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Honest Services Fraud and the FCPA

By on June 22, 2010 in Enforcement Agency Policy, FCPA Jurisprudence, FCPA Related Charges, Giffen

While much of the white-collar bar awaits the Supreme Court’s decisions in the trio of honest services fraud cases on its docket (Jeffrey Skilling, Conrad Black and Bruce Weyhrauch) why not talk about the FCPA and honest services fraud!
What is honest services fraud? Stay tuned for the Supreme Court’s decisions.

For present purposes, honest services fraud is part of the mail and wire fraud statutes and is found at 18 USC 1346 which simply states that the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

What does this have to do with the Foreign Corrupt Practices Act?

It turns out, not much, but that is not how the DOJ saw it when charging James Giffen in 2004. (For more on the Giffen case see here).

The Giffen superceding indictment focuses on charges that he made unlawful payments totaling more than $78 million to the former Prime Minister and Oil Minister of Kazakhstan in violation of the FCPA.

In addition to the FCPA charges, the indictment also alleged that Giffen’s actions violated 18 USC 1346 by depriving the citizens of Kazakhstan of the honest services of their government officials.

Yes, you did read that correctly – the DOJ alleged that Giffen deprived the citizens of Kazakhstan of the honest services of their government officials. That is why the Giffen honest services fraud charge is one of the more curious “tag-a-long” charges ever in an FCPA enforcement action.

Unlike most FCPA defendants (corporate and individual) Giffen mounted, and still is mounting, an aggressive legal defense.

In 2004, Giffen moved to dismiss portions of the charges that alleged a scheme to deprive the citizens of Kazakhstan of the honest services of their government officials. He asserted that application of the honest services fraud theory of Section 1346 to Kazakhstan impermissibly extended the mail and wire fraud statutes to cover activities beyond Congress’ original intent.

Judge William Pauley of the Southern District of New York agreed with Giffen and granted his motion to dismiss portions of the charges that alleged a scheme to deprive the citizens of Kazakhstan of the honest services of their government officials. See U.S. v. Giffen, 326 F.Supp.2d 497 (S.D.N.Y. 2004).

In so holding, Judge Pauley stated that the DOJ offered “the slenderest of reeds to support its expansive interpretation.” Among other things, Judge Pauley noted that the DOJ could not point to “any decision where a court upheld application of the honest services theory in an international setting involving a foreign government and its citizens.”

When the DOJ pointed to “two 25-year old indictments” charging a similar theory, Judge Pauley noted that the DOJ “has not unearthed any published decision on the issue” and that the DOJ “conceded that there were no court decisions addressing the validity of the two 25-year old indictments.” Judge Pauley further stated that just because certain U.S. Attorneys were able to obtain indictments “under an intangible rights theory, grounded between a foreign government and its citizenry, is not the kind or quality of precedent this Court need consider.”

Accordingly, Judge Pauley concluded that “Congress did not intend that the intangible right to honest services encompasses bribery of foreign officials in foreign countries” and that “application of Section 1346 to Giffen [was] unconstitutional.”

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As FCPA practitioners well know, many current FCPA legal theories are aggressive, untested and not supported by any case law or other meaningful precedent or guidance.

If challenged, would a judge (like Judge Pauley in Giffen) conclude that the DOJ offered the “slenderest of reeds” to support its expansive interpretations?

What case law would the DOJ cite to support certain of its aggressive interpretations (such as employees of seemingly “commercial” enterprises being “foreign officials” under the FCPA)? Would DOJ not have to concede that there are no court decisions addressing the validity of its interpretations?

All interesting (and important) questions to ponder while awaiting the Supreme Court’s honest services fraud decisions.

“I was taught if they violated a law, you charge them. If they didn’t violate the law, you don’t charge them.”

By on June 21, 2010 in Congressional Activity, Deferred Prosecution Agreements, Enforcement Agency Policy, Non-Prosecution Agreement

In 2008 (the most recent year for which I’ve seen the following statistic) seven of the sixteen non-prosecution or deferred prosecution agreements entered into by the DOJ were in the FCPA context. (See here).

NPAs and DPAs are thus very much a Foreign Corrupt Practices Act topic and these resolution vehicles are frequently covered on this blog. (See here and here).

Thus, the following exchange between Senator Jeff Sessions (R-AL) and James Cole caught my eye. It occurred during Cole’s Senate Judiciary Committee confirmation hearings last week for the Deputy Attorney General position.

