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Whistleblower Developments

Some whistleblower developments on both sides of the Atlantic to pass along.


The U.K. Serious Fraud Office recently issued this release to launch “SFO Confidential” – a live on-line resource “for concerned individuals to help expose situations that might deserve a closer look.”  Richard Alderman, Director of the SFO, stated as follows.  “I want people to come forward and tell us if they think there is fraud or corruption going on in their workplace. Company executives, staff, professional advisors, business associates of various kinds or trade competitors can talk to us in confidence. I have set up a special team to make the SFO readily accessible to whistleblowers, with trained staff sympathetic in dealing with any anxieties people might have about coming forward.  I want whistleblowers to feel comfortable about it and use SFO Confidential to help flush out fraud.”

As Bryan Cave attorneys note in this alert, unlike the recently enacted Dodd-Frank Act whistleblower provisions that provide monetary incentives to whistleblowers, “SFO Confidential appeals instead to the individual’s civic duty and/or self interest in preventing fraud and corruption (for example, promising to “level the commercial playingfield” where a competitor is gaining business unfairly through fraud or corruption).”

Perhaps sensing a marketing opportunity, Field Fisher & Waterhouse (here) stated as follows.  “The SFO’s implementation of a whistleblowing hotline may worry companies who have experienced corruption issues in the past. The hotline clearly increases the risk of issues being highlighted anonymously by disgruntled employees or competitors. The introduction of the hotline comes 4 months after the date that the Bribery Act 2010 came into force. Under this Act, commercial organisations can be held liable for bribes paid by those acting on their behalf, even if the bribe is paid outside the UK. A business which implements “adequate procedures” to prevent bribery has a complete defence to this kind of charge under the Act.   The hotline also comes at a time of increased enforcement by the Serious Fraud Office. During the course of last week the SFO announced two new prosecutions for corruption.”


Martin Weinstein and Robert Meyer (Willkie Farr & Gallagher) report here on the recently introduced Whistleblower Improvement Act of 2011 (“H.R. 2483”) (see here).   Among other changes the legislation would make to the recently enacted Dodd-Frank whistleblower provisions are the following according to Weinstein and Meyer:  “It would revise the award eligibility standards to require whistleblowers who are reporting their employer’s possible violations of federal securities laws to internally report such misconduct prior to reporting to the SEC;” “It would render the whistleblower award discretionary as opposed to mandatory, and eliminates the 10% minimum award requirement;” and “It would mandate that the SEC inform an entity targeted for an investigation initiated by a whistleblower tip before commencing an enforcement action.”

In conclusion, the authors state as follows.  “This legislation reflects the recommendations of some practitioners within the antibribery community.  In particular, many commentators have advocated that Congress adopt a requirement that whistleblowers internally report misconduct prior to any disclosure to the SEC.  Although it remains to be seen whether this legislation will be enacted, the debate as to how to effectively structure and implement a robust whistleblower program is certain to continue.  Irrespective of the outcome of this debate, the new SEC whistleblower program likely will put additional pressure on legal and compliance systems to readily identify and respond to possible violations of the securities laws.”

How Fast Did You Drive Today?

Yesterday  I traveled from Point A to Point B.  The route included country roads, state highways, and an interstate.  Each road had the speed limit displayed and along the route police cars were monitoring traffic and an few motorists were in fact pulled over.  During the trip, I stayed below the speed limit, but nevertheless when I arrived home last night I logged my trip (route, speed limit, purpose of trip, etc.).  In fact, I do this every day so that at the end of the year I can report my speed to a federal agency.

Sound a bit foolish to you?

If you answered yes, you should likewise conclude that Section 1504 of Dodd-Frank is foolish.  As detailed in this prior post, Section 1504 was the “Miscellaneous Provisions”  titled “Disclosure of Payments by Resource Extraction Issuers”  tucked into Dodd-Frank at the last minute (even though the original bill languished in Congress). 

Once the SEC issues final rules as to Section 1504, the rules are likely to substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.  As noted in the prior post and in this submission I made to the SEC, Section 1504 is akin to “swatting a fly with a bazooka” and it attempts to legislate an issue that was sensibly put to rest in the mid-1970′s when Congress held extensive hearings on what would become the FCPA.  In short, bribery and corruption are bad, but that does not mean that every attempt to curtail bribery and corruption is good.

I was reminded of Section 1504 last week when reading Joe Palazzolo’s article in the Wall Street Journal Corruption Currents page about how Royal Dutch Shell “is trying to curb” the reach of Section 1504’s disclosure requirements.  The article links to an August 1st letter from Shell to the SEC (here) in which Shell “provide[d] greater clarity regarding [its] expected costs associated with the Commission’s proposed rules in its release titled Disclosure of Payments by Resource Extraction Issuers.  (See here for the proposed rules).   In the letter, Martin ten Brink (Executive Vice President Controller) focuses on material vs. immaterial projects and states as follows.  “… [W]e wish to inform the Commission that if it were to adopt rules requiring disclosure for immaterial projects, disclosure that by definition is not important to reasonable investors, our marginal costs for this additional disclosure, with the required changes to our financial systems, needed to gather, assure and disclose the proposed information, would be in the tens of millions of dollars. However, by revising its proposed rules to limit disclosure to material projects, those projects that a reasonable investor considers important, we have estimated that the increase in our marginal costs would be reduced very significantly.”

