred prosecution agreements in the FCPA context. (See previous posts here, here, here, and here for instance). In short, and as noted in the prior posts, use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues as well as other issues. (See “The Facade of FCPA Enforcement“).
As noted in this previous post, in May 2012 the Center for Legal Policy Research at the Manhattan Institute released this dandy report titled “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements.” Authored by James Copland, the report stated in pertinent part as follows:
“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”
Recently, Copland and a co-authored followed up with this dandy report titled “The Shadow Lengthens: The Continuing Threat of Regulation by Prosecution.” In pertinent part, the Executive Summary states:
“The last ten years have seen the emergence of a new approach to business regulation and prosecution of wrongdoing in the United States. The U.S. Department of Justice now regularly enters into “deferred prosecution” or “non-prosecution” agreements (DPAs or NPAs) with large corporations, in which companies are paying billions of dollars in fines annually without trial. These agreements are presented as steps short of prosecution of corporations, a step that might drive firms into bankruptcy and disrupt their economic sectors. At the same time, a good case can be made that these agreements suffer from a lack of transparency. Questions naturally arise as to whether attorneys working for the federal government, with minimal to no judicial oversight, are best positioned to change significantly the business practices of individual companies and, indeed, entire industries.
Businesses prefer to enter into DPAs or NPAs rather than face trial, even when the costs of such arrangements are severe, because of the significant capital-market pressures stemming from criminal inquiries (including depressed stock prices and impaired credit) as well as the statutory and regulatory consequences flowing from indictment or conviction—for example, exclusion from government reimbursement or contracts, or the retraction of government licenses vital to a company’s operation. Prosecutors, in turn, prefer to avoid the risk and cost of trial as well as the potentially severe collateral consequences that indictment or conviction can impose on corporate stakeholders, including employees and creditors, as witnessed in the collapse of the large accounting firm Arthur Andersen following its 2002 federal indictment—which was ultimately set aside by the U.S. Supreme Court.
Thus, such arrangements have become commonplace, so much so that they might be characterized as a “shadow regulatory state” over business. The federal government has reached 278 DPAs and NPAs with businesses since 2004, with ten of the Fortune 100 companies operating under such agreements just since 2010. Although the federal government entered into only 17 DPAs and NPAs from 1993 through 2003, it entered into 66 in just the last two years, in which almost $12 billion in total fines and penalties were imposed. Companies in the finance and health-care sectors have been particularly likely to wind up under such agreements, with the finance sector accounting for 13 DPAs and NPAs and the health-care sector accounting for 8 of them in 2012–13. The reach of federal prosecutorial agreements has not stopped at America’s shores: the Department of Justice has asserted authority over hosts of foreign businesses—in some cases, for alleged conduct occurring completely outside the United States.
DPAs and NPAs are notable in that they impose terms on companies that go beyond the fines or incarceration normally associated with criminal punishment and because they go beyond requiring that the companies correct the specific practices alleged to be violations of the law. Instead, these agreements often call for major changes in firms’ internal processes of many types—from training to human resources—based on the apparent assumption that absent such changes, wrongdoing will be more likely to recur.
[…]
In many cases, the alleged predicate offenses underlying DPAs or NPAs involve ambiguous facts or strained or novel interpretations of law—interpretations that have remained untested in court, given companies’ pronounced pressure to settle. In addition, DPAs and NPAs regularly cede to prosecutors the sole discretion to determine whether companies are in breach of the agreement’s terms, without judicial oversight or the possibility of appeal.”
One of the NPAs highlighted in the recent report is the Ralph Lauren Corporation. Citing to, among other sources, prior FCPA Professor posts, the report states:
“The Ralph Lauren [NPA] also highlights the broad scope of federal FCPA enforcement, in which the executive branch is arguably holding companies to account for activities exempted from Congress’s statute, with minimal prospects for judicial review.”
The report also rightly notes:
“Congress’s intent in enacting the FCPA was clearly to deter American companies from buying foreign influence on a large scale – but not to police all foreign bribes potentially paid by U.S. businesses. Given the powerful incentives that businesses have to enter into DPAs and DPAs, however, federal prosecutors have broadly interpreted the FCPA’s scope – and limited its express exemption – effectively insulting it from judicial review.”