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SEN. SESSIONS: […] I noticed just as an aside you did a speech entitled role of an in-house lawyer in a corporation in October of ’06, and you stated this. Quote: “The experience with Arthur Andersen taught the government something that consequences were too drastic and hurt too many innocent employees. The government now tries to work settlements with companies that find themselves in that kind of predicament and the company does not get indicted and therefore can continue to exist.” Closed quote. Well, we know that Arthur Andersen failed immediately upon being charged as I recall that. So I’m not suggesting this is a totally improper statement. But it seems to go beyond strict enforcement of the law and try to preserve corporations who perhaps should be charged and suffer whatever consequences might result from their criminal acts. Do you have any second thoughts about that quote that I just read?

MR. COLE: Senator Sessions, I don’t. The point of that was to say that there are reasons why you charge corporations and reasons why you don’t charge corporations. And certainly the Justice Department starting back when the Attorney General Eric Holder was deputy attorney general has issued a series of memoranda that guide prosecutors in determining when a corporation should be charged. The issue is so sensitive because when you charge a corporation and you cause its demise through that charge, thousands and thousands of employees who had no role in the misconduct are hurt. Thousands and thousands of shareholders who had no role in the misconduct and whose savings were invested in that corporation are hurt, and it’s those people who had no role who are hurt are the ones you need to think about, as well, when you decide whether to charge a corporation.

SEN. SESSIONS: Well, I think that’s, I guess, a reality, but it’s got to be carefully thought through, else you’re just picking and choosing winners. You’re saying BP is too big to fail. They’ve got employees, too. This is a dangerous philosophy. Normally, I was taught if they violated a law, you charge them. If they didn’t violate the law, you don’t charge them.

MR. COLE: Well — and one of the issues, Senator, that is very much, as I understand it, in the forefront of the prosecution decisions in the Department is to prosecute the individual executives in these companies who are responsible for these criminal acts because that’s how you’re going to get the most deterrence.

SEN. SESSIONS: But are you now saying that you’re backing off corporate indictments?

MR. COLE: No, I am not at all. I’m just saying there are many ways to be quite effective, and I think you have to balance the interests of how much damage you’re doing to people who had nothing to do with the wrongdoing versus how much deterrence you’re going to be placing on future conduct like this. And I think you have to make sure that you are effective in the prosecution, both of corporations and of the individual officers.

SEN. SESSIONS: Yeah, so how much empathy you have for the employees. Well, anyway, it’s a tough decision. I guess we could go ’round and ’round, but I think you need to be careful with that philosophy. It has some danger to it. I think you fully recognize, as an experienced prosecutor that you are, the — I also salute you for wanting to reinvigorate traditional prosecutions in the Department. I hope that you will look at the numbers, you will look at the prosecutions and make sure that they are working effectively and that they’re high enough based on the number of prosecutors and investigators in the country. I’m not sure that we are. We’ve added a lot of prosecutors and assistant United States attorneys around the country. They’re paid big salaries. They need to be producing day after day. […]

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The above exchange raises an interesting question – what is the “shelf life” of the Arthur Anderson prosecution?

In other words, how long will the 2002 prosecution (and related consequences) guide DOJ corporate charging decisions? Will a DOJ prosecutor in 2015 or 2020 be persuaded not to criminally indict a corporation because of what happened in 2002? Should a corporation escape the most severe consequences of criminal conduct just because it employs lots of people? Just because the corporation sells certain products to certain customers?

All questions to ponder as another week begins.

DOJ Guidance and the FCPA

By on June 10, 2010 in Compliance, DOJ, Enforcement Agency Policy, Guest Posts, Legislative History, United Kingdom

That is the issue addressed by James Parkinson (Mayer Brown – see here) in the below guest post.

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As followers of this blog know well, the UK’s newly-enacted Bribery Act (here) calls for the UK government to “publish guidance about procedures that relevant commercial organisations can put into place to prevent persons associated with them from bribing…” Seeing this provision in the Bribery Act suggests the question whether similar guidance issued by the US government would be helpful.

As it turns out, the US government considered this very question over 20 years ago but declined to offer guidance to companies affected by the FCPA. In the 1988 amendments to the FCPA, Congress added provisions entitled “Guidelines by Attorney General,” which required the following:

“Not later than one year after August 23, 1988, the Attorney General, after consultation with the Commission, the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with this section would be enhanced and the business community would be assisted by further clarification of the preceding provisions of this section and may, based on such determination and to the extent necessary and appropriate, issue–

(1) guidelines describing specific types of conduct, associated with common types of export sales arrangements and business contracts, which for purposes of the Department of Justice’s present enforcement policy, the Attorney General determines would be in conformance with the preceding provisions of this section; and

(2) general precautionary procedures which issuers may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy regarding the preceding provisions of this section.