As noted by Palazzolo, the Shell letter specifically references the recent decision by the U.S. Court of Appeals (D.C. Circuit) in Business Roundtable and Chamber of Commerce vs. SEC.  In the opinion (here) a three-judge panel unanimously struck down the SEC’s so-called proxy access rule (Rule 14a-11) because “the Commission acted arbitrarily and capriciously for having failed once again […]  adequately to assess the economic effects of a new rule.”  As noted by Palazzolo, the SEC was supposed to have Section 1504’s rules finalized by April, but the agency pushed the deadline to the end of the year.

The SEC is not to blame for Section 1504.  Congress put this issue on the SEC’s plate and said you write the rules.  With the SEC struggling mightily to write the rules implementing Section 1504, the remedy should be for Congress to revisit Section 1504 and for it to reach the sensible conclusion (a conclusion a prior Congress reached in considering legislation to address the foreign payments issues in the mid-1970’s)  that disclosure of perfectly legal and legitimate payments to foreign governments is not necessary.  

Many NGO’s and civil society organizations support Section 1504 and have been known to say that companies who do not bribe should not be bothered by Section 1504’s disclosure requirements.   That is like saying motorists who do not speed should not be bothered by the speed disclosures referenced at the beginning of this post.

Assessing the Power of the SEC to Impose Monetary Penalties In Administrative Proceedings Charging Violations of the FCPA

Foley & Lardner attorneys Kenneth Winer (here) and Manda Sertich (here) contribute this guest post regarding a little-noticed provision in Dodd-Frank and its impact on SEC FCPA enforcement.


Assessing the Power of the SEC to Impose Monetary Penalties In Administrative Proceedings Charging Violations of the FCPA

The SEC recently imposed a civil penalty in an administrative proceeding involving payments to foreign government officials. In In the Matter of Ball Corporation, Exchange Act Rel. No. 64123, AAER No. 3255 (Mar. 24, 2011)(here), the SEC charged that Ball Corporation’s Argentinean subsidiary offered and paid at least ten bribes, totaling at least $106,749, to Argentinean government employees for favorable import/export treatment and mischaracterized the nature of the payments in the subsidiary’s books and records. In settling its administrative enforcement action against Ball Corporation on March 24 of this year, the SEC imposed a civil penalty of $300,000.00. [In a number of administrative proceedings, the Commission has ordered disgorgement and pre-judgment interest in addition to cease-and-desist orders in FCPA administrative proceedings, without additional civil penalties. See In the Matter of Avery Dennison Corporation, Exchange Act Rel. No. 60393, AAER No. 3021 at 6 (July 28, 2009); In the Matter of Westinghouse Air Brake Technologies Corp., Exchange Act Rel. No. 57333, AAER No. 2785 at 7 (Feb. 14, 2008), In the Matter of Electronic Data Systems Corp., Exchange Act Rel. No. 56519, AAER No. 2725 at 9 (Sept. 25, 2007)].

Until 2004, the SEC’s authority to impose monetary penalties in administrative proceedings was limited to regulated entities (brokerage firms, investment advisers and investment companies) and to persons who were associated with regulated entities. In 2010, as part of the Dodd-Frank Wall Street Reform Act, Congress granted the SEC broad authority to impose civil monetary penalties in administrative proceedings. Section 929P of Dodd-Frank amended the Securities Exchange Act to permit the imposition of civil monetary penalties in administrative proceedings in which the SEC staff seeks the issuance of a cease-and-desist order. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

Law360 recently published an article analyzing the implications of Congress’s recent grant to the SEC of a broad power to impose civil monetary penalties in administrative proceedings stemming from the Dodd- Frank Act. Kenneth Winer & Laura Kwaterski, Assessing SEC Power in Administrative Proceedings (SecuritiesLaw360 Mar. 24, 2011). In this post, we discuss the implications this power poses for FCPA cases.

While the SEC’s interest in imposing monetary penalties in administrative proceedings is obvious given the rapid and inexpensive nature of such proceedings compared to federal district court trials, administrative proceedings risk incorrect factual and legal decisions against respondents because respondents do not have the same safeguards present in SEC administrative proceedings as in federal court. The three bases for this concern outlined in the Law360 article also apply in the FCPA context: (1) the limited discovery available to a respondent in an administrative proceeding; (2) the expedited pace of the administrative proceeding; and (3) the fact that the initial decision of the administrative law judge who presided at the hearing is subject to de novo review by the Commission.

