That’s Strengthening, Not Weakening And That’s A Race To The Top, Not The Bottom
In a recent speech at Transparency International-USA’s Annual Integrity Award Dinner, Secretary of State Hillary Clinton stated (see here) as follows. “We [the Obama administration] are unequivocally opposed to weakening the Foreign Corrupt Practices Act. We don’t need to lower our standards. We need to work with other countries to raise theirs. I actually think a race to the bottom would probably disadvantage us. It would not give us the leverage and the credibility that we are seeking.”
The FCPA is a fundamentally sound, but not perfect, statute.
A way to strengthen the FCPA and best advance its objective of reducing bribery is to amend the FCPA to include a compliance defense. See here for my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”
The FCPA’s objective of reducing bribery is best accomplished not solely through ad hoc enforcement actions, but by also better incentivizing corporate compliance designed to prevent improper payments. Existing incentives merely lessen the impact of legal exposure and are thus “baby carrots.” What is needed to better incentivize more robust FCPA compliance are real “carrots.”
An FCPA compliance defense is a real “carrot” that will better incentivize compliance across the business landscape. Organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better. Likewise, organizations currently without stand-alone FCPA policies and procedures—and statistics indicate there are many—will be incentivized to spend finite resources to implement FCPA compliance policies and procedures. By better incentivizing organizations to implement more robust FCPA policies and procedures, an FCPA compliance defense can reduce instances of improper conduct and thereby advance the FCPA’s objectives.
I also argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” that an FCPA compliance defense will also increase public confidence in FCPA enforcement actions (no more enforcement actions against the World’s Most Ethical FCPA Violators – see here for the prior post) and allow the Department of Justice to better allocate its limited prosecutorial resources to cases involving corrupt business organizations and the individuals who actually engaged in the improper conduct thereby increasing the deterrent effect of FCPA enforcement actions.
That’s not weakening the FCPA, Secretary Clinton, that is strengthening the FCPA and best advancing its objective of reducing bribery. That’s not a race to the bottom, that’s a race to the top.
Potpourri
“Can Someone Please Turn On the Lights”
Former U.S. Attorney General Michael Mukasey (here – currently at Debevoise & Plimpton and active in the FCPA reform movement on behalf of the Chamber of Commerce) and James Dunlop (here – Jones Day) recently published “Can Someone Please Turn On the Lights? Bringing Transparency to the Foreign Corrupt Practices Act” (here). Published in Engage, a publication of the Federalist Society, the article asserts as follows.
” … [The] unobjectionable vision [of the FCPA] has virtually disappeared in a miasma of aggressive prosecutions by the Justice Department … The FCPA is almost never litigated in court. Public companies are the typical FCPA target, and such defendants are rarely positioned to litigate criminal charges, or even risk indictment, given (among other things) the substantial risk of federal contract debarment in many industries. The same is often true for individuals, most of whom face substantial prison time if convicted and who are thus unwilling to hang their hopes on uncertain interpretive arguments. As a result, the FCPA has had almost no judicial oversight, with the result that corporations trying to comply with its mandates find they are fighting corruption in the dark, their quest for standards confined to making mitigation arguments in prosecutors’ offices. This has enabled the FCPA’s enforcers, the Justice Department, and the Securities and Exchange Commission, to ‘win’ most FCPA cases through plea bargains or settlements, in which regulators set the terms, and into which regulators import their capacious constructions of the FCPA. This regulatory latitude has, in turn, transformed the FCPA into a catch-all for illicit conduct abroad, no matter how removed the target of the enforcement action is from the underlying offense. As Professor Mike Koehler has put it, ‘the FCPA means what the enforcement agencies say it means.'”
The article next states that “because the FCPA will never be heavily litigated—thus depriving the courts of the opportunity to clarify its murky text—Congress must speak clearly about what conduct does and does not violate the FCPA.” The article then largely tracks the reform proposals originally set forth in the Chamber sponsored white paper “Restoring Balance” (here).
Regardless of your views on FCPA reform, the Mukasey, Dunlop article is well written, extensively footnoted, and should find a place on your reading stack.
Checking in on the Carson Case
This previous post highlighted the Carson defendants recent motion to suppress (here) and motion to dismiss (here).