To learn more about Congressional intent in enacting the FCPA, see “The Story of the Foreign Corrupt Practices Act.”
An Odd Speech By The SFO Director
U.K. Serious Fraud Office Director David Green recently delivered this speech titled “Ethical Business Conduct: An Enforcement Perspective” at an event sponsored by PwC.
It is an odd speech.
Contrary to the “active engagement” position of his predecessor Richard Alderman, Green stated as follows.
“The role of the SFO is to investigate and to prosecute the topmost tier of serious and complex fraud and bribery. As part of that process, we are engaging and will continue to engage in a straight-forward way, by a process which is now underpinned by statute and a Code of Practice, with companies which self-report misconduct to us. We totally get the importance of generating trust and, in the right circumstances, legitimate expectation based on a track record of our dealings with companies who self-report. But the SFO is not a regulator, an educator, an advisor, a confessor, or an apologist. I am not funded for any of those activities. The SFO is a law enforcement agency dealing with top end, well-heeled, well-lawyered crime. We enforce the law in our specialist field. It follows that I am not here to preach. The SFO does not do lectures on ethics. We do not issue guidance on how not to rob banks. I would not dream of telling you how I think you should behave. It is for business and senior managers to decide appropriate standards of ethics and integrity in their commercial activities. They have access to the best expertise and advice available from the law and accountancy sectors of the Bribery Act industry. That advice would doubtless take account of the legitimate profit motive, and the interests of employees, shareholders, investors and pensioners. So I cannot help you on ethics. But the SFO will continue to engage with companies who want to do the right thing, and we are very interested in building trust.”
However, after stating that he would not “preach,” that “the SFO does not do lectures on ethics,” and that he “would not dream of telling you how I think you should behave,” Mr. Green proceeds to do the things he said he would not do.
For instance, “why should a company self-report suspected criminal misconduct to the SFO.”
In the words of Green, because “there is a moral and reputational imperative to self-report: it is the right thing to do and demonstrates that the corporate is serious about behaving ethically.”
Mr. Green’s speech was not entirely an air ball.
He did state as follows regarding the difference between U.K. style deferred prosecution agreements and U.S. deferred prosecution agreements.
“The US model for DPAs has no statutory foundation; it has developed through practice. The downsides are that some judges feel they are used as rubber stamps for deals agreed between prosecutor and corporate and that the public may perceive a DPA as a “sweet-heart deal” which lacks transparency.
The British model for DPAs is adapted to the British context.
It is a creature of statute, explained by a published Code of Conduct.It is available only in relation to corporates, not individuals.
It is designed to take account of the frustration expressed by very senior judges in the Innospec and BAE hearings that they had been presented with fait accompli as to penalty agreed between prosecution and defence. [See prior posts here and here]
The whole process, from preliminary hearing to application for approval to pronouncement of approval, takes place under judicial supervision.
The judge has to be persuaded that the DPA is in the interests of justice, reasonable, fair and proportionate.
The final hearing (the pronouncement of approval of the DPA, with reasons) will almost always be in open court.
It is by invitation only.
It is not a panacea.
Prosecution remains an option and the prosecution of individuals remains likely.As experience is built up by all parties, this will generate consistency and therefore predictability around the likelihood of achieving a DPA.”
Even so, it remains troubling that Mr. Green defends the new DPA model by calling it “cheaper” and “quicker.” As noted in this prior post, ease and efficiency are not concepts normally associated with the rule of law and justice.
*****
What is the DOJ’s primary role when it comes to the Foreign Corrupt Practices Act? As highlighted in this previous post, in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990) the court, after reviewing the FCPA’s legislative history, concluded that the “legislative action clearly evinces a preference for compliance in lieu of prosecution …”.
The U.K. Enters The Facade Era
In my 2010 article “The Facade of FCPA Enforcement,” I warned that this was going to happen.
Under the heading “why the facade of FCPA enforcement matters,” I noted, among other things, the “increasing frequency by which other nations are modeling enforcement of their own bribery laws on U.S. enforcement methods and theories” and stated that “these methods and theories, unless addressed and corrected here in this country, will continue to be replicated elsewhere, perhaps leading to a global facade of enforcement.”