With respect to the first basis for concern, in SEC administrative proceedings, the parties – except in rare circumstances – cannot depose witnesses. The inability to depose witnesses has only a limited adverse impact on the ability of the SEC to obtain incriminating evidence. The Staff can obtain incriminating evidence by using its investigative powers and the information- sharing arrangements that the SEC and DOJ have with law enforcement agencies across the globe. Although a respondent, like the SEC, can ask a witness to submit voluntarily to an interview, the typical respondent has far less leverage than the SEC to persuade a witness to agree voluntarily to an interview, especially given the SEC’s subpoena power and its ability to intimidate witnesses with its enforcement powers.

This concern may be particularly troublesome in FCPA cases, where potential key witnesses are often located in other countries, with little or no incentive to appear in an SEC administrative proceeding. Because the rules of evidence do not govern administrative proceedings, the SEC will be able to introduce statements of witnesses whom the respondent has had no opportunity to cross examine.

Next, as discussed in the Law360 article, in 2003 the Commission adopted a rule mandating that administrative proceedings must be completed at the ALJ level within 120 days, 210 days or 300 days. Additionally, SEC rules provide that the ALJs and the Commission shall “strongly disfavor” requests for extensions unless the moving party makes a strong showing that denial of the request would substantially prejudice his or her case. See 17 C.F.R. § 201.161(b)(1). At least as to individuals, the requirement of expedited administrative proceedings is also particularly worrisome when considered in the framework of the normal course of FCPA cases. The record developed in FCPA investigations often is extensive. It often will be unreasonable to expect an individual to prepare an appropriate defense in less than four months, especially when witnesses are likely to be scattered across the globe.

A third basis for concern identified in the Law360 article, de novo review by a commission, applies fully to the FCPA context. Both respondents and the public often have trouble understanding how it is fair and appropriate for the very commission that authorizes the institution of an enforcement proceeding to be able to overrule the factual findings of the ALJ who presided at the hearing, and this is no different with respect to FCPA enforcement proceedings.

The broad grant of the power to impose monetary penalties in administrative proceedings is especially significant in the context of the FCPA for at least two reasons. First, the SEC’s enforcement of the FCPA has been characterized by aggressive interpretations of the statute that have not been tested in the courts. In a civil action, a defendant could test such interpretations through motion practice. In administrative proceedings, however, a respondent’s ability to file motions testing aggressive legal theories is very limited. See, e.g., In the Matter of John P. Flannery and James D. Hopkins, Order on Motions for Leave to File Motions for Summary Disposition, Administrative Proceeding File No. 3-14081 (Jan. 10, 2001). In addition, a respondent will only be able to obtain judicial review of the SEC’s aggressive interpretation by appealing to the Court of Appeals the final decision that the Commission issues upon review of the initial decision of the administrative law judge who presided over the administrative proceeding.

Second, the SEC has sought substantial monetary penalties in settling enforcement actions involving the FCPA. For example, in 2007 the SEC filed a settled enforcement action charging Baker Hughes Incorporated with violations of the FCPA. Baker Hughes agreed to pay a civil penalty of $10 million for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA, in addition to a payment of $23 million in disgorgement and prejudgment interest. SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-07-1408, United States District Court for the Southern District of Texas (Houston Division) (EW) (Filed April 26, 2007). In 2010, the SEC filed a settled civil action against ABB, Ltd., in which it charged the company with bribing Mexican government officials to secure business with state-owned utilities companies and Iraqi government officials to obtain contracts under the U.N. Oil-for-Food Program. Pursuant to this settlement, ABB Ltd. was ordered to pay $16.51 million in civil penalties, in addition to nearly $23 million in disgorgement and prejudgment interest.

Individuals have also paid substantial civil penalties in settling such enforcement actions. Most recently, in January of this year, the SEC settled an enforcement action with Innospec’s former CEO, Paul Jennings, based on allegations that Jennings played a “key role” in Innospec’s bribery activities in Iraq and Indonesia. The executive was ordered to pay a $100,000 civil penalty, in addition to disgorging $116,092 and paying prejudgment interest in the amount of $12,945. SEC v. Paul W. Jennings, 1:11-CV-00144 (D.D.C. filed Jan. 24, 2011). In 2006, the Senior Vice President of Sales and marketing for Invision was ordered to pay a $65,000 civil penalty based on allegations that he aided and abetted InVision’s failure to establish adequate internal controls to prevent the company from violating the FCPA and that he indirectly caused the falsification of the company’s books and records. SEC v. David M. Pillor, Case No. C-06-4906-WHA (N.D. Cal. filed Aug. 15, 2006). Also in 2006, three senior employees of ABB Ltd. were ordered to pay civil monetary penalties ranging from $40,000 to $50,000 for violating the anti-bribery provisions of the FCPA and the books and records and internal accounting control provisions of Exchange Act Section. (One employee was also ordered to pay $64, 675 in disgorgement and prejudgment interest.) SEC v. John Samson, John G. A. Munro, Ian N. Campbell, and John H. Whelan, Civil Action No. 06 CV 01217(D.D.C. filed July 5, 2006).