The Attorney General shall issue the guidelines and procedures referred to in the preceding sentence in accordance with the provisions of subchapter II of chapter 5 of Title 5 and those guidelines and procedures shall be subject to the provisions of chapter 7 of that title.”

15 U.S.C. §§ 78dd-1(d), 78dd-2(e).

Following the 1988 mandate, the DOJ issued a formal notice inviting all interested persons “to submit their views concerning the extent to which compliance with 15 U.S.C. 78dd-1 and 78dd-2 would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines.” Department of Justice, Anti-Bribery Provisions of the Foreign Corrupt Practices Act, 54 Fed. Reg. 40,918 (Oct. 4, 1989).

What happened?

On July 12, 1990, the DOJ declined to issue guidelines on the anti-corruption provisions of the FCPA, stating:

“After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”

Department of Justice, Anti-Bribery Provisions, 55 Fed. Reg. 28,694 (July 12, 1990).

How many responses did the DOJ receive?

According to the OECD’s Phase I Report on the US implementation of the Convention (at 15), “[o]nly 5 responses were received, and 3 of the responses were to the effect that guidelines were unnecessary.”

This suggests another question: what would the commentary landscape look like today if the DOJ published a new Federal Register notice soliciting “views concerning the extent to which compliance with 15 U.S.C. 78dd-1 and 78dd-2 would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines”?

Given the rise in enforcement activity and the focus companies now bring to compliance, it seems very likely that far more than five people would submit comments.

A Look Back in Time

By on June 7, 2010 in Enforcement Agency Policy, FCPA Inc., Foreign Official, GAO Report, Legislative History, Opinion Procedure Release

Literally, Time Magazine that is.

In connection with my work in progress on the FCPA’s legislative / early history, the below articles from Time’s searchable archives caught my eye. (See here).

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In November 1979, Time carried a piece (here) about the DOJ’s new program to offer advice on the FCPA – what has come to be called the FCPA Opinion Procedure Release. The article contains this quote from Stanley Sporkin, the SEC’s then Enforcement Chief: “We do not have guidelines for rapists, muggers and embezzlers, and I do not think we need guidelines for corporations who want to bribe foreign officials.” Fast forward 30-some years and Sporkin is still on the FCPA scene. It was recently reported (here) that Sporkin is assisting former FBI Director Louis Freeh as the monitor in the Daimler enforcement action. Among the monitor’s duties is “review[ing] and evaluat[ing] the effectiveness of Daimler’s internal controls, record-keeping, and existing or new financial reporting policies and procedures as they relate to Daimler’s compliance with the books and records, interal accounting controls and anti-bribery provisions of the FCPA, and other applicable anti-corrption laws.” (See here Appendix D).

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Almost as soon as the FCPA was passed, concerns were raised that the law was harmful to U.S. business. There was much activity on this issue in the early 1980’s as evidenced in this article from October 1980, this article from March 1981, this article from March 1981 as well, and this article from June 1981.

These articles detail, among other things: (i) that the Carter administration (Carter signed the FCPA into law in December 1977) “sent a hefty 250-page report to Congress on the various ways the U.S. discourages exporters” – one example – “the provisions of the 1977 Foreign Corrupt Practices Act, which have never been clearly spelled out by the Justice Department.” (ii) that the GAO released a report in 1981 (see here for a prior post) detailing how the FCPA “is riddled with complicating ambiguities and shortcomings” including the key “foreign official” element; and (iii) that President Reagan’s “transition team on the workings of the Securities and Exchange Commission […] has recommended decriminalization of bribery.”

At to this last point, Time notes:

“Such a stance by the Administration toward foreign bribery would itself cause problems. By failing to enforce the act as written, the Administration not only would leave the legislation’s ambiguities unresolved, but would show a disrespect for the law, which is itself corrupting. Since the U.S. has adopted a moral position with regard to foreign bribery, neither the Administration nor Congress can now afford to let the subject wither away without compromising its principles in the process.”

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In response to Forbes recent FCPA article (see here), the Wall Street Journal Law Blog asked (see here) “is the FCPA just a full employment act for the private bar.” Such a question as it relates to the FCPA is not new. This March 1981 Time piece notes that the FCPA was “dubbed by one Wall Street wag” as the “Accountants’ Full Employment Act of 1977.”