Today, the U.K. formally enters the facade era as deferred prosecution agreements become available to U.K. prosecutors. (See here and here for relevant documents recently released by the Serious Fraud Office (SFO) and Crown Prosecution Service (CPS)).
To anyone who values the rule of law, reading these documents is truly distressing and I imagine Sir William Blackstone (the famed English jurist best known for his Commentaries on the Laws of England) has flipped in his grave.
Why did the U.K. adopt DPAs?
In short, the SFO and CPS tell us that doing things the old-fashioned way (i.e. proving a criminal violation in an adversarial system) is too difficult and takes too long. The SFO Director’s language on this issue is blunt as he states that “one of the principal purposes of DPAs is to bring resolution to cases of corporate criminality more quickly.”
The U.K.’s justification for DPAs is really quite sad as ease and efficiency are not concepts normally associated with the rule of law and justice. Yet, when politicians and civil society groups are clamoring for more prosecutions this is the end result.
Before highlighting certain troublesome features of the U.K.’s new system, it is important nevertheless to recognize the following.
When the U.K. was considering its approach, it rejected U.S. style non-prosecution agreements and stated that such agreement
“[Are] unsuitable for the constitutional arrangements and legal traditions in England and Wales. We have concluded that [NPAs] are not suitable for this jurisdiction due to their markedly lesser degree of transparency, including the absence of judicial oversight.” (See here for the prior post).
Moreover, even though the U.K. is adopting DPAs, the DPA regime is most certainly different from the U.S. regime in that the U.K. regime contemplates active and early involvement by the judiciary.
U.K. DPAs will be used to resolve a variety of corporate criminal actions, not just actions under the Bribery Act. My opposition to the U.K. adopting DPAs has been limited to application to Bribery Act offenses (see here for my prior submission to the U.K. Ministry of Justice as well as prior posts here, here and here). The questions I posed have never been answered.
“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. This seems like a just and reasonable result and there is no need for a third option in such a case. On the other hand, if a corporate does not have adequate procedures (thus demonstrating a lack of commitment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. This seems like a just and reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures? I submit the answer is no and urge the MoJ to reject use of DPAs in the Bribery Act context.”
For years, I have been highlighting how the DOJ picks and chooses which aspects of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions it chooses to follow. When the DOJ wants to justify a position it is taking and feels like the OECD Convention supports this position, the DOJ cites to the OECD Convention. However, when the DOJ is acting inconsistent with the OECD Convention, it simply ignores the Convention.
For instance, OECD Convention Article 5, under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.” Every time the DOJ enters into an NPA or DPA and justifies its decision through reference to potential collateral consequences that may result to a particular company, the DOJ is considering the “identity” of the “legal persons involved” in violation of Article 5.
The U.K.’s Code of Practice for DPAs does the same thing.
Section 2.7 of the Code of Practice states:
“Prosecutors should have regard when considering the public interest stage to the U.K.’s commitment to abide by the OECD Convention on ‘Combating Bribery of Foreign Public Officials in International Business Transactions’ in particular Article 5. Investigation and prosecution of the bribery of a foreign public official should not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”
Yet a page later, at Section 2.8 under the heading “additional public interest factors against prosecution,” the Code of Practice sets forth the following:
“[whether] a conviction is likely to have disproportionate consequences for [an organization], under domestic law, the law of another jurisdiction including but not limited to that of the European Union …”
“[whether] a conviction is likely to have collateral effects on the public, [an organization’s] employees and shareholders of [an organization] and/or institutional pension holders.”
In other words and contrary to Article 5, the U.K., like the U.S., will take into account the identity of the legal person involved.
Notwithstanding the above, the most troubling feature of the Code of Practice concerns the evidence sufficient for U.K. prosecutors to resolve an action via a DPA. In defending adoption of the “lower evidential test” in the Code of Practice and addressing concerns that this standard “was so easily satisfied as to have very little substance,” the SFO’s response is, in pertinent part, as follows.
“One of the principal purposes of DPAs is to bring a resolution to cases of corporate criminality more quickly. […] If a prosecutor had to be satisfied that the evidence against an organization was sufficient to meet the Full Code Test (“Prosecutors must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction against each suspect on each charge”) without the alternative of the ‘lower’ evidential test before considering whether a DPA was in the public interest, a key purpose of DPAs, as was the express intention of parliament, would become redundant. In order to achieve one of parliament’s key intentions in legislating for the introduction of DPAs a ‘lower’ evidential test is necessary.”
