Category: Deferred Prosecution Agreements

Negotiating Bribery: Toward Increased Transparency, Consistency, and Fairness in Pre-Trial Bargaining Under The Foreign Corrupt Practices Act

A guest post today from Peter Reilly (Associate Professor, Texas A&M University School of Law).  Professor Reilly, a negotiations expert, discusses his article “Negotiating Bribery: Toward Increased Transparency, Consistency, and Fairness in Pre-Trial Bargaining Under the Foreign Corrupt Practices Act,” forthcoming in the Hastings Business Law Journal.

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I would like to thank Mike Koehler for the opportunity to contribute to this ongoing conversation about the FCPA.

In the context of FCPA matters, the use of DPAs and NPAs is not guaranteed; rather, they are awarded to defendants through elaborate negotiations with the Department of Justice. These negotiations present an opportunity for accused parties to agree to clean up their respective acts, usually by (1) adopting or enhancing internal anti-corruption programs; (2) carrying out self-policing audits and investigations; and (3) voluntarily disclosing compliance issues and information to federal authorities.  In addition to agreeing to implement various rules, policies, and procedures to prevent bribery from taking place, the accused parties oftentimes agree to pay hefty monetary fines.  In exchange, the Justice Department agrees to hold off (perhaps forever) on prosecution.  Ultimately, if all aspects of the negotiated agreement are successfully carried out, the initially-accused party can move forward without fear of further legal consequences on the matter.

But here is the problem:  This ultimate negotiation between prosecutor and accused can sometimes be unfair to the point where any “bargaining” taking place is merely illusory.  This is because in many instances, the government has too much power, too much leverage, and too much discretion in presenting, negotiating, and implementing DPAs and NPAs.  Given its enormous leverage in the negotiation, DOJ can oftentimes negotiate quite favorable prosecution agreements, whose terms can include large financial penalties, significant internal business reforms, and cooperation in pursuing the company’s individually culpable directors, executives, managers, and/or employees.  This cooperation can include the company admitting liability, identifying wrongdoers within the organization, and sometimes even waiving work-product protection and attorney-client privilege pursuant to internal documents and internal investigations.

Moreover, while DOJ has complete discretion on whether or not to offer accused parties an NPA or a DPA, the consequences of not being offered one or the other can be devastating to a company.  Due to negative collateral consequences surrounding corporate prosecutions, accused companies tend to yield to whatever demands are made by DOJ during the negotiation.  This helps explain why, in the last twenty years, only a handful of companies have decided to go to trial in an FCPA case.[1] And while federal prosecutors enjoy wide, largely non-reviewable discretion regarding which corporate entities to target and what crimes to allege, the most effective way for any criminal justice system to test such prosecutorial discretion and to rein in overly-aggressive prosecutors—namely, the trial by jury[2]—is, for the most part, not being utilized to resolve FCPA cases.  Given that corporations cannot run the risk of going to trial, they essentially do not have a Best Alternative To a Negotiated Agreement (or “BATNA”)[3] in their negotiations with DOJ; in other words, they have little choice but to accept whatever terms are offered through the form of a DPA or NPA.

Professors Robert Mnookin and Lewis Kornhauser taught us in their seminal article, “Bargaining in the Shadow of the Law: The Case of Divorce,” that parties do not bargain “in a vacuum” and that two essential ingredients of power within the context of legal negotiations include:  (1) the option of going to trial should the negotiation fail to achieve agreement; and (2) knowledge of what the likely outcome would be, in accordance with legal precedent, should one ultimately choose to go to trial.  And yet, corporations facing FCPA charges lack both of these essential ingredients of power:  (1) as pointed out previously, going to trial would be so damaging to the company that it has little choice but to accept whatever terms are offered through the form of a DPA or NPA; and (2) because so few FCPA cases have gone to trial, it is very difficult for companies to accurately predict what the outcome at trial would likely be if they decide to pursue that avenue.  The end result is that the balance of power in the context of FCPA pre-trial negotiations is weighted significantly in favor of the government.