In substance, the motion to suppress argued that “from the outset of [Control Component Inc’s] CCI’s internal investigation in August 2007, CCI, through its counsel Steptoe & Johnson LLP (“Steptoe”), worked hand-in-hand with DOJ to investigate the matters at issue in this case.” The motion further argued as follows. “The DOJ and CCI essentially agreed to a private information-sharing arrangement between them. With this agreement in place, CCI selectively disclosed only information CCI believed inculpated Defendants and DOJ did not seek additional information.” According to the motion, “the collaborative nature of DOJ’s and CCI’s relationship provided both parties benefits, to the detriment of Defendants …”.
Last week the DOJ filed (here) its opposition brief. In summary, the DOJ asserts as follows. “Only state actors can violate a defendant’s Fifth Amendment rights, and the evidence shows that the Company’s actions were not the result of any pressure or influence from the government sufficient to convert the Company’s lawyers to state actors.”
The government submitted in camera the notes of Mark Mendelsohn, then Deputy Chief of the DOJ’s Fraud Section, reflecting his summary of the Company’s voluntary disclosure and many of the factual issues in dispute concern e-mails between Steptoe & Johnson and Mendelsohn. As to these e-mails, the DOJ states as follows. “These e-mails show no nexus between the Company and the government. Instead, they show a company in cooperative mode informing the government of what is transpiring in its internal investigation. [….] At no time did the government direct the actions of Steptoe/CCI. The government did not instruct the company who to interview or what questions to ask. In fact, the government provided no direction or instruction as to the conduct of the interviews.”
Citing caselaw that purports to show that a company’s efforts to cooperate with the government do not transform it into an arm of the state, the DOJ states that a company’s voluntary disclosure coupled with DOJ policy regarding a company’s cooperative efforts does not equate to state action and that finding state action “on these facts alone would be unprecedented and unwarranted, the effect of which would be to turn the cooperating company into a government agent in every case. There is no precedent for such an outcome.”
The DOJ also filed last week (here) its opposition to the motion to dismiss which mostly focused on due process / discovery issues.
Common Ground
Recently, Ann Hollingshead, writing on Global Financial Integrity’s (GFI) blog (here), made a spot-on observation regarding the type of “petty corruption” (or what I will call “harassment bribery”) common throughout the world. Hollingshead stated as follows.
“But this type of corruption is pervasive and deeply entrenched in the culture of many nations. It makes life difficult for citizens trying to live their lives and carry out what should be ordinary tasks. And in many countries—like India for example—where paying a bribe is illegal, the corrupt official forces everyday citizens to choose between completing your transaction and complying with the law. It is in this way that systematic corruption creates both a power imbalance and a forced cooperative between those demanding the bribe and those paying it.” (emphasis added).
I agree and the same is precisely the point I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) as to a specific reason, among others, warranting an FCPA compliance defense. Like Hollingshead, I too focus on India and note as follows. “Recent FCPA enforcement actions concerning business conduct in India demonstrate that harassment bribery is common and that companies operating in India face – just as locals face – difficult conditions simply to get things done.” I further note that “companies seeking to do business in many foreign countries are often funneled into an arbitrary world of low-paying civil servants who frequently supplement their meager salaries through bribe payments condoned in the host country.”
It is encouraging to see that proponents of an FCPA compliance defense and opponents on an FCPA compliance defense seem to at least agree on the business conditions present in many foreign markets giving rise to discussion of an FCPA compliance defense.
Hollinghead’s comments on GFI’s blog would seem drastically different from GFI’s previous statements concerning the general issue. Previously, in connection with the June 2011 House FCPA hearing, GFI (and others) release a statement (here) that stated as follows. “If a company is found to be in violation of the FCPA, then the existence of a company’s compliance program must not have prevented the acts of bribery. So why should the existence of their compliance program be a defense to the charge of bribery?”
Basurto Sentenced to Time Served
As detailed in this prior post, Fernando Maya Basurto was charged along with John Joseph O’Shea. Unlike O’Shea, who decided to put the DOJ to its burden of proof – and when he did he prevailed (see here), Basurto (the principal of the Mexican company that performed work for ABB’s business unit on its contracts with CFE) pleaded guilty.
The DOJ release (here) stated as follows. “Basurto pleaded guilty … to a one-count information charging him for his role in the conspiracy. In his plea, Basurto admitted that while he acted as a sales representative for the Texas business unit, he conspired with others to make corrupt payments to CFE officials, helped launder the bribe monies, and engaged in a cover up to obstruct the investigations of the Department of Justice and the SEC. Basurto also admitted that he submitted false invoices and helped fabricate correspondence in contemplation of federal investigations into the bribery.”