“Satisfaction of the Full Code Test, particularly in view of the well documented difficulties in proving corporate liability, would in most circumstances require a complete an full scale investigation, sometimes spanning many jurisdictions, which inevitably is time consuming and expensive. It is not intended for there to be such an investigation before a DPA is entered into.”
This response is nothing short of laughable and truly distressing to anyone who values the rule of law. The SFO is defending the DPA regime by saying that the old regime of proving corporate criminal liability required a complete and full scale investigation that took too long.
At the end of the day, the U.K.’s adoption of DPAs is a political response to show results. Because this new system expands the market for legal services, you will find few opposing it.
What a sad state of affairs the U.S. has started and is now spreading across the world.
Friday Roundup
Wal-Mart’s FCPA expenses, scrutiny alerts and updates, quotable, February 21st, further to the conversation, and for the reading stack. It’s all here in the Friday roundup.
Wal-Mart’s FCPA Expenses
For over a year now, I have been tracking Wal-Mart’s pre-enforcement action professional fees and expenses and calculating what Wal-Mart is spending per working day on its FCPA scrutiny and exposure. (See here for the prior post with embedded links to others). Here is what Wal-Mart executives said yesterday in its earnings conference call for the fourth quarter of FY 2014.
“Core corporate expenses [for the fourth quarter of FY 2014] increased 5.8 percent. FCPA and compliance-related expenses were approximately $58 million, which was below our guidance of $75 to $80 million for the quarter. Approximately $38 million of these expenses represented costs incurred for the ongoing inquiries and investigations, while the remaining $20 million was related to our global compliance program and organizational enhancements.”
[…]
“Corporate & support expenses [for the fiscal year 2014] increased 24.1 percent for the full year, primarily from our investments in leverage services and Global eCommerce. Core corporate expenses, which included $282 million in charges related to FCPA matters, increased 15.6 percent. Approximately $173 million of these expenses represented costs incurred for the ongoing inquiries and investigations, while the remaining $109 million was related to our global compliance program and organizational enhancements.”
[…]
“During the first quarter of this year, we will begin to anniversary the increased costs we’ve incurred for FCPA matters, including compliance program enhancements and the ongoing investigations. These costs will remain in the Corporate and Support area, and we anticipate expenses to be between $200 million and $240 million for the year. [for the fiscal year 2015]
You add it up, and here is what you get.
FY 2013 = $157 million (approximately $$604,000 per working day)
FY 2014 = $282 million (approximately $1.1 million per working day)
FY 2015 = $200 – $240 million (anticipated)
As Wal-Mart’s FCPA scrutiny will once again demonstrate, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.
Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts). For instance, the total of the above pre-enforcement action professional fees and expenses and estimates is approximately $659 million. A $659 million FCPA settlement amount would be second of all-time.
That pre-enforcement action professional fees and expenses are typically the most expensive aspect of FCPA scrutiny is a fact. However it must nevertheless be asked whether FCPA scrutiny has turned into a boondoggle for many involved. Using just Wal-Mart and Avon’s pre-enforcement professional fees and expenses results in FCPA Inc. being over a billion dollar industry!
Is Wal-Mart’s conduct for which it is under scrutiny in violation of the FCPA? Does it even matter? See my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”
Scrutiny Alerts and Updates
Knut Hammarskjold
Earlier this week, the DOJ announced that Knut Hammarskjold “pleaded guilty today for his role in a scheme to pay bribes to foreign government officials and to defraud PetroTiger.” According to the release, Hammarskjold pleading guilty “to an information charging one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and to commit wire fraud and is scheduled for sentencing on May 16, 2014.” Despite the DOJ’s announcement, the docket for Hammarskjold’s case does not contain the plea agreement or related documents. For a comprehensive summary of the DOJ’s charges against Kammarskjold and co-defendants Joseph Sigelman and Gregory Weisman, see this prior post. As noted in the previous post, Weisman has also pleaded guilty and the charges against Sigelman remain pending.