In addition to increasing the risk that innocent parties will mistakenly be found to have violated the FCPA, the broad power Congress granted the SEC to impose civil monetary penalties in administrative proceeding adds additional pressure on individuals and entities to settle with the SEC even though they have not violated the law. Before seeking larger civil penalties in the FCPA context, the Commission therefore should consider whether the efficiency it gains by bringing enforcement actions administratively warrants the risk that the innocent will wrongly be found liable and the credibility that the Commission risks losing by aggressively exercising this broad grant of power.

Interesting, Significant and Bold

Last week I had the pleasure of participating in Securities Docket’s Year in Review webcast (see here for viewing – the FCPA portion begins at about 51 minutes).

For those of you who missed the event, below are my thoughts on four significant events from 2010, three interesting events from 2010, and two bold predictions for 2011.

The FCPA in 2010 was interesting, significant, and bold all at once. Among other things, it was a year in which Assistant Attorney General Lanny Breuer declared a “new era of FCPA enforcement.” (see here).

Significant Events

The Foreign Corrupt Practices Act

If anyone out there still believes that the FCPA is a law that only applies to U.S. companies, you clearly have been living under a rock.

2010 was the year of non-U.S. companies resolving FCPA exposure.

BAE (here)(I am hesitant to call this matter an FCPA enforcement action because it wasn’t, but everyone seems to be doing so), Daimler (here), Technip (here), Eni/Snamprogetti (here), ABB (here), Panalpina (here), and most recently Alcatel-Lucent (more in a future post).

It has been reported that approximately 90% of 2010 FCPA fines and penalties were paid by foreign companies.

I expect this trend to continue – albeit perhaps not at the level seen in 2010. The 4th member of the JV involved in Bonny Island bribery – JGC of Japan – has yet to settle, certain of the medical device and pharma companies that have disclosed FCPA issues are non-U.S. companies, and an emerging trend I see is an increased focus on China-based issuers. For instance, last year, 25% of the IPOs were China based issuers and last month, Rino International (see here) disclosed an FCPA inquiry, the first time I believe a China-based issuer has been the focus of an FCPA inquiry.

Two Tiers of Justice

Under basic rule of law principles, the law is to be equally and consistently applied to all subject to the law, regardless of how big or small the company is and regardless of what type of company is involved.

In a troubling trend, two tiers of justice have emerged from FCPA enforcement.
If the company is a large multinational company, the company will end up paying large fine, but chances are the company will not be charged with FCPA anti-bribery violations.

For instance, the DOJ’s allegations against BAE (see here) included that the company provided various benefits – through U.S. payment mechanisms – to influence Saudi officials through and through other conduct that clearly had a U.S. nexus. Yet, BAE, one of the world’s largest defense contractors, was not charged with any FCPA anti-bribery violation.

Daimler, according to the DOJ (see here), had a corporate culture that tolerated and/or encouraged bribery and its numerous bribery schemes involved various high-ranking executives. Yet, Daimler, was not charged with any FCPA anti-bribery violations.

It’s bribery yet no bribery, and it contributes to what I’ve called the façade of FCPA enforcement (see here).

While certain companies in certain industries appear immune from FCPA anti-bribery charges, in other instances, instances generally involving small companies such as Nexus Technologies (here) or Lindsey Manufacturing (here), the DOJ seems to come out with guns a blazing and criminally indicts the company for violating the FCPA. One can legitimately ask what did these companies do that BAE, Daimler, and some other companies didn’t do?

The two tiers of justice is also present when it comes to individual enforcement actions. As was highlighted in the recent Senate hearing, one odd aspect of the most high-profile, egregious instances of corporate bribery is that, for the most part, no individuals are charged. Yet in cases that can only be called minor in comparison, Nexus Technologies, Lindsey Manufacturing and the Haiti Teleco cases come to mind, the DOJ again seems to come out with guns a blazing and criminally indicts multiple individuals.

Companies that commit bribery on a major scale, involving hundreds of millions dollars, are still able to secure multi-million dollar U.S. government contracts (see here and here). On the other hand, individuals like Charles Jumet are sent to prison for nearly 7 years for making a $200,000 payment to secure a lighthouse and buoy contract and conspiring to violate the same law that major companies are apparently immune from violating. (See here).

DOJ officials frequently talk about the rule of law (here), and the importance of consistency and transparency in charging decisions (here), but these examples raise the issue of whether such principles are followed when it comes to FCPA enforcement.

Is the Facilitating Payments Exception Meaningless?

When Congress passed the FCPA in 1977 and amended it in 1988 it clearly understood and accepted that the statute was not going to cover every conceivable unethical payment made in transacting overseas business. (See here). The legislative history is clear on this point and that is why the FCPA contains an express exception for so-called facilitating or grease payments.