As part of his plea agreement, Basurto agreed to cooperate with the DOJ in its prosecution of O’Shea and Basurto was a key DOJ witness at O’Shea’s trial. However, the presiding judge, Judge Lynn Hughes (S.D. Tex.), stated, in dismissing the FCPA charges against O’Shea, that Basurto knew ” almost nothing” and that his answers “were abstract and vague, generally relating to gossip.”
Last week, Hughes granted the DOJ’s request and sentenced Basurto to time served. As noted by Christopher Matthews (here – Wall Street Journal Corruption Currents), Basurto was arrested in April 2009 and was released on bail in July 2011, according to court records.
A Q&A With Claudius Sokenu On “Where Else”
Why do FCPA investigative fees often reach tens of millions of dollars? Why does FCPA scrutiny (from the point of disclosure to the point of resolution – if any) often last two to four years and perhaps longer? In part, it is because of the “where else” question.
The “where else” questions often works as follows. A company voluntarily discloses conduct to the DOJ/SEC that occurred in country x that could implicate the FCPA. Before the DOJ/SEC agree to resolve any enforcement action, the agencies will often ask something to the effect – if the conduct occurred in country x, convince us that similar conduct did not also occur in countries a, b, c, etc. The lawyers on the receiving end of the “where else” question don’t mind being asked because the “where else” question often leads to a world-wide review of their client’s operations around the world.
I first started writing about “where else” in 2009, see here, and most recently wrote about “where else” here. As a former FCPA practitioner I was on the receiving end of the “where else” question and conducted resulting world-wide reviews on behalf of corporate clients.
The “where else” question is asked in nearly every FCPA enforcement action. How does one know? Read the resolution documents. For instance, the Magyar Telekom resolution documents states that the company conducted a “thorough global internal investigation concerning bribery and related misconduct.” The Tenaris resolution documents cites that company’s “voluntary investigation of the Company’s business operations throughout the world.” The Tyson resolution documents state that all of the company’s wholly-owned overseas production facilities were “subjected to rigorous FCPA reviews.” Numerous other examples could also be cited.
Claudius Sokenu is a leading FCPA practitioner at Arnold & Porter (see here). As a former SEC FCPA enforcement attorney, Sokenu has both asked the “where else” question in the context of an FCPA inquiry and has been on the receiving end of the “where else” question as an FCPA practitioner. His views on “where else” first caught my attention in this 2011 interview with The Metropolitan Corporate Counsel and he expands on “where else” in the below Q&A.
What percentage of FCPA enforcement actions that you have been involved in have resulted in the “where else” question being asked?
In my time as a regulator at the Securities and Exchange Commission’s Division of Enforcement and in private practice, the “where else” question has been asked in virtually every single FCPA matter in which I have been involved. I have asked it and it has been asked of me.
Do you believe the “where else” question was appropriate in these instances?
In some instances it was entirely appropriate for the SEC, the Justice Department, and other regulators to ask the “where else” question. In others, however, the allegations did not support a “where else” question and it appeared to be more of a fishing expedition and boiler plate question than a well-reasoned question under the facts. “Where else” is a reasonable and appropriate question when the alleged misconduct appears to be systemic and/or the company under investigation appears to lack the controls necessary to prevent the payment of bribes to foreign government officials. It is not, however, an appropriate question where it is intended to force companies to conduct multi country internal investigations with little more than the uninformed hunch of a government official who has little or no experience in how businesses work around the world.
The “where else” question could logically be asked in any DOJ or SEC investigation regardless of substantive area of law. Do you believe the “where else” question is asked more frequently in FCPA enforcement actions
compared to say antitrust, tax, or environmental enforcement actions? If so, why?
Because the “where else” question is often raised behind closed doors in private conversations between government and counsel, it is difficult to be certain, but yes, I do believe the question is asked more frequently in FCPA enforcement investigations.
This is not entirely unreasonable given the nature of the FCPA. First, the scope of the FCPA’s jurisdiction, by definition and necessarily, covers the entire world. And unlike antitrust laws, for example, which have some extraterritorial application but are primarily concerned with the impact on U.S. markets, the FCPA’s primary focus is on actions occurring abroad. Second, it is not always unreasonable to think that the insufficient (or nonexistent) internal controls that facilitated bribe payments in one country will have the same effect elsewhere. Taking these two factors together, one could reasonably conclude that the FCPA is uniquely amenable to the “where else” question.
