Deep Within Its Section 1504 Final Rules, The SEC Adopts An FCPA Reform Proposal Advanced By The Chamber And Contradicts An Enforcement Theory At Issue In Several Of Its Prior FCPA Actions
In late August, the SEC adopted final rules implementing Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions. A future post will discuss the final rules as to this provision which was tacked to the end of the massive financial regulation bill at the last minute as a “miscellaneous provision” (see here for a prior post).
This post highlights that deep within the 232 pages of Section 1504 SEC final rules, the SEC adopted an FCPA reform proposal advanced by the Chamber of Commerce as well as contradicts an enforcement theory at issue in several of its prior FCPA actions.
First a bit of background.
In “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act” (here), the Chamber proposed to clarify the definition of “foreign official.” In Congressional testimony, former Attorney General Michael Mukasey, testifying on behalf of the Chamber, stated as follows. “The FCPA therefore should be amended to clarify the meaning of ‘foreign official,’ indicate the percentage of ownership by a foreign government that would qualify the entity as an instrumentality. We think majority ownership is the most plausible threshold.” (See here for the hearing transcript).
In the aftermath of the House hearing, and in response to questions from Capital Hill, SEC Chairman Mary Schaprio stated that the FCPA “sufficiently defines the term foreign official” and further stated as follows. “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.” (See here for the prior post).
Back to Section 1504. It defines “foreign government” to mean a “department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission.” On page 101 of its recently issued final rules (here), the SEC states as follows. “[T]he final rules clarify that a company owned by a foreign government is a company that is at least majority-owned by a foreign government.”
By so concluding, not only did the SEC quietly adopt an FCPA reform proposal advanced by the Chamber, but it also contradicted an enforcement theory at issue in several of its prior FCPA actions.
For instance, in the several Bonny Island, Nigeria enforcement actions (see here for a summary) the SEC alleged that employees of Nigeria LNG Limited (“NLNG”) were “foreign officials” despite the fact that NLNG was owned 51% by a consortium of private multinational oil companies.
In the Alcatel-Lucent enforcement action, the SEC alleged that employees of Telekom Malaysia Berhad were “foreign officials” in that the entity was a state-owned and controlled company even though the Malaysian Ministry of Finance owned only 43% of the company’s shares. (See here for the prior post).
The Comverse enforcement action focused on Hellenic Telecommunications Organization (“OTE”) and allegations that the Greek Government was OTE’s largest shareholder and controlled the company. The SEC suggested that employees of OTE were “foreign officials” even though, during the relevant time period, the Greek Government held only 33% – 38% of the company’s shares. (See here for the prior post).
With the SEC’s conclusion in its Section 1504 final rules that a company owned by a foreign government is a company that is at least majority-owned by a foreign government, the SEC will be hard pressed to allege in future FCPA enforcement actions that an entity with less than 50% foreign government ownership or control is an instrumentality of a foreign government and that its employees are “foreign officials” under the FCPA. This is assuming of course that the SEC cares about intellectual honesty and consistency.
As noted in previous posts, Section 1504 of course also demonstrates that when Congress wants to, it knows how to pass a bill that captures state-owned or state-controlled enterprises (SOEs). Congress is presumed not to use redundant or superfluous language in enacting statutes. If instrumentality include SOEs (as the enforcement agencies maintain), then Congress violated this legislative maxim by using redundant or superfluous language in Section 1504. Congress did not violate this maxim in Section 1504 because instrumentality does not include SOEs and there is no support in the voluminous FCPA legislative history to support such a claim. (See here for my foreign official declaration).
In its 11th Circuit “foreign official” response brief (here) the DOJ merely states, in a footnote, the following as to Section 1504. “[Section 1504’s] definition of “foreign government,” enacted more than 30 years after the FCPA and in a very specific and unrelated context, has no bearing on the meaning of instrumentality in the FCPA.”
Further Thoughts On A Compliance Defense
The day after Labor Day has always seemed like a second New Year. In that spirit, let’s kick off the “new year” with further thoughts on a compliance defense.