Yet one can legitimately ask whether this exception intended by Congress has any meaning.

In November, a group of companies collectively paid approximately $235 million to settle FCPA enforcement actions principally involving import permits for oil rigs, other customs and duty payments to Nigerian officials, and payments to expedite shipment of product in Nigeria and some other jurisdictions. (See here for a summary of the CustomsGate enforcement actions).

It seems a bit silly when several major companies settle an FCPA enforcement action for this amount of money to ask the question – did the conduct at issue even violate the FCPA, but this question should be asked in connection with the CustomsGate enforcement actions. It is also a question that can legitimately be asked as to several other recent FCPA enforcement actions that involve permits, licenses, certifications and other administrative tasks that have nothing to do with obtaining or retaining government contracts.

The issue as I see it is not whether such payments are ethical, but whether such payments violate the narrow anti-bribery provisions Congress intended and whether, once again, the DOJ and the SEC are actually enforcing the FCPA as Congress intended or whether the FCPA has morphed into a broader corporate ethics statute.

If the FCPA should become a broader corporate ethics statute, let Congress make that decision – not the DOJ or the SEC.

Emergence of a Plaintiff’s Bar

The FCPA, it has been held by some courts, does not contain a private right of action – yet there are other legal avenues available to plaintiffs to hold companies that violate the FCPA accountable. (See here).

Common causes of action include derivative claims against officers and directors, securities fraud claims by investors, RICO claims, unfair competition claims and antitrust claims such as last year when one of Innospec’s competitors sued it in Virginia state court in connection with its recently settled FCPA enforcement action. (See here).

Such causes of action have been pursued before 2010, but 2010 witnessed an explosion in such claims and so-called investigations by plaintiff firms representing investors.

The most noteworthy example is what I called the feeding frenzy surrounding SciClone Pharamaceutials. (See here). Last August, the company simply made an FCPA disclosure – that it was contacted by the SEC and the DOJ in connection with the government’s pharma industry sweep. The company’s stock dropped about 30%. Within weeks about a dozen plaintiff firms announced “investigations” and/or filed securities fraud cases – never mind the company’s stock price regained all that value within about a month.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted.

However, these types of FCPA violations are rare – the more typical situation is where, because of respondeant superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

Interesting Events

Giffen Enforcement Action

When an enforcement action begins with allegations (here) that James Giffen made more than $78 million in unlawful payments to two senior Kazakhstan officials in connection with oil transactions for major American oil companies and abruptly ends with a one-paragraph superceding information (here) charging a misdemeanor tax violation and the company he worked for settling an FCPA enforcement action focused solely on two snowmobiles (here) – I call that interesting.

Even more interesting is that part of Giffen’s defense was that his actions were taken with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. (See here for a prior post).

A few years ago George Clooney and Matt Damon starred in Syriana (here) a movie about the FCPA.

The Giffen enforcement action presents a superb Hollywood script – it is the most mysterious conclusion to an FCPA enforcement action ever – made even more interesting given that the presiding judge called Giffen a cold war hero and stated that the case should never have been brought in the first place. (See here for the prior post).

Africa Sting Cases

In January 2010, the DOJ arrested 22 defendants – most while attending a gun show in Las Vegas – in connection with a major undercover sting operation in which the government, utilizing an individual who had already pleaded guilty to separate FCPA violations, assisted the government in manufacturing a case involving a fake foreign official from Gabon. (See here, here and here for prior posts).

The defendants (see here) are principally owners or employees of small gun and weapons companies.

I would put this case in the interesting category.

Contrary to media reports and even DOJ statements, it is not the first time undercover tactics were used in connection with an FCPA investigation (see here), but the magnitude and breadth of the tactics were indeed unprecedented.

This case is far from over and the remaining defendants are sure to raise entrapment, among other legal issues, and this will be an interesting case to follow in 2011.

The Africa Sting case has draw the attention of an industry that probably had never thought much about FCPA compliance. Thus, regardless of the ultimate outcome of the case, it has likely resulted in an industry and small enterprises thinking more proactively about FCPA compliance and risk assessment.

Greater Scrutiny and Why Questions

2010 also saw greater scrutiny and why questions about the FCPA, FCPA enforcement and what I have called FCPA Inc.

For the time time in nearly a decade, Congress held hearings (see here) on the FCPA in which some basic why questions were asked.

The U.S. Chamber sponsored a paper (here) titled “Restoring Balance – Proposed Amendments to the FCPA” that was widely covered and, in some circles, railed.

Several members of Congress are legitimately scratching their heads as to why companies that settle fraud, bribery and corruption cases continue to secure lucrative U.S. government contracts and the House passed a bill (here) that seeks to debar companies found to be in violation of the FCPA from receiving U.S. government contracts. Problem is, because of the façade of FCPA enforcement (see here), it will be an impotent bill.