That is not to say, of course, that the “where else” question will always be appropriate in the FCPA context or that it will never be relevant elsewhere. For example, a discharge of pollutants in one of a company’s many U.S. plants may very well justify a widespread environmental audit. Expanding the scope of investigation in such a case would depend on whether the discharge was the result of, say, incompetent employees hired under criteria used nationwide, as opposed to a once-in-a-generation weather event. In the former case, a widespread audit would likely be called for, whereas in the latter it likely would not. The fact is, in the FCPA context, the vast majority of cases have resembled the first scenario – i.e., systematic defects whose effects could arise anywhere – and thus broad investigations have often made more sense than localized ones.
Of course, a somewhat more pessimistic reason for the “where else” question’s predominance in the FCPA context would involve the issues that you’ve written about extensively in your papers and on your blog. Namely, a case law scarcity that causes risk-averse corporate defendants to cooperate regardless of the cost, and government agencies who have the mostly unchecked power (and possibly incentive) to exploit a corporation’s position to cobble together the largest possible fine. Overall, I expect both of these possible frameworks are at play.
DOJ or SEC asks the “where else” question in the absence of any meaningful check or judicial oversight. What is the remedy?
If I had been asked a year ago whether there was any meaningful check or judicial oversight with respect to the “where else” question, I would almost certainly have replied that there was not. Given the government’s assorted setbacks in the past year, however — the overturned Lindsay Manufacturing convictions, the O’Shea acquittal, the Africa sting case acquittals and mistrial — it is possible that a potential check is emerging. Until recently, the government’s near-perfect track record has given them the power to unilaterally dictate the terms of a defendant’s “voluntary” cooperation. It stands to reason that once defendants have some hope of a positive outcome at trial, the parties’ negotiating positions will not be so lopsided and a company will be able to resist, without fear of reprisal, an unreasonable demand to expand the investigation.
Another possible remedy, although perhaps a more improbable one, would be a revision not to the FCPA itself, but instead to the agencies’ internal guidelines. This revision would make clear that cooperation credit should not be withheld in situations where the company declines to expand its investigation in the absence of some specific and articulable facts pointing to wrongdoing there. This “reasonable suspicion” language is, of course, less demanding than the probable cause required for a warrant, but it is at least enough to prevent the blind fishing expeditions that happen now.
Both of the above scenarios will likely require another high-profile setback or two, but as we’ve seen over the past year, those are certainly not out of the question anymore.
Where Should The Money Go?
It is a thorny question with no easy answer. Where should the money go when a company resolves an FCPA enforcement action? It was addressed last year in connection with the Alcatel-Lucent enforcement action. (See here, and here for prior posts). Two recent events raise the issue again.
*****
Earlier this month, it was announced (here) that the U.K. “Serious Fraud Office, the Government of Tanzania, BAE Systems and the Department for International Development (DFID) … signed a Memorandum of Understanding enabling the payment of £29.5 million [$47 million USD] plus accrued interest to be paid by BAE Systems for educational projects in Tanzania.” As noted in the release, “textbooks will be purchased for all 16,000 primary schools in the country and as a result 8.3 million children will benefit” in subjects such as Kiswahli, English, Maths and Science. The release further notes that funds will also be used to “provide all 175,000 primary school teachers with teachers’ guides, syllabi and syllabi guides to help improve their teaching skills” as well as the purchase of desks. In the release, SFO Director Richard Alderman stated as follows. “This agreement is a first for the SFO which piloted it through the UK legal system. It provides a satisfactory outcome for all concerned but most of all for the Tanzanian people and I am personally delighted that SFO staff were able to achieve this.”
In this release, BAE stated as follows. “We are glad to finally be able to make the payment to the Government of Tanzania and bring this matter to a close. We are grateful to DFID for their work in agreeing the Memorandum of Understanding with the Government of Tanzania.” The BAE release states that the “payment follows the settlement agreed between BAE Systems and the SFO.” For a prior post on the settlement, see here.
To be sure, BAE’s payment to Tanzania, and the role of the SFO in brokering the payment, feels good. What is not to like about children receiving textbooks?
However, the feel good nature of this most recent BAE development should not mask the significant problems with the BAE enforcement action (on both sides of the Atlantic). As noted in this prior post, even the U.K. judge who accepted the SFO-BAE plea agreement called it “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge.”
And let’s not forgot how this story began. In 2004, the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward. However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case. In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicted a few days earlier in connection with bribe payments in “certain Eastern and Central European countries” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also noted that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.” For more on “BAE – Inside the SFO”, see this prior post.