My article explores in depth the various factors that contribute to less-than-optimal transparency, consistency, and fairness in pre-trial bargaining under the Foreign Corrupt Practices Act, and it concludes with recommendations to strengthen the current system and make it more fair, including:

– DOJ should release to the public carefully redacted information regarding all FCPA declination decisions.

– FCPA Opinion Procedure Releases should have greater precedential value.

– The U.S. Congress should thoroughly investigate, in as non-partisan a manner as possible, the advantages and disadvantages of passing an FCPA compliance defense.

– Judicial supervision of the NPA and DPA negotiation processes should be mandated.

– Judicial review of NPAs and DPAs after they are drafted but before they are signed should be mandated.

– Judicial review regarding the issue of NPA and DPA breaches should be mandated.

Even if one disagrees with my recommendations or sees legislative, judicial, or political roadblocks to their adoption or implementation, my hope is that the article points out to readers that real and significant power imbalances exist when DOJ employs DPAs and NPAs to address FCPA enforcement matters.  This is not fair or just to the party sitting on the “accused” side of the negotiation table, and something should be done to address that unfairness

Friday Roundup

Cooperation vs. capitulation, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Cooperation vs. Capitulation

A good read (here) from George Terwilliger (Morgan, Lewis &  Bockius and a former Deputy Attorney General) regarding the difference between cooperation vs. capitulation in DOJ inquiries.  All sound advice and worth noting.

However, when the DOJ publicly states that a foreign company declined “to cooperate with the DOJ based on jurisdictional arguments” – as it did in the JGC FCPA enforcement action – the message being sent is that indeed the DOJ expects FCPA counsel to roll over and play dead.  (See here for the prior post).

When the DOJ publicly “warn[s] defendants facing charges under the foreign bribery law against contesting [the] definition [of foreign official]” – as it did in connection with the Carson enforcement action – the message being sent is to capitulate.  (See here for the prior post).

Quotable

Regarding JPMorgan’s recent $920 million to settle civil allegations brought by the SEC and other regulators in connection with a multibillion-dollar trading loss that’s come to be known as the London Whale case, the New York Times DealBook states:

“At first glance, it sounded like a lot of money and, frankly, it sounded as if the S.E.C. had a strong case and had exacted quite a settlement.  But look closer and scrutinize the S.E.C.’s 15-page description of its findings. Then think about this: When the S.E.C. says that JPMorgan is ‘paying’ a record fine, where is the money actually coming from?  The answer: shareholders. The same shareholders who were ostensibly the victims of the scandal that already cost them $6 billion. The victims, if you want to call them that, become victimized twice.”

The article then quotes Columbia University Law Professor John Coffee as follows.

“It is perversely inappropriate. You are adding injury to injury. All we’re doing is punishing the shareholders more,” said John C. Coffee Jr., a professor of securities law at Columbia Law School. “This is a case where the victims are the shareholders.”

If you’re wondering why the S.E.C. sought to settle with “the firm” — in truth, JPMorgan’s shareholders, who don’t have say in the matter — rather than bring cases against the individuals who were responsible for the admitted failures of “the firm,” Mr. Coffee has a skeptical, if not necessarily cynical, theory that bears repeating: “You could have tried to sue some individuals for negligence, but I don’t think those cases they would have easily won.”

Instead, he said, the S.E.C. pursued what he described as “the path of least resistance” by suing the firm itself.

“It is much easier for the S.E.C. to settle for very high penalties which are borne by the shareholders,” he said. “The S.E.C. often desperately needs a victory. This way you can get a victory that you can celebrate.”

But on the merits of the case, the settlement, Mr. Coffee said, begins to look a lot like bribery — to some degree, on both sides. Without a strong case against any individuals, the S.E.C. looks as if it held the firm for ransom. And on the other side, the firm’s senior management appears to have bribed the S.E.C., using shareholder money, not to bring cases against individuals.

“It’s a form of self-dealing,” Mr. Coffee said.”

Reading Stack

See here for the upswing in white collar defense work among large Philadelphia firms.  The article stated, “to promote its white-collar practice, [a firm] recently began showing a corporate training film to potential clients that depicts the travails of a multinational company whose share price crashed after employees were charged with bribery in a foreign jurisdiction.  The takeaway: This is what can happen without good white-collar legal advice.”