In May 2010, Congressman Towns, chairman of the House Committee on Oversight and Government Reform, sent a letter to Attorney General Holder expressing concern that settlements of civil and criminal cases, including FCPA cases, by the DOJ are being used as a shield to foreclose other appropriate remedies such as suspension and debarment. (See here for the prior post).

And in Spring 2010, Forbes ran a front-page story titled “The Bribery Racket,” an article, notwithstanding some of its flamboyant language, raised several valid and legitimate questions and issues when it comes to FCPA enforcement. (See here for the prior post).

This scrutiny in 2010 raised valid and legitimate public policy questions that hopefully will be picked up on in 2011.

Bold Predictions

After a year in which (1) the largest individual prosecutions involved a fake “foreign official” (2) the most egregious cases of corporate bribery were prosecuted without FCPA anti-bribery charges; and (3) a signature case abruptly ended with a misdeamenor tax violation and a corporate prosecution involving two snowmobiles, I wonder what bold will look like in 2011.

Here are two bold predictions for 2011.

The Dodd-Frank Whistleblower Provisions Will Have a Negligible Impact on FCPA Enforcement

My (what seems) contrarian thoughts are the same as when I first made this post in July.

Enforcement of the U.K. Bribery Act Will Be Disciplined and Measured

The U.K. Bribery Act, already delayed, and with implementation slated for April 2011, has been the subject of much discussion and much over-hype in my opinion.

It has been called the FCPA “on steroids” (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near.

True, the Bribery Act is broader than the FCPA. For starters, it is an all-purpose bribery and corruption statute and addresses bribery and corruption in the private sector – not just bribery to “foreign officials” like the FCPA.

True, the Bribery Act has potentially a very broad reach – so does the FCPA.

True, the Bribery Act has no exception for facilitating payments – the FCPA does – although as highlighted above, query whether this exception means anything.

However, the Bribery Act has the “adequate procedures” defense – something the FCPA does not have – but query whether it should.

Thus, while the Bribery Act is indeed more broad than the FCPA, because of this defense, it is at the same time more narrow than the FCPA.

Public statements by U.K. officials suggest that this adequate procedures defense is a meaningful defense. For instance, in September at the World Corruption and Compliance Forum, an event I chaired in London, the U.K. Attorney General (Dominic Grieve) stated (see here) that “any company small or large” that puts into place a system of adequate procedures “has nothing to fear” when an employee or agent “goes off the rails” and makes a bribe payment. Attorney Grieve said that a company should have nothing to fear if it is “walking the walk, and talking the talk” when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that “those who don’t heed the warnings and don’t take the necessary steps have something to fear.” Richard Alderman, the Director of the U.K. Serious Fraud Office, stated in October (see here) as follows. “I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be – were those procedures adequate?” As to the adequate procedures defense, Vivian Robinson (General Counsel of the Serious Fraud Office) said in an October webcast (here) that because of the defense “there is every reason to be optimistic that we won’t get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates.”

As demonstrated by the Innospec matter (see here), the U.K. courts are playing, and rightfully so, a much greater role than U.S. courts in reviewing bribery and corruption cases. I’ve been told that even if the SFO prosecutes a corporate bribery case with an NPA or DPA, the U.K. courts will still play a meaningful oversight role – a role that is unfortunately not true here in the U.S.

In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense.

I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA and I will be surprised if the U.K. Bribery Act develops outside of the judicial system as has generally been true with U.S. enforcement of the FCPA.

Will Dodd-Frank’s Whistleblower Provisions Be Exported?

Meet Markus Funk (here). He is a former DOJ attorney and now a partner at Perkins Coie.

He recently wrote a piece (here) that caught my eye.

It’s about Dodd-Frank’s whistleblower provisions.

You might ask, what isn’t these days!

Funk’s piece however is a bit different because it uses Dodd-Frank’s whistleblower provisions to ask the question – will signatory nations of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (here) incorporate similar provisions into their domestic law to demonstrate commitment to combating bribery?

Interesting question – and more on this below.

First a quick summary of Funk’s piece.

In it, Funk states that “the passage of [Dodd-Frank] signals a significant acceleration of the U.S. government’s already intensified Foreign Corrupt Practices Act enforcement efforts.” He states that by “unveiling” Dodd-Frank’s whistleblower provisions “to the world” “the United States heralds a new phase in its increasingly global anti-bribery enforcement efforts.”

Funk then writes, “as U.S.-led political pressures to enhance national anti-bribery efforts continue to grow, the Dodd-Frank Act’s novel enforcement mechanisms have the potential to attract international imitators.” He further states: “with mounting global pressure (not the least of which originates from the United States) on signatory states to comply with the Anti-Bribery Convention’s requirements, currently under-performing countries will likely be looking for efficient and effective ways to demonstrate their earnest intent to live up to their commitments.” “Given this backdrop,” Funk writes, “the Dodd-Frank’s Act’s new whistleblower provisions may well stand out as an ideal template for others (who are not culturally or otherwise averse to such rewards) to emulate.”