In any event, at least some children in Tanzania received some textbooks from BAE as a result.
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As previously highlighted on the FCPA Blog (here), Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) recently wrote a letter (here) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross) regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.” As the letter notes, “currently such proceeds, once paid, are retained by the U.S. government.”
In summary, the SERAP letter requests “that the Enforcement Division establish a case-by-case policy or process that would enable foreign governmental entities that have been victims of corruptly-procured contracts to apply for, subject to appropriate anti-corruption safeguards, some or all of the civil penalty and disgorgement proceeds that would eventually be paid by companies alleged to have violated the U.S. Foreign Corrupt Practices Act.” SERAP also suggests that “civil society groups in the home country, or U.S. non-profit organizations serving that country, be eligible within a short time-period to apply for such proceeds as well, or instead, for use for ‘public benefits projects’ in the affected foreign country, again subject to anti-corruption safeguards.”
The SERAP letter notes, among other things, as follows. “… Many citizens in a country where such bribery has occurred might consider FCPA civil penalties and disgorgement payments imposed by the US, and then kept by the US, as in fact representing funds that rightfully ‘belong’ to the victim.”
Stating that “corruptly procured contracts ‘cost’ the victim at least 10 percent extra” the SERAP letter says that “this figure ought to be a presumed measure of possible funds available for third-party application in the context of a civil FCPA settlement, particularly since the Enforcement Division typically settles an investigation before extensive evidence of damages, as opposed to liability, is placed in the public realm.”
The specific SERAP proposal is as follows. “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity. Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions. In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.
The SERAP letter raises some interesting issues regarding alleged victims of FCPA enforcement actions. The SERAP letter also raises some interesting questions, including the following.
If the SEC would be required to relinquish a certain portion of money recovered in an FCPA enforcement action, what impact would this have on FCPA enforcement? Would the SEC be less aggressive in bringing enforcement actions or perhaps more aggressive because more enforcement actions would be needed to sustain the current FCPA “revenue stream”? For instance, 10% of SEC FCPA “revenue” in 2011 was approximately $15 million, in 2010 approximately $53 million.
The SERAP proposal appears to assume that all FCPA enforcement actions involve foreign government procurement. This is not the case. Approximately 50% of recent FCPA enforcement actions (i.e. in the past five years) do not involve foreign government procurement, but rather issues relating to foreign taxes, customs duties, or foreign licenses, permits, certifications and the like. Is the victim analysis the same in these FCPA enforcement actions compared to foreign government procurement enforcement actions?
Are individuals or organizations located in the country giving rise to the FCPA enforcement action really the most direct victims of the conduct at issue? In the procurement context, what about a competitor who may have lost out on the foreign business because it was unwilling to make an improper payment? With victim issues attracting new attention, should an FCPA private right of action receive new attention?
Last, but certainly not least, companies settling SEC FCPA enforcement actions are allowed to settle without admitting or denying the SEC’s allegations. Even the SEC itself has stated that this settlement device often leads to settlements that “do not necessarily reflect the triumph of one party’s position over the other.” Given this dynamic, would SERAP’s proposal lead to undeserved “windfalls” for civil society organizations? [In this prior post, I asked the same question as to Dodd-Frank Act whistleblowers.]
The FCPA: What Can & Should Be Done To It?
The Dow Jones Global Compliance Symposium Conference is next Tuesday and Wednesday in Washington D.C. (see here for program details). I am pleased to be joining Michael Mukasey (former U.S. Attorney General and currently at Debevoise & Plimpton – see here) and Mark Mendelsohn (former DOJ FCPA unit chief and currently at Paul Weiss – see here) in the concluding panel of the conference titled “The FCPA: What Can & Should Be Done To It?” moderated by Dionne Searcey of the Wall Street Journal.
The panel should be a lively event. I testified at the November 2010 Senate FCPA hearing (see here for my prepared statement) and recently authored “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (see here); Mukasey testified, on behalf of the Chamber of Commerce, at the June 2011 House FCPA hearing (see here for his prepared statement); and Mendelsohn is described on his firm’s website “as the architect and key enforcement official of DOJ’s modern Foreign Corrupt Practices Act (FCPA) enforcement program.”
Several other panels at the Dow Jones Global Compliance Symposium will also focus on the FCPA and U.K. Bribery Act, and/or touch upon bribery and corruption issues in Africa, Russia, and China.
FCPA Professor readers interested in attending the Global Compliance Symposium can receive a $400 discount from the conference fee by calling 212-416-2951.