Mead Johnson
As highlighted in this previous Friday Roundup, last year Mead Johnson Nutritional Company disclosed an internal investigation related to business practices in China. Thus, contrary to certain reports Mead Johnson’s FCPA scrutiny is not “new,” but earlier this week, the company updated its disclosure as follows.
“Following an SEC request for documents relating to certain business activities of the Company’s local subsidiary in China, the Company is continuing an internal investigation of such business activities. The Company’s investigation is focused on certain expenditures that were made in connection with the promotion of the Company’s products or may have otherwise been made. Certain of such expenditures were made in violation of Company policies and may have been made in violation of applicable U.S. and/or local laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). The investigation is being conducted by outside legal counsel and overseen by a committee of independent members of the Company’s board of directors. The status and results of the investigation are being discussed with the SEC and other governmental authorities. At this time, the Company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”
Lyondellbasell
As highlighted in this 2010 post, in connection with a bankruptcy proceeding, Lyondellbasell’s disclosed as follows.
“We have identified an agreement related to a project in Kazakhstan under which a payment was made in late 2008 that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”).
Yesterday the company disclosed:
“We previously reported that we had identified, and voluntarily disclosed to the U.S. Department of Justice, an agreement related to a former project in Kazakhstan under which a payment was made that raised compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). In January 2014, the U.S. Department of Justice advised the Company that it had closed its investigation into this matter. No fine or penalty was assessed.”
In the minds of some, this is a declination. I beg to differ – see here.
Baxter International
The company recently disclosed as follows.
“The company was the recipient of an inquiry from the U.S. Department of Justice (DOJ) and the SEC that was part of a broader review of industry practices for compliance with the U.S. Foreign Corrupt Practices Act. In January 2014, the company was notified by both the DOJ and the SEC that their respective investigations were closed as to Baxter without any further action taken by either agency.”
For a previous post regarding Baxter, see here.
Alstom
Bloomberg reports:
“Alstom SA, the French maker of trains and power equipment, will be charged in the U.K. over bribery allegations after a five-year investigation, according to two people with knowledge of the case. The Serious Fraud Office may ask the attorney general to approve charges in the coming weeks, a standard requirement for the agency to prosecute some offenses, according to the people, who asked not to be identified because the case is private. […] The SFO said in 2011 it suspected that Alstom gave money to companies that acted as “bogus consultants” to bribe overseas officials for contracts from 2004 to 2010, according to court papers at the time.”
If Alstom does face criminal charges in the U.K., the charges are unlikely to fall under the U.K. Bribery Act as the law went effective in July 2011 and is forward-looking only. As highlighted in previous posts (see here for instance) in 2013 the DOJ brought charges against four individuals associated with Alstom concerning alleged conduct in Indonesia.
Quotable
In this recent Chicago Tribune article, Tom Pritzker (Chairman and Chief Executive Officer of The Pritzker Organization, LLC – the principal financial and investment advisor to various Pritzker family business interests) reportedly stated as follows at a recent Chicago Council on Global Affairs event:
“The way that [FCPA] enforcement is working out of Washington strikes all of us in American business as arbitrary. It’s a revenue-generating mechanism for Washington, and that makes it additionally difficult in terms of how you figure out how to navigate emerging markets.”
February 21st
Today is a notable day in FCPA history (see this prior post).
I am grateful that I – and this website – have played a role in these events.
Further to the Conversation I
As frequently highlighted on these pages (see here for instance), trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
Simply put, trade barriers and distortions create bureaucracy.
Bureaucracy creates points of contact with foreign officials.
Points of contact with foreign officials create discretion.
Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.
This recent Wall Street Journal article highlights China’s “quota system” for foreign-films. As the article states:
“[34 is] maximum number of foreign titles the Chinese government allows into its nation’s theaters every year, a quota in place to try to protect China’s own nascent movie business. Hollywood studios have wondered when that number might be boosted—the last time was in February 2012, when Vice President Joe Biden announced a deal increasing the quota to the current 34 titles, from 20.”
Perhaps you’ve heard that various film companies are under FCPA scrutiny concerning business practices in China. (See here).