As noted in a prior post (here) Dodd-Frank’s whistleblower provisions are buried deep in the 2,000+ pages of the Dodd-Frank Act. The provisions apply to all securities law violations. It is an open question whether anyone in Congress had the FCPA on their mind when voting for Dodd-Frank, including its whistleblower provisions.

Yet, perhaps because the FCPA bar is such an active group of writers, Dodd-Frank’s whistleblower provisions have come to be reported in some circles as the FCPA whistleblower provisions. After all, the FCPA is indeed part of the Securities and Exchange Act of 1934 so the generic whistleblower provisions are indeed FCPA relevant.

In any event, I wondered why Funk wrote that “the passage of [Dodd-Frank] signals a significant acceleration of the U.S. government’s already intensified Foreign Corrupt Practices Act enforcement efforts” and why he wrote that Dodd-Frank’s generic whistleblower provisions “symbolize the government’s accelerating fight against foreign corruption.”

So I went to the source and posed Funk the following question.

“Why do you believe that a generic securities law provision in a 2,000+ page financial regulatory reform bill is going to prompt other countries to adopt bribery/corruption specific whistleblower provisions?”

Below is Funk’s response, posted with his express permission.


‘My answer to your question comes in parts.

Let me start out with an observation directed towards your question’s basic premise. I do not see why the raw page-count of the Dodd-Frank Act should have any meaningful bearing on whether its whistle blower provisions are (1) generally known and understood, or (2) likely to generate domestic success or foreign imitators.

Pundits, the media, and legal observers have certainly succeeded in swiftly digging through the bill’s 2,000+ pages of text and zeroing in on the tip-generating provisions we are talking about. Their very public analysis, moreover, strips away from the whistleblower bounty provisions any obscurity they may at one point have enjoyed (and, as the widespread attention to the Act signals, most observers do not categorize the novel provisions as unexceptionally “generic”).

Evidence of the recently-enacted whistleblower provisions’ emergent renown is, indeed, plentiful. Do a simple Google search for “Dodd-Frank” and “whistleblower,” and watch the thousands of hits come pouring in. Most foreign-based white collar websites, whether run by governments or lawyers, moreover, contain extensive and nuanced analysis of the Act’s whistleblower provisions. Hardly the reception accorded to an enactment that got lost in the shuffle.

And the whistleblower provisions’ renown is not the only thing that has confounded critics’ expectations; within a few short months, the Act has begun to yield actual real-world results. As recently reported by the Wall Street Journal, the new whistleblower incentives have generated an average of one tip a day (though the quality of the tips, and the country of origin of the tipsters, is admittedly still unknown).

These newly-generated/motivated tipsters, as well as the steady drumbeat of domestic and international corporate clients expressing concern about, and wanting more information on, this particular aspect of the Dodd-Frank Act, at a minimum place significant doubt on the position that the Act’s whistleblower provisions are so deeply buried within the rest of the Act that their effectiveness is nil because nobody knows about them.

Having addressed your foundational criticism of the Dodd-Frank whistleblower provisions, we can now move on to a companion challenge facing our ramped-up transnational anti-bribery efforts (and, for that matter, facing transnational law enforcement efforts generally).

Skeptics of global anti-bribery efforts now point to the much-cited International Bar Association’s recent survey of 642 legal professionals in 95 jurisdictions for proof that even lawyers don’t know about the world’s leading anti-bribery conventions and instruments. The IBA survey revealed that roughly half of the world’s lawyers have never heard of the FCPA. Some 70 percent of those questioned, moreover, knew nothing about the U.K. Bribery Act, and 40 percent are entirely unfamiliar with the Organization for Economic Cooperation and Development (“OECD”) and United Nations anti-corruption conventions. Four in 10 respondents in developed countries such as Denmark, Germany, Canada, and Japan likewise knew of none of these anti-bribery instruments; the result was bumped up to 7 in 10 for New Zealand and Hong Kong lawyers.

Observers hold these results up as conclusive, damning proof that few in the world’s legal community know, or much care, about these internationally celebrated/hyped anti-bribery enactments.

It would be pointless for me to argue against the existence of an unfortunate, long-standing dissonance between international diplomatic proclamations, on the one hand, and tangible results on the ground, on the other. Indeed, I have personally experienced this frustrating phenomenon while working in post-conflict countries for the U.S. State Department, and have also written a book on the International Criminal Court which takes aim at the international community’s “much talk, little action” habit.

But, in the present context, I remain unmoved by the IBA’s headline-grabbing findings. For one, these survey results smack of a high-minded variant of Jay Leno’s “Jaywalking,” in which Leno probes the proverbial “man on the street’s” basic knowledge of topics such as history, politics, and world affairs. The hapless respondents are inevitably revealed to be, or at least portrayed as being, ignorant dolts.