For a better way to prosecute corporations, look overseas says Professors Brandon Garrett and David Zaring in the NY Times DealBook.

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A good weekend to all.

Attorney General Holder’s Speech Has Broad Application

Yesterday Attorney General Eric Holder delivered this speech at the Annual Meeting of the ABA House of Delegates.

Below are snippets from his speech.

“It’s time – in fact, it’s well past time – to address persistent needs and unwarranted disparities by considering a fundamentally new approach.”

“[W]e must face the reality that, as it stands, our system is in too many respects broken.  The course we are on is far from sustainable.  And it is our time – and our duty – to identify those areas we can improve in order to better advance the cause of justice for all Americans.”

“[W]e need to examine new law enforcement strategies – and better allocate resources.”

“I’ve also issued guidance to ensure that every case [the DOJ] bring serves a substantial federal interest …”.

“As a society, we pay much too high a price whenever our system fails to deliver outcomes that deter and punish crime …”.

“The bottom line is that, while the aggressive enforcement of federal criminal statutes remains necessary, we cannot simply prosecute or incarcerate our way to becoming a safer nation.  To be effective, federal efforts must also focus on prevention and reentry.  We must never stop being tough on crime.  But we must also be smart and efficient when battling crime and the conditions and the individual choices that breed it.”

“Today – together – we must declare that we will no longer settle for such an unjust and unsustainable status quo.  To do so would be to betray our history, our shared commitment to justice, and the founding principles of our nation.  Instead, we must recommit ourselves – as a country – to tackling the most difficult questions, and the most costly problems, no matter how complex or intractable they may appear.”

“This is our chance – to bring America’s criminal justice system in line with our most sacred values.  This is our opportunity – to define this time, our time, as one of progress and innovation. This is our promise – to forge a more just society. And this is our solemn obligation, as stewards of the law, and servants of those whom it protects and empowers:  to open a frank and constructive dialogue about the need to reform a broken system.”

Holder’s speech focused primarily on the war on drugs, violent crime, and incarceration rates.

However, the above quotes have broad application, including in the FCPA context.

Disparity?  See here, here, here and here for previous posts.

Broken? As highlighted in this post, how many former high-ranking DOJ officials and/or former DOJ FCPA enforcement attorneys does it take before the current DOJ realizes that its FCPA enforcement policies and procedures are, in certain cases, broken?  See also here.

Better allocate resources?  There is a way to do that in the FCPA enforcement context while at the same time best advancing the laudable objectives of the FCPA.  See here.

Cases that serve a substantial federal interest?  Perhaps you’ve heard that a substantial majority of the top FCPA enforcement actions in terms of settlement amounts have been against foreign companies based on sparse U.S. jurisdictional allegations.  See here for instance.

A system that fails to deliver outcomes that deter and punish crime?  As highlighted in this prior post, the DOJ itself has acknowledged that it does not even know if NPAs and DPAs in the FCPA context deter.

As highlighted in this previous post, there is a way forward in the FCPA context – a system that will better promote compliance and hold wrongdoers accountable.

It will however require courage and bold leadership to – in the words of Holder “open a frank and constructive dialogue about the need to reform a broken system.”

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I also drew inspiration from the following in Holder’s speech.

“[T]o question that which is accepted truth; to challenge that which is unjust; to break free of a tired status quo; and to take bold steps to reform and strengthen America’s criminal justice system – in concrete and fundamental ways.”

These are among the reasons why I write about the FCPA and related topics.

Friday Roundup

A sign-off, no surprise, scrutiny alert, for the reading stack, spot-on, and the $10 million man.

Judge Leon Signs-Off On IBM Action

As highlighted in this prior post, in March 2011 the SEC announced an FCPA enforcement action against IBM concerning alleged conduct in South Korea and China.  The settlement terms contained a permanent injunction as to future FCPA violations and thus required judicial approval.  Similar to the Tyco FCPA enforcement action, the case sat on Judge Leon’s docket.  Last month, Judge Leon approved the Tyco settlement (see here) and yesterday Judge Leon approved the IBM settlement.

The common thread between the two enforcement actions would seem to be that both companies were repeat FCPA offenders.