Further to the Conversation II
Whether it’s a federal court judge stating that a pending federal criminal case is “not window dressing” nor is the court “a potted plant” in concluding that a federal court does indeed have supervisory authority over the DPA process (see here for the prior post) or whether it’s a federal court judge criticizing various common aspects of corporate criminal law enforcement, including DPAs, as “both technically and morally suspect” (see here for the prior post) – there is an important conversation taking place concerning how the DOJ resolves alleged instance of corporate criminal liability.
Further to this conversation, the Better Markets, Inc. (a group that advocates for greater transparency, accountability, and oversight in the financial system) recently filed this complaint for declaratory and injunctive relief against the DOJ and Attorney General Eric Holder. While the complaint reads more like a policy paper than a complaint, it nevertheless calls the $13 billion settlement between the DOJ and JPMorgan a “mere contract” and alleges in pertinent part:
“Yet, this contract was the product of negotiations conducted entirely in secret behind closed doors, in significant part by the Attorney General personally, who directly negotiated with the CEO of JP Morgan Chase, the bank’s “chief negotiator.” No one other than those involved in those secret negotiations has any idea what JP Morgan Chase really did or got for its $13 billion because there was no judicial review or proceeding at all regarding this historic and unprecedented settlement. However, it is known that JP Morgan Chase’s $13 billion did result in almost complete nondisclosure by the DOJ regarding JP Morgan Chase’s massive alleged illegal conduct.
Thus, the Executive Branch, through DOJ, acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any review or approval of its unilateral and largely secret actions. The DOJ assumed this all-encompassing role even though the settlement amount is the largest with a single entity in the 237 year history of the United States and even though it provides civil immunity for years of illegal conduct by a private entity related to an historic financial crash that has cause economic wreckage affecting virtually every single American. The Executive Branch simply does not have the unilateral power or authority to do so by entering a mere contract with the private entity without any constitutional checks and balances.”
The complaint seeks a declaration that, among other things,
“the DOJ violated the separation of powers doctrine by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval”
“the DOJ acted in excess of its statutory authority by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval”
“the DOJ acted arbitrarily and capriciously by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval.”
I agree with Professor Peter Henning who recently stated in his New York Times Dealbook column:
“The lawsuit faces substantial hurdles that make it unlikely to succeed. As a general matter, private parties do not have standing to challenge a decision by the government to settle a case. The Justice Department has broad discretion in how it chooses to exercise its authority, and courts rarely intervene to scrutinize a decision unless there is evidence involving improper discrimination.
Nevertheless, the frustration expressed by Better Markets about the process for determining what JPMorgan should have paid to resolve multiple investigations is fair.”
Reading Stack
For more on princelings and the hiring practices of certain financial institutions in China, see here from Bloomberg.
A dandy article here from Jon Eisenberg (K&L Gates) titled “Brother Can You Spare $8.9 Billion? Making Sense of SEC Civil Money Penalties.” In pertinent part, the article is about:
“Other than negotiations about the wording of settlement documents, agreeing to the amount of the money penalty is often the last barrier to resolution. And it’s one of the most frustrating because the amounts proposed may appear untethered to any principle or precedent.
In an effort to provide more clarity on SEC money penalties, we look at four sources that should inform the negotiations about those penalties: first, the explosive growth in the SEC’s authority to impose civil money penalties; second, the relevant statutory language since the SEC’s authority to impose civil money penalties comes from and is limited by Congress; third, two recent D.C. Circuit decisions making clear that there are meaningful limits on the Commission’s discretion in assessing money penalties; and fourth, the outcome in recent cases before SEC administrative law judges in which the amount of the penalties was contested.”
The article is not FCPA specific, but very much FCPA relevant, particularly given the SEC’s increased interest in resolving corporate FCPA enforcement actions via administrative actions. In short, Eisenberg’s article is excellent. Read it.
*****
A good weekend to all.
Friday Roundup
Cisco’s discreet blog post, McDonald’s receives the “princeling” treatment, Avon update, further to the free-for-all, more candy, and for the reading stack. It’s all here in the Friday roundup.
Cisco’s Discreet Disclosure
There is not much that slips through the cracks when it comes to the FCPA space.