For starters, I am pleased to share (here) the published version of my scholarship “Revisiting a Foreign Corrupt Practices Act Compliance Defense.” The published version in the Wisconsin Law Review (compared to the draft released last January) contains additional reasons and rationale for why the FCPA ought to be amended to make a company’s pre-existing compliance policies and procedures, and its good-faith efforts to comply with the FCPA, relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures.
In other developments relevant to a compliance defense and of particular note, a Senior Investigations Counsel with the SEC’s FCPA Unit published an article (here) in Standford’s Journal of Law, Business & Finance arguing that “the United States should adopt a compliance procedures defense for the FCPA similar to the adequate procedures defense under the Bribery Act.” The typical “I am not speaking on behalf of the SEC” disclaimers applied to Jon Jordan’s article, but it is hard to ignore calls for reform from a current SEC official who spends his days investigating FCPA issues.
As noted in this previous post, William Jacobson (former assistant chief of DOJ FCPA enforcement and current co-general counsel and chief compliance officer at Weatherford International Ltd.) has joined the growing chorus of former high-ranking DOJ officials calling for reform. The FCPA Blog recently (here) called for a revival of Jacobson’s plan for recognizing a company’s pre-existing FCPA compliance policies and procedures. While I agree with much of what Jacobson says, I disagree that the solution to this important issue is non-binding DOJ policies and procedures. I also disagree that a trigger for recognizing a company’s pre-existing FCPA compliance policies and procedures should be, as Jacobson suggests, a company’s voluntary disclosure to the enforcement agencies.
Over the summer, Alexandra Wrage (President of Trace International) compiled a list of antibribery and anticorruption resources (here) for in-house counsel to consult in developing and implementing compliance programs. Separately, Transparency International announced here its “Assurance Framework for Corporate Anti-Bribery Programs” with the goal of “provid[ing] benchmarks in the form of control objectives for use by enterprises in designing and evaluating their anti-bribery programmes in anticipation of independent assurance.” Ought not these quality resources and the benchmarking factors they contain matter other than in the opaque world of enforcement agency discretion?
Also over the summer, Ben Heineman (former General Electric Company senior vice president-general counsel and current senior fellow at Harvard) wrote here that “federal enforcement authorities should give much more systematic credit to effective corporate compliance programs when making decisions about criminal prosecutions …”.
In this post concerning a compliance defense, Michael Volkov states that my proposal to have compliance incorporated into the FCPA as an element of a bribery offense, the absence of which the DOJ must establish to charge a substantive bribery offense is “unprecedented.” This is not true. Such a concept is not unprecedented as several peer countries, as noted in my Revisiting article, have adopted this approach in their FCPA-like laws. Volkov returned to the issue of compliance in this post arguing that “one alternative which is not discussed very often is to increase the benefit for an effective corporate compliance program under the US Sentencing Guidelines.” Perhaps the Sentencing Guidelines could be tweaked, but revising non-binding guidelines that are only implicated after liability has been established is not a comprehensive solution to the issue.
I have debated an FCPA compliance defense with Howard Sklar (see here). His main objection to a defense seems to be that if there is such a defense, an FCPA inquiry will turn into an investigation of the company’s overall compliance culture. For starters, how is this any different from the current enforcement environment in which the “where else” question is typically asked (see here for the prior post) and in which instances of FCPA scrutiny typically lead to world-wide reviews of a company’s operations? In addition. Sklar’s fears are overblown because a compliance defense ought to be situational. The FCPA compliance defense that passed the House in the 1980’s was situational in that it focused on specific employees engaged in specific conduct and the specific officers and employees of the company who had supervisory responsibility of the specific employees and specific conduct. Likewise, the adequate procedures defense in the U.K. Bribery Act is situational. The statutory text itself references particular instances of bribery (i.e. “such conduct”) and Ministry of Justice guidance states that “the commercial organisation will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing.” (emphasis added).