Like Judge Leon’s final order in Tyco, the final order in IBM action states:

“[For a two year period IBM is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that IBM has violated the FCPA in connection with either improper payments to foreign officials to obtain or retain business or any fraudulent books and records entries …””

For additional coverage of yesterday’s hearing, see here from Bloomberg.  The article quotes Judge Leon as follows.  IBM “has learned its lesson and is moving in the right direction to ensure this never happens again.” If there’s another violation over the next two years, “it won’t be a happy day.”

However, as noted in this previous post, IBM recently disclosed additional FCPA scrutiny.

No Surprise

This recent post highlighted the 9th Circuit’s restitution ruling in the Green FCPA enforcement action and was titled “Green Restitution Order Stands … For Now.”  As noted in the prior post, the decision practically invited the Greens to petition for an en banc hearing.

No surprise, the Greens did just that earlier this week – see here for the petition.

Scrutiny Alert

This February 2012 post detailed how Wynn Resorts $135 million donation to the University of Macau became the subject of an SEC inquiry.

Earlier this month, Wynn disclosed in an SEC filing as follows:

“On February 13, 2012, Wynn Resorts, Limited (the “Company”) filed a Report on Form 8-K disclosing that it had received a letter from the Salt Lake Regional Office (the “Office”) of the Securities and Exchange Commission (the “SEC”) advising the Company that the Office had commenced an informal inquiry with respect to certain matters, including a donation by Wynn Macau, Limited, an affiliate of the Company, to the University of Macau Development Foundation. On July 2, 2013, the Company received a letter from the Office stating that the investigation had been completed with the Office not intending to recommend any enforcement action against the Company by the SEC.”

According to this report:

“Speaking to The Associated Press from his boat on the Spanish island of Ibiza … CEO Steve Wynn said he never had any doubt federal investigators would clear the company.  ‘We were so sanguine that we never paid any attention to it; we had no exposure. It was a nonevent except for the damn newspapers.'”

For the Reading Stack

The always informative Gibson Dunn Mid-Year FCPA Update and Mid-Year DPA and NPA Update (through July 8th, approximately 30% of all DPAs/NPAs have been used to resolve FCPA enforcement actions).

Sound insight from Robertson Park and Timothy Peterson in this Inside Counsel column:

“Without putting too fine a spin on the matter, the discussion of the potential consequences faced by a company with potential anti-bribery exposure was fundamentally U.S.-centric. The dispositive question was often whether or not the potential misconduct was likely to fall under the umbrella of FCPA enforcement. Would U.S. authorities be interested in pursuing this matter? Would they find out about this matter? There were not many other concerns that mattered. Whether the site of the potential misconduct was in the European, Asian, South American or African sector, the substantial likelihood was that home authorities would have little interest in the matter, and even if they did it was likely an interest that would often frustrate and impede efforts by the Department of Justice or the Securities and Exchange Commission to investigate the matter. Cooperative enforcement was unlikely. This has changed. […]  For companies that learn of a potential international corruption issue, the impact of this emerging global enforcement market means that the headache associated with scoping an internal investigation is now a migraine with diverse and complex symptoms. Companies investigating potential bribery have always faced the question of how, if at all, they plan to disclose any subsequent findings to government authorities. Now, initial assessments of investigative plans in anti-bribery matters must consider a broader array of potentially interested enforcement authorities. Companies must design their anti-bribery investigations at the outset to consider not only the FCPA enforcement regime in the U.S., but also a newly energized U.K. anti-bribery law, along with a growing list of ant-bribery measures in almost all of the important jurisdictions with business growth opportunities.”

Six ways to improve in-house compliance training from Ryan McConnell and Gérard Sonnier.

The reality of facilitation payments from Matt Kelly.

“… Facilitation payments are a fact of life in global business. Nobody likes them, and no compliance officer wants to pay a bribe disguised as a facilitation payment. But when the transaction truly fits the definition of a facilitation payment—money paid to a government official, to speed up some job duty he would normally perform anyway—there shouldn’t be any ethical or legal crisis in paying it. After all, we have facilitation payments domestically in the United States. If you want a passport from the State Department, you pay $165 in fees. If you want an expedited passport, you pay an extra $60 fee and get your passport in half the usual time. That’s a facilitation payment, pure and simple. Other countries have all sorts of facilitation payments as well, say, to get a visa processed quickly or to clear goods through customs rather than let them rot on the docks. Urgent needs happen in business, and facilitation payments get you through them. That’s life.”