However, this December 23, 2013 Cisco blog post by a Vice President for Compliance Services under the discreet heading “The Importance of Ethics in Global Business” has not otherwise been reported. The post states, after noting that “for the sixth time in as many years, the Ethisphere Institute honored Cisco by naming us to its list of the “World’s Most Ethical Companies,” as follows:
“Recently, at the request of the Securities and Exchange Commission and the US Department of Justice, Cisco began an investigation into our business activities and discounting practices in Russia and other Commonwealth of Independent States in response to a communication those agencies had received. We are cooperating with the agencies and will fully share the results of our investigation with them. Despite the extensive investigation that we have undertaken thus far, we have found no basis to believe that Cisco’s activities are in violation of any law, and indeed the information we were provided does not allege wrongdoing by any of Cisco’s executive management. While this investigation is ongoing, we do not expect the outcome to have any material adverse effect on our business or operations.”
For a prior post concerning companies that have resolved FCPA enforcement actions or have otherwise been under FCPA scrutiny while at the same general time earning “world’s most ethical” company status see here.
McDonald’s
The word of the last six months would seem to be “princeling.” In “princeling” updates:
This Wall Street Journal article “Vietnam Gets Its First McDonald’s” states:
“McDonald’s chose Henry Nguyen, a Vietnamese-American investor and the son-in-law of Vietnamese Prime Minister Nguyen Tan Dung, as its main franchise partner in the country.”
This Quartz article “McDonald’s Partnered with a Vietnamese Princeling” notes:
“Partnering up with a well-connected member of one of Vietnam’s most prominent political families has raised remarkably few eyebrows for McDonald’s—especially given the growing scandal in China over investment banks that have done much the same thing.”
Among other things, the article notes:
“Nguyen, who also heads Vietnam’s Pizza Hut franchise business, worked hard for a decade to convince McDonald’s he was the right person for the partnership, he told Reuters last year. A McDonald’s spokeswoman said then, “His marriage did not preclude him for participating in what was a very competitive selection process.”
Avon
Avon has been under FCPA scrutiny since 2008 and disclosed yesterday as follows.
“The Company recorded an aggregate accrual related to the previously disclosed government Foreign Corrupt Practices Act (“FCPA”) investigations of $89 million, or $0.20 per diluted share, within operating profit, of which $12 million was recorded in the second quarter. Based on the status of the Company’s current settlement negotiations with the DOJ and the staff of the SEC, including the level of monetary penalties being discussed, an additional $77 million was recorded in the fourth quarter, and the Company estimates the aggregate amount of any potential settlements with the government could exceed this accrual by up to approximately $43 million. There can be no assurance that the Company’s efforts to reach settlements with the government will be successful or, if they are, what the timing or terms of such settlements will be.”
“As you saw in our press release this morning, we’ve continued our discussions with that SEC and DOJ and we’ve made significant progress. Based on the status of our recent discussions, we believe that a reasonable range for settlement with both agencies would be $89 million to $132 million. Our discussions with the government are ongoing and differences remain, but the team is working hard in an effort to bring these matters to a close.”
Free-For-All
In my recent article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action,” I noted that with increasing frequency in this new era of FCPA enforcement, it appears that the Department of Justice and the Securities and Exchange Commission have
transformed FCPA enforcement into a free-for-all in which any conduct the enforcement agencies find objectionable is fair game to extract a multimillion-dollar settlement from a risk-averse corporation. In this post regarding the recent Alcoa enforcement action I noted that it was hard to square the enforcement action (the fourth largest FCPA enforcement action of all-time in terms of a settlement amount) when the alleged consultant at the center of the alleged bribery scheme was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed
the case because there was no ”realistic prospect of conviction.”
Further to the free-for-all, Wiley Rein attorneys Gregory Williams, Ralph Caccia and Richard Smith write here as follows.
“[I]t is remarkable that such a large monetary sanction was imposed when the criminal charges brought by the U.K. Serious Fraud Office against the consultant central to the alleged bribery scheme were dismissed on the grounds that there was no “realistic prospect of conviction.” Perhaps most striking, however, is the theory of parent corporate liability that the settlement reflects. Although there is no allegation that an Alcoa official participated in, or knew of, the improper payments made by its subsidiaries, the government held the parent corporation liable for FCPA anti-bribery violations under purported “agency” principles. Alcoa serves as an important marker in what appears to be a steady progression toward a strict liability FCPA regime.