There will likely be no movement on FCPA reform until after the DOJ releases its guidance this Fall and until a new Congress begins after the elections. When reform discussion begins anew, it will be against the backdrop of a growing chorus who do not believe that the enforcement agencies adequately recognize and credit pre-existing FCPA compliance policies and procedures.
There is disagreement as to the remedy, but I believe for the reasons stated in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” that the best solution is to make a company’s pre-existing compliance policies and procedures relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures.
A New Strategy For Preventing Bribery And Extortion In International Business Transactions
Today’s post is from Bruce Klaw (here), an Assistant Professor of Law at Keimyung University in South Korea. Klaw discusses his recent scholarship “A New Strategy for Preventing Bribery and Extortion in International Business Transactions” recently published in the Harvard Journal on Legislation (see here to download the article).
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I’d like to thank Professor Koehler for this opportunity to write about my article and more importantly, for running FCPA Professor, an invaluable resource for scholars and practitioners alike.
With that said, let me introduce my article with a bit of context, using two stories of FCPA violations in Mexico:
The first story involves Tyson de Mexico, a wholly-owned subsidiary of Tyson Foods, Inc., a U.S. issuer subject to the FCPA. From 1994 to 2006, Tyson de Mexico made approximately $350,000 worth of secret payments to veterinarians employed by the Mexican government to inspect Tyson’s facilities after those veterinarians expressly threatened to disrupt the operations of two of its chicken processing plants. When Tyson voluntarily disclosed the extorted payments to U.S. enforcement authorities, it was forced to pay $5.2 million in penalties as part of a non-prosecution agreement and settlement with the S.E.C. concluded in early 2011. (See here for the previous FCPA Professor post).
The second story involves Wal-Mart, which became the focus of significant FCPA attention when the New York Times broke a story in April about an alleged pattern of bribery of Mexican officials in order to facilitate the expansion of Wal-Mart’s business south of the border. (See here for the previous FCPA Professor post). The real kicker of the Wal-Mart story, however, was not the fact that bribes were paid to local officials in apparent violation of the FCPA, but rather that top level executives at Wal-Mart’s U.S. headquarters learned about the apparent misconduct through an internal investigation but effectively hushed it, choosing not to disclose the matter to U.S. enforcement officials until their hand was forced by The Times several years later.
The Tyson and Wal-Mart cases illustrate a number of the problems inherent within the FCPA that are identified within the article:
1) its one-sided focus on only the supply-side of bribery transactions (i.e., the payer) and not the corrupt government recipients who may solicit or demand them;
2) its failure to meaningfully account for the circumstances under which payments are made or legally distinguish between bribery and extortion; and
3) its paradoxical reliance on voluntary disclosure as the primary means of detection and corresponding penalization of companies that voluntarily disclose such payments.
As a result of these flaws and others identified within the article, the U.S. anti-corruption regime establishes a structure that all but encourages bribery and extortion in international business transactions to remain secret and pervasive. Many companies, including Wal-Mart, may well be making the choice to try to keep their payments to foreign officials secret rather than risk the almost certain negative consequences of disclosure.
This is what my article seeks to address.
In this piece, I argue that the focus of the U.S. anti-corruption strategy should be shifted from punishment to prevention. To accomplish this end, the article argues for a number of detailed and significant changes to the FCPA, which implemented together, should better serve the interests of justice and provide the appropriate incentive structure for substantially reducing international bribery and extortion.
Chief among the changes I propose is decriminalizing the act of giving bribes to foreign officials. Decriminalization is not only morally appropriate in some cases (i.e., when a company like Tyson makes a payment to a foreign official in response to an extortionate demand), but also is likely to prevent bribery in the long run. Decriminalization will help bring corruption out of the shadows, have a nominal impact on the number of bribes offered, and ultimately reduce the incidence of bribe solicitation and acceptance by foreign officials.
In place of criminalization, I argue Congress should focus on strengthening payment disclosure requirements. Congress should impose upon all companies subject to U.S. jurisdiction a strict requirement of mandatory disclosure of all bribe solicitations by foreign officials, and all payments to foreign intermediaries or foreign officials above a certain monetary threshold, similar to the requirement currently imposed on financial institutions to report suspicious activity.