The language of corruption from the BBC.

Spot-On

Regardless of what you think of former New York Attorney General Eliot Spitzer, he is spot-on with his observation that the so-called Arthur Anderson effect (i.e. if a business organization is criminally charged it will go out of business) is “overrated.”  As noted in this Corporate Crime Reporter piece, in a new book titled “Protecting Capitalism Case by Case” Spitzer writes:

“Almost all entities have the capacity to regenerate — even if under a new name, with new ownership and new leadership — and forcing them to do so will have the deterrent effect we desire.”

“Most companies would have no trouble continuing in operation once charged. They might suffer reputational harm, perhaps lose contracts, have certain loans be declared to be in default, and lose some personnel and public support. But that would probably be the proper price to be paid in the context of the violations of the law they committed.”

As noted in previous posts, the Arthur Anderson effect was effectively debunked (see here) and even Denis McInerney (DOJ, Deputy Assistant Attorney General) recently acknowledged (see here) that there is a very small chance that a company would be put out of business as a result of actual DOJ criminal charges.

In his new book Spitzer also writes as follows concerning the SEC’s neither admit nor deny settlement policy.

“I hope that the new leadership at the Securities and Exchange Commission will mandate that an admission of guilt is a necessary part of future settlements in cases of this stature or magnitude. The law and justice require such an acknowledgement — or else nothing has been accomplished.”

Speaking of neither admit nor deny, part of the SEC’s talking points defense of this policy is that the SEC is not the only federal agency that makes use of such a settlement policy.

On this score, it is notable – as detailed in this Law360 article – that Bart Chilton, a top official at the U.S. Commodity Futures Trading Commission, “said the commission should rethink its policy of allowing defendants to settle claims without admitting or denying the allegations.”  According to the article, Chilton stated:

“I understand there are certain circumstances where we might not want to require [admissions], but I think we at the CFTC should change our modus operandi.  The default position should be that people who violate the law should admit wrongdoing.”

$10 Million Man

Continuing with neither admit nor deny, one of the defenders of this settlement policy was Robert Khuzami while he was at the SEC as the Director of Enforcement.   As noted in this Kirkland & Ellis release, Khuzami joined the firm as a partner in the global Government, Regulatory and Internal Investigations Practice Group.  According to this New York Times article, Khuzami’s new position “pays more than $5 million per year” and is guaranteed for two years.  In joining Kirkland, the New York Times stated that Khuzami “is following quintessential Washington script: an influential government insider becoming a paid advocate for industries he once policed.”

Khuzami and former Assistant Attorney General Lanny Breuer were the voice and face of the SEC and DOJ last November upon release of the FCPA Guidance.  As detailed in this prior post, Breuer is currently at Covington & Burling making approximately $4 million per year.

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A good weekend to all.

“A Pending Federal Criminal Case Is Not Window Dressing; Nor Is The Court … A Potted Plant”

Non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) of course are not just used to resolve Foreign Corrupt Practices Act enforcement actions.  However, year-after-year, approximately 25-50% of the agreements are used to resolve FCPA enforcement actions.

Thus, this Order earlier this month by U.S. District Court Judge John Gleeson (E.D.N.Y.) approving the DPA in the HSBC enforcement action is noteworthy.

By way of background, in December 2012 the DOJ filed a criminal information charging HSBC Bank USA with violations of the Bank Secrecy Act for willfully failing to maintain an effective anti-money laundering program.  The information also charged HSBC Holdings with willfully facilitating financial transactions on behalf of sanctioned entities in violation of the International Emergency Economic Powers Act and the Trading with the Enemy Act.  As noted in the DOJ release, the charges were resolved via a DPA in which HSBC agreed to forfeit approximately $1.3 billion.  HSBC further agreed to pay $665 million in civil penalties.