Similarly, the IBA’s survey results stand for little more than the rather unremarkable proposition that the “average” attorney (the survey omits any indication of specialization or areas of the survey-takers’ expertise) is not particularly well-versed on the topic of international anti-bribery instruments. Wish it weren’t so, but does it really matter?

Surveys of similar type could undoubtedly be constructed to reveal lawyers worldwide as wholly unfamiliar with wide swaths of accumulated substantive legal knowledge (anyone interested in taking a pop quiz surveying the examinee’s understanding of patent, human rights, or regulatory law?).

Are the IBA survey takers’ low scores to be read as meaning that global anti-bribery efforts are under-appreciated by lawyers to such an extent that they are rendered irrelevant? Hardly. What actually matters, of course, is whether the key decision-makers active in the anti-bribery fight know about these provisions. They clearly do.

But even if these survey results are meaningful, the “so what?” question remains: do the low scores represent (1) a call to action, or (2) a call to throw in the towel? Even assuming purely for the purpose of argument that throwing in the towel is the more sensible course, this clearly is not what the U.S. Government has in mind. Quite to the contrary.

In one public pronouncement after another, high-ranking Department of Justice, State Department, and Administration officials reaffirm the U.S. Government’s commitment to remain fully engaged in – and, indeed, to significantly ramp up – the global fight against public corruption.

During his May 31, 2010, address to the Organization for Economic Cooperation and Development (OECD) in Paris, for example, Attorney General Eric Holder publicly announced the U.S. Government’s continued support for the Anti-Bribery Convention: “As Attorney General, I have made combating [global] corruption one of the highest priorities of the Department of Justice.” Holder additionally announced the Government’s intent to strengthen global anti-bribery efforts through enhanced transnational collaboration and the sharing of “best practices.” Not coincidentally, in the month following the Attorney General’s speech, the U.S. House passed the Dodd-Frank Act’s conference report of the bill.

Whether through high-minded moral leadership, innovative new initiatives, or more pedestrian, self-interested incentives connected with financial-based trade, aid, and protection, the U.S. has a way of ensuring that its message is heard – heard loud and clear, actually – and acted on. And there is no need to even walk down the increasingly lonely road of American exceptionalism to make this point. Realpolitik will suffice.

Few would dispute that, despite some recent setbacks, the U.S. Government continues on as the dominant force in world affairs. When the U.S. takes action, foreign governments and global businesses take notice.

Well-publicized, enormous fines/disgorgements of corporate wrongdoers collected not only in the U.S., but increasingly also abroad, only further raise awareness, underscoring that the “old way” of doing business is coming to an abrupt end. Even on the enforcement side, good news for corporate criminals is hard to come by.

The proliferation of Mutual Legal Assistance Treaties (MLATs) between the U.S. and other countries, moreover, make extradition and public trial a reality. As USDOJ Criminal Division Assistant Attorney General Lanny Breuer put it during a May 2010 speech: “We are actively working with our foreign counterparts in various areas to ensure that country borders won’t limit our ability to fight fraud . . . . As recently as February, new U.S.- E.U. agreements on mutual legal assistance and extradition went into effect. These agreements offer significant new tools that will streamline cross-border investigations and allow for even greater cooperation with our counterparts abroad.”

The world is clearly growing uncomfortably smaller for corporate criminals. Viewed from this perspective, we are currently experiencing a race to the top, not a race to the bottom.

Available international numbers in fact lend support for the argument that mounting U.S. diplomatic pressure aimed at increasing global anti-corruption efforts is, to some extent at least, achieving its desired result. Transparency International (TI) recently released its “July Progress Report 2010: Enforcement of the OECD Convention on Combating Bribery of Foreign Public Officials.” TI notes that, between 2009 and 2010, the number of signatory countries actively enforcing the Anti-Bribery Convention increased from four to seven (those countries representing some 30 percent of world exports). Furthermore, since the mid-2000s, the number of moderately enforcing countries doubled from 8 to 16.

Although these statistics demonstrate that most signatory countries still have considerable room for improvement towards living up to their anti-bribery commitments, the recent uptick in enforcement signals that domestic and international pressures have not gone unnoticed. The Dodd-Frank Act’s novel way of incentivizing individuals with knowledge to step forth and blow the whistle is readily-understood, and provides a simple way to increase OECD Anti-Bribery Convention compliance. Considering that the U.S. Government is giving every available signal that these pressures will, if anything, only increase, it is reasonable to expect global anti-corruption initiatives and cooperation to trend in the same direction.

To the extent that the innovative Dodd-Frank whistleblower bounty provisions continue to generate substantive tips, and that foreign whistleblowers are appropriately protected, there is no reason to think that other countries will not imitate the provisions in the same way as other effective U.S.-born legal provisions have found new second homes throughout the world.”

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