Once disclosed and investigated, payments to foreign officials will tend to fall into two categories: willing and unwilling. The distinction rests on the presence or absence of express or implicit coercive extortion by a public official. By following the natural implications of such a distinction—that criminals should be punished and victims should be compensated—the law can incentivize the disclosure of corruption, enable the true victims of such corruption to take action against the wrongdoer, and facilitate restitution where appropriate.
In the case of truthfully disclosed unwilling payments to foreign officials, such payers should be entitled to restitution and granted safe harbor to insulate them not only from U.S. enforcement action, but also from private civil litigation, the threat of which currently impedes disclosure.
Bribes made willingly, on the other hand, should be publicly disclosed so that foreign governments may prosecute and take other action to rescind tainted contracts. Likewise, upon disclosure and after the creation of a limited private right of action under the FCPA (for which I also argue in the article), competitors harmed by such unfair business practices may take action against those willing payers to recover their damages. After all, why should the U.S. government devote its resources to prosecuting bribe-givers when business competitors and foreign governments stand ready and willing, in most cases, to police violators at a fraction of the cost to U.S. taxpayers?
Finally, I argue that to address the demand-side of bribery, Congress should expand extraterritorial U.S. jurisdiction under the FCPA to prosecute foreign officials who solicit or demand unwilling payments if foreign governments are unwilling or unable to do so.
By addressing the problems and implementing the prescriptions I have laid out in the article, it is hoped that the occurrence of bribery and extortion in international business transactions may be substantially reduced.
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As highlighted in various previous posts, discussed in my “foreign official” declaration (here), and will be discussed in greater detail in my forthcoming scholarship “The Story of the Foreign Corrupt Practices Act” (Ohio State Law Journal), addressing the foreign corporate payments problem discovered in the mid-1970’s via a disclosure approach (vs. the current criminalization approach) was favored by the Ford administration. President Ford’s point person on the issue was Elliot Richardson (Secretary of Commerce) who, in a letter to Senator William Proxmire, summarized the work of the Ford Task Force as follows. “The Task Force has concluded that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult if not impossible. […] The criminal approach would represent poor public policy. […] At the same time, the Task Force perceived several very positive attributes of systematic disclosure.”
President Ford stated as follows. “The reporting requirement covers a broad range of payments relative to government transactions as well as political contributions and payments made directly to foreign public officials. By requiring reporting of all significant payments, whether proper or improper, made in connection with business with foreign government, the legislation will avoid the difficult problems of definition and proof that arise in the context of enforcement of legislation that seeks to deal specifically with bribery and extortion abroad.”
The disclosure regime was rejected by Congressional leaders. A Senate Report stated as follows. “The Committee concluded that an outright prohibition would be at least as feasible to enforce as any meaningful disclosure requirement. […] Clearly, in order to enforce such a disclosure requirement and apply sanctions for failure to file reports, it would be necessary to prove that the undisclosed payment was actually made, and that it was made with an improper purpose. Thus, the same evidence necessary to prove a violation of a direct prohibition would have to be marshalled in order to enforce a disclosure statute. Accordingly, the Committee concluded that a disclosure approach has at least the same enforcement problems inherent in the direct prohibition approach and none of its advantages.”
Jimmy Carter (who favored a criminalization approach over a disclosure approach) defeated Ford in the 1976 election and the rest is history.
Proposed Irish Bill Contains A Compliance Defense
Ireland, like the U.S. a member country of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, has an FCPA-like law.
However, as explained in this Ireland Department of Justice and Equality document “the existing law on corruption – the Prevention of Corruption Acts 1889 to 2010 – comprises several different Acts, and includes statutes dating back to the late nineteenth century.”
Thus, Ireland is in the process of revising its FCPA-like law and the purpose of the proposed Criminal Justice (Corruption) Bill 2012 “is to clarify and strengthen the law criminalising corruption by replacing and updating 7 different statutes dating back to Victorian times, so that the legislation is essentially in one statute.”