The Holder Memo and FCPA Enforcement

By on June 2, 2010 in BAE, Charles Paul Edward Jumet, Daimler, Enforcement Agency Policy, Enforcement Agency Speeches, Siemens

Attorney General Eric Holder recently issued a memo (here) regarding “Department Policy on Charging and Sentencing.”

There is little that is new is this memo; in fact Holder states that the purpose of the memo is “to reaffirm the guidance” provided by Title 9 of the U.S. Attorneys’ Manual, Chapter 27″ (see here) – a manual which has “guided federal prosecutors” for “nearly three decades.”

Nor is there anything FCPA specific in the memo.

Yet the memo, and the broad pronouncements Holder makes, call into question whether several recent Foreign Corrupt Practices Act enforcement actions contradict the guidance the Attorney General has reaffirmed.

In the memo, Holder states – “persons who commit similar crimes and have similar culpability should, to the extent possible, be treated similarly.”

Under the law, “persons” include both individuals and business entities, including corporations.

However, as explored in this post, a two-tiered justice system has seemingly developed in FCPA enforcement.

Certain corporations in certain industries, most often selling certain things to certain customers, can seemingly violate the FCPA’s anti-bribery provisions with very little consequence. In fact, with increasingly frequency, such companies are not even charged with FCPA antibribery violations and/or may not even have to plead guilty to anything. See here for the recent Daimler, here for the recent BAE, and here for the Siemens “bribery, yet no bribery” enforcement actions.

On the other hand, the DOJ seeks long prison sentences for individuals such as Charles Paul Edward Jumet, who make payments that pale in comparison to the payments made by the above corporations. In doing so, the DOJ usually trots out its get tough language (i.e. “bribery isn’t just a cost of doing business overseas [… but] a serious crime that the U.S. government is intent on enforcing”).

The Holder memo also states “in accordance with long-standing principle, a federal prosecutor should ordinarly charge ‘the most serious offense that is consistent with the nature of the defendant’s conduct, and that is likely to result in a sustainable conviction.”

Again, reference is made to the Daimler, BAE, and Siemens enforcement actions.

In Daimler, the DOJ release (here) notes that Daimler “brazenly offered bribes in exchange for business around the world” and that Daimler “saw foreign bribery as a way of doing business.” Yet, Daimler was not charged with FCPA anti-bribery violations. In fact, Daimler was not required to plead guilty to anything as it received a deferred prosecution agreement.

In BAE, the DOJ’s criminal information (here) alleges that “BAE provided substantial benefits to one KSA (Kingdom of Saudi Arabia) public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.” The indictment alleges that BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.” Yet, BAE was not charged with FCPA anti-bribery violations.

In Siemens, the DOJ release (here) states, among other things, that for “much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens.” Yet, Siemens was not charged with FCPA anti-bribery violations.

It is difficult to reconcile the charging decisions in these recent enforcement actions with the language of the Holder memo.

As to sentencing, the Holder memo states – “in a typical case” the appropriate sentence should be reflected by the “applicable guidelines range, and prosecutors should generally continue to advocate for a sentence within that range.”

Apparently, neither Siemens and Daimler were “typical” cases, because in both enforcement actions the DOJ advocated for a sentence significantly below the guidelines range.

In Siemens, the guidelines range (see here) was $1.35 billion – $2.7 billion. However, the ultimate DOJ fine was $448.5 million. Siemens did not voluntarily disclose the conduct at issue, nevertheless, the DOJ gave Siemens greater sentencing credit than allowed for under the guidelines because the guidelines calculation was “incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.” For more on Siemens’ fine, see here and here.

In Daimler, the guidelines range (see here) was $116 million – $232 million. However, the ultimate DOJ fine was approximately $94 million. Again, Daimler did not voluntarily disclose the conduct at issue, nevertheless, the DOJ gave Daimler greater sentencing credit allowed for under the guidelines. The DOJ stated, “indeed, because Daimler did not voluntarily disclose its conduct prior to the filing of the whistleblower lawsuit, it only receives a two-point reduction in its culpability.” However, the DOJ “respectfully submit[ed] that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.”

As demonstrated above, three of the DOJ’s most high-profile FCPA or “FCPA like” enforcement actions seemingly contradict many of the guiding principles in the Holder memo.

With Attorney General Holder now re-affirming these principles, it will be interesting to see if future FCPA enforcement actions comply more closely with these principles or if the future holds more facade enforcement actions.

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Speaking of Attorney General Holder, while most of us were enjoying the Memorial Day barbeque, he was delivering remarks at the OECD Conference in Paris. See here for a copy of his remarks.

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