[…]
Such an enforcement approach appears to abrogate basic tenets of corporate liability. A parent company is not liable for the acts of its subsidiary except when the companies disregard corporate formalities (alter ego theory) or when the subsidiary acts as the agent of the parent for a specific purpose. For the latter, the parent is required to control the particular activity in question. The government’s new agency theory of enforcement represents an aggressive expansion of corporate liability, with significant the implications for parent companies both in terms of the compliance and potentially liability.”
For additional reading, see this recent post (“Dig into certain corporate Foreign Corrupt Practices Act enforcement actions and it would appear that legal liability seems to hop, skip, and jump around a multinational company. This of course would be inconceivable in other areas, such as contract liability, tort liability, etc. absent an “alter ego” / “piercing the veil” analysis for the simple reason that is what the black letter law commands”).
More Candy
Previous posts here and here have dispensed FCPA candy (that is year in reviews). You can be tardy for the party, but still be included in the fun and set forth below are three additional worthwhile reads.
BakerHostetler 2013 Year-End Foreign Corrupt Practices Act Update
“This [recent] decrease [in corporate FCPA enforcement actions] appears to be the result of proactive internal investigations and remediation by U.S. companies that recognize the importance of retaining external resources to investigate FCPA issues in light of the substantial fines levied by the government over recent years.”
That’s a nice way to spin it, but the better answer by far is to have a proper perspective on FCPA statistics and to realize that 35% of all corporate FCPA enforcement actions in recent years and 55% of the settlement amounts were the direct result of just three unique events.
WilmerHale Foreign Corrupt Practices Act Alert
Kudos for the following statement regarding so-called “declinations.”
“[W]hile these corporate disclosures are frequently referred to generically as “declinations,” that term seems to encompass not only genuine declinations where the government exercises discretion to decline prosecution of an otherwise chargeable offense, but also cases where the government decides not to prosecute because it has found insufficient evidence of FCPA violations or faces insurmountable legal hurdles in bringing a case.”
For more on so-called “declinations” see prior posts here, here and here.
Miller & Chevalier FCPA Winter Review 2014
Once again, be warned – the divergent enforcement statistics are likely to make you dizzy at times and as to certain issues. [Given the increase in FCPA Inc. statistical information and the growing interest in empirical FCPA-related research, I again highlight the need for an FCPA lingua franca (see here for the prior post), including adoption of the “core” approach to FCPA enforcement statistics (see here for the prior post), an approach endorsed by even the DOJ (see here), as well as commonly used by others outside the FCPA context (see here)]
For the Reading Stack
From the Washington Post, a look at New Jersey Governor Chris Christie and the rise and controversy of non-prosecution and deferred prosecution agreements.
In this recent NY Times Dealbook article, “S.E.C.’s Losing Streak in Court Puts Agency in Spotlight,” Professor Peter Henning (a former SEC enforcement official) begins as follows.
“Every litigator says that trials are messy affairs because no one can predict how they will play out. After a string of recent unfavorable verdicts in fraud cases, the Securities and Exchange Commission may, too, be concerned with that trend. The S.E.C. is a bit like the New York Yankees, because every defeat is magnified, so we should be careful not to read too much into the anecdotal evidence as garnered by the results of a few recent trials. Most cases filed by the agency are settled, garnering only modest publicity, so the effectiveness of its enforcement program is not tied solely to its wins in the courtroom.”
For more on the SEC’s recent losses, see here from Marc Fagel and Mary Kay Dunning (Gibson Dunn).
“One likely consequence [of the SEC’s recent losses] may be an increase in the number of enforcement matters filed as administrative cease-and-desist proceedings rather than as federal district court actions.”
Spot-on observation, but again a sorry state of affairs in that a way for the SEC to avoid litigated losses when put to its burden of proof is to avoid the judicial system altogether.
A recent survey from AlixPartners conducted in November 2013. (The survey group consisted of executives at companies based in North America, Europe, the Middle East, and Asia that have annual revenues of $150 million or more). “The survey also found that although some companies have expanded the scope of their reviews of their foreign subsidiaries, one-third said they have not done that. Less than half (43%) of respondents said they regularly conduct due diligence on third-party agents.” (See here for the prior post “It’s More Like Bronze Dust.”).