One aspect of the proposed legislation, in response to OECD criticism of existing Irish law, is to establish a “clear provision for the liability of corporate bodies for corrupt criminal acts.” The Department of Justice and Equality explains as follows. “Up to now, we have not provided specifically in statute in this area, relying instead on the common law in this regard. [The proposed law] include[s] a new provision setting out that a corporate body can be held liable where an officer or employee of the body commits a corruption offence with the intention of obtaining a business advantage for the body. It is considered that this will provide greater clarity for companies as regards their criminal liability in this regard.”
However, and this is the key point for this post, the proposed legislation, “makes provision for a defence by a body corporate to prove that it took all reasonable steps and exercised all due diligence to avoid the commission of the offence.”
Head 13, titled “Offences by Bodies Corporate and Unincorporated Bodies,” of the draft legislation (see here) provides as follows. “It is a defence to an offence … for the defendant body corporate to prove that it took all reasonable steps and exercised all due diligence to avoid the commission of the offence.”
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) I highlight several other peer countries that already have a compliance-like defense relevant to their “FCPA-like” law such as the U.K., Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, and Switzerland.
[Note: That additional OECD Convention countries do not have compliance-like defenses ,does not mean that those countries rejected such a defense. Rather, in many OECD Convention countries the concept of legal person criminal liability (as opposed to natural person criminal liability) is non-existent. Further, in many OECD Convention countries that recognize legal person criminal liability, such legal person liability can only result from the actions of high-level personnel or other so-called ‘controlling minds’ of the legal person. If a foreign country does not provide legal person liability, there is no need for a compliance defense, and the rationale for a compliance defense is less compelling if legal exposure of the legal person can only result from the conduct of high-level executive personnel or other ‘controlling’ minds of the legal person.]
In the article, I argue that, contrary to the claims of FCPA compliance defense opponents such as the DOJ, a compliance-like defense applicable to the offense of bribery of foreign officials is not novel, risky, or dangerous and that amending the FCPA to include a compliance defense would not conflict with U.S. OECD Convention obligations. In this previous post, I argued that a compliance defense is not a race to the bottom, it is a race to the top.
For more on the proposed Irish law, see this recent Irish Times article.
Of Note From The Pfizer Enforcement Action
Yesterday’s post (here) went long and deep as to the Pfizer / Wyeth enforcement action. Today’s post continues the analysis by highlighting additional notable issues.
FCPA Reform Issue
For the second time in recent months, the DOJ has attempted to address an FCPA reform proposal in an enforcement action press release. See here and here for prior posts concerning the Garth Peterson enforcement action / Morgan Stanley no enforcement action.
As noted here and here (among other posts), one FCPA reform proposal seeks to address an acquiring company inheriting the acquired company’s FCPA exposure.
The DOJ’s release (here) in the Pfizer enforcement action stated as follows. “In the 18 months following its acquisition of Wyeth, Pfizer Inc., in consultation with the department, conducted a due diligence and investigative review of the Wyeth business operations and integrated Pfizer’s Inc.’s internal controls system into the former Wyeth business entities. The department considered these extensive efforts and the SEC resolution in its determination not to pursue a criminal resolution for the pre-acquisition improper conduct of Wyeth subsidiaries.”
Kudos to the DOJ … in part.
As evident from a close read of the statement of facts attached to the DPA (here), a substantial portion of the improper conduct giving rise to the allegations in Pfizer HCP’s information resulted from Pfizer’s acquisition of Pharmacia Corporation in 2003. The statement of facts state as follows. “[In April 2003] Pfizer acquired Pharmacia Corporation in a stock-for-stock transaction. Pharmacia’s international operations were combined with Pfizer’s, including Pharmacia’s operations in Bulgaria, Croatia, Kazakhstan and Russia which were thereafter restructured and incorporated into Pfizer HCP.” [Conduct in these countries was the focus of the information].