Soon thereafter, at a status conference, Judge Gleeson indicated that the court had authority to accept or reject the DPA and requested that the parties respond to the question of whether the DPA would yield a result consistent with the goals of the federal sentencing scheme.  Both the DOJ and HSBC responded (see here and here).

In the Order, Judge Gleeson approved the DPA, but that is not what is notable from this case.

What is notable is that Judge Gleeson rejected the DOJ’s position (and HSBC’s position) that the court lacked authority to approve of the DPA.

Judge Gleeson wrote:

“This Court has authority to approve or reject the DPA pursuant to its supervisory power.  The supervisory power . . . permits federal courts to supervise ‘the administration of criminal justice’ among the parties before the bar.  […]  One of the primary purposes of the supervisory power is to protect the integrity of judicial proceedings.  […]  Both parties assert that the Court lacks any inherent authority over the approval or implementation of the DPA. They argue that the Court’s authority is limited to deciding, in the present, whether to invoke an exclusion of time under the Speedy Trial Act and, in the distant future, whether to dismiss the charges against HSBC.  I conclude that the Court’s authority in this setting is not nearly as cabined as the parties contend it is.”

“The government has absolute discretion to decide not to prosecute.  Even a formal, written agreement to that effect, which is often referred to as a ‘non-prosecution agreement,’ is not the business of the courts.  In addition, the government has near-absolute power under Fed. R. Crim. P. 48(a) to extinguish a case that it has brought.  In my view, if the government were now moving to dismiss this case, it would be an abuse of discretion to deny that motion.”

“The government has chosen neither of those paths. Rather, it has built into the DPA with HSBC a criminal prosecution that will remain pending (assuming all goes well) for at least five years.  Just as a non-prosecution agreement is perceived as a public relations benefit to a company, perhaps the filing and maintenance of criminal charges was intended to produce a public relations benefit for the government.  But for whatever reason or reasons, the contracting parties have chosen to implicate the Court in their resolution of this matter. There is nothing wrong with that, but a pending federal criminal case is not window dressing. Nor is the Court, to borrow a famous phrase, a potted plant.  By placing a criminal matter on the docket of a federal court, the parties have subjected their DPA to the legitimate exercise of that court’s authority.”

“The courts ‘are not concerned with law enforcement practices except in so far as courts themselves become instruments of law enforcement.’  The inherent supervisory power serves to ensure that the courts do not lend a judicial imprimatur to any aspect of a criminal proceeding that smacks of lawlessness or impropriety.  ‘The court protects itself.’  The parties have asked the Court to lend precisely such a judicial imprimatur to the DPA, by arranging for its implementation within the confines of a pending case. The Court will therefore exercise its supervisory authority over the DPA.”

“I recognize that the exercise of supervisory power in this context is novel. In the typical supervisory power case, the defendant raises a purported impropriety in the federal criminal proceeding and seeks the court’s redress of that impropriety.  In the deferred prosecution context, the defendant is presented with the opportunity for diversion from the criminal proceeding altogether. For obvious reasons, a defendant in these circumstances is less likely to raise a purported impropriety with the process, let alone seek the court’s aid in redressing it, given the risk of derailing the deferral of prosecution.”

“Nevertheless, it is easy to imagine circumstances in which a deferred prosecution agreement, or the implementation of such an agreement, so transgresses the bounds of lawfulness or propriety as to warrant judicial intervention to protect the integrity of the Court.”

[…]

“I do not intend to catalog all of the possible situations that might implicate the Court’s supervisory power in this case. I couldn’t even if I wanted to; the exercise would amount to looking through a glass, darkly, at five years of potential future developments in the case. What I can say with certainty is that by placing the DPA on the Court’s radar screen in the form of a pending criminal matter, the parties have submitted to far more judicial authority than they claim exists.”

Time will tell whether Judge Gleeson’s order will have an effect similar to Judge Jed Rakoff’s decisions in SEC v. Bank of America and SEC v. Citigroup regarding the SEC’s neither admit nor deny settlement policy.  Judge Rakoff’s decisions began a conversation on neither admit nor deny.  Let’s hope that Judge Gleeson’s order will start a conversation as to the judiciary’s role in the alternate reality that the DOJ has created and championed.