No Knowledge at Corporate Headquarters
Pfizer’s press release (here – pursuant to the DPA, Pfizer had to consult with the DOJ prior to issuing) stated as follows. “There is no allegation by either DOJ or SEC that anyone at Pfizer’s or Wyeth’s corporate headquarters knew of or approved the conduct at issue before Pfizer took appropriate action to investigate and report it. As soon as these local activities came to the attention of Pfizer’s corporate headquarters, they were voluntarily brought to the attention of the DOJ and SEC. Today’s settlements are focused solely on these local activities.”
You do wonder whether those opposed to FCPA reform (such as here) actually read FCPA resolution documents and understand this as well as other alleged facts in the Pfizer action such as the successor liability issue discussed above and that the conduct at issue in the DOJ enforcement took place between 6 – 15 years ago. Probably not.
Curious Charging Decisions
In criminal actions, the DOJ’s burden of proof is beyond a reasonable doubt. In civil actions, the SEC’s burden of proof is a more lenient preponderance of the evidence. Given these different burdens of proof, it is common for the SEC to charge FCPA anti-bribery violations even in the absence of similar DOJ charges.
The exact opposite happened in this enforcement action.
The DOJ’s information charges FCPA anti-bribery violations, however, the SEC’s complaint which tracks the DOJ’s allegations (and then some) merely charge FCPA books and records and internal control violations.
Thinking About Disgorgement
There are certain exceptions, but one FCPA-related issue that has always intrigued me is that most corporate FCPA violators are otherwise viewed as selling the best product or service for the best price. In my 2010 opening remarks at the World Bribery and Corruption Compliance (see here) I observed as follows. “Another issue in need of deeper analysis is the commonly held enforcement view that the contract (and thus net profits of the contract) at issue was secured solely because of the alleged improper payments made by the corporate. This ignores the fact that most of the companies settling enforcement actions are otherwise viewed as industry leaders presumably because they offer the best product or service for the best price. With such companies, can it truly be said that the alleged improper payments were the sole reason the company secured the contract at issue, thus justifying the company being forced to disgorge all of its net profits associated with the contract? Does a but for analysis have a place in bribery laws – in other words should the enforcement agency have to prove that but for the improper payment, the company would not have secured the contract at issue?”
Given my interest in this issue, I was delighted to read (as highlighted in this prior post) a piece titled “Economic Analysis of Damages under the Foreign Corrupt Practices Act,” (here) by Dr. Patrick Conroy (here) and Dr. Graeme Hunter (here) – both of Nera Economic Consulting. The authors note that “to date there has been little consideration of the true benefit of the bribe” but “with fines in the hundreds of millions of dollars and increasing enforcement, it is necessary to clearly understand what effect a bribe had on profits and to carefully establish what the but-for profits would have been without the bribe.” The authors note that “while a bribe may have led to very high gains, the but-for profits could have been high (and the gain from the bribe low) if the bribe would have little effect on the probability of winning the work or if alternative projects were similarly profitable.”
As noted by the FCPA Blog (here), the combined SEC disgorgement (and pre-judgement interest amount) in the Pfizer / Wyeth settlements was approximately $45 million.
However, does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set? Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort? Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians? Numerous other examples could also be cited in connection with the enforcement action, be I trust you get the point.
Given the above referenced SEC charges, the enforcement action also again raises the issue of “no-charged bribery disgorgement” which was the focus of this prior post that highlighted an FCPA Update by Debevoise & Plimpton (the author group included Paul Berger (here) a former Associate Director of the SEC Division of Enforcement).
A Gray Cloud That Lasted 8 Years
The FCPA Blog recently highlighted here the FCPA’s long shadow and asked “how long should the DOJ and SEC keep self reporting companies on the hook?” I share the concern that FCPA scrutiny, and the gray cloud it represents as hanging over a company, simply lasts too long. In many cases, the gray cloud lasts between 2-4 years from the point of first disclosure to the point of an enforcement action. In certain cases the gray cloud hangs over a company for a longer period of time. Pfizer is one such example. As noted in the resolution documents, Pfizer voluntarily disclosed various conduct giving rise to the enforcement action in 2004. Thus the gray cloud lasted approximately 8 years.