FCPA Reform Feast
If you enjoy the FCPA reform debate, there is much to feast upon in this post.
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ABA Global Anti-Corruption Task Force Co-Chair T. Markus Funk and his Perkins Coie colleague M. Bridget Minder recently authored “Bribery of Foreign Officials: The FCPA in 2011 and Beyond: Is Targeted FCPA Reform Really the “Wrong Thing at the Wrong Time”? in the Bloomberg Law Reports.
Funk and Minder’s article examines a wide array of questions that are described as analytical precursors to substantive FCPA reform, including whether: incremental domestic FCPA reform is really going to impact foreign anti-corruption efforts; foreign policy considerations advanced in favor of the FCPA status quo ante should, as a matter of good public policy and criminal law theory, stand in the way of improving the clarity of domestic legislation; the “Busting Bribery” authors’ criticisms of US Chamber of Commerce reform efforts fall short of the mark; there are sound public policy arguments that counsel in favor of reform.
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As noted in this release from Global Financial Integrity, yesterday “more than 30 civil society and business groups, including human rights and anticorruption organizations, sent a letter to every member of the U.S. House of Representatives and U.S. Senate expressing their opposition to any efforts to amend the world’s flagship anticorruption legislation …”. As noted in the release “the organizations stated in their correspondence that any narrowing of the law, which serves as the model for other international anticorruption conventions and foreign anticorruption laws, would have a negative effect on global commerce, human rights, and the standing of the U.S. in the world.”
Typical of the rhetoric defining the FCPA reform debate, the release states that FCPA reform proposals “could deliver a devastating blow to the fight against human rights abuses and corruption across the globe.”
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In other FCPA reform news, The Hill’s Congress Blog recently hosted (here) an op-ed by David Riker (Managing Director, Third Party Screening at Kroll Risk & Compliance Solutions). In the piece Riker targets the U.S. Chamber’s FCPA reform proposals (see here) and states as follows. “Invoking the rhetoric of a populist manifesto, the Chamber is trying to make the case that increased enforcement of the FCPA has had a chilling effect on US businesses, causing them to avoid doing deals abroad for fear of setting off a FCPA investigation. But while this sentiment sounds pro-America, it is actually quite the opposite. Beneath the flag-waving sentiment, the Chamber is essentially asking for the US government to look the other way on bribery of foreign officials. That sets a dangerous precedent for a way of doing business that does not favor US corporations.” Riker states that “the Chamber’s logic on amending the FCPA is akin to raising blood-alcohol limits to reduce the number of drunken driving cases.”
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My two cents. What is most striking about many of the opposition pieces written about FCPA reform is that while opponents of FCPA reform warn of a U.S. retreat on bribery and corruption issues should the FCPA be amended, opponents of FCPA reform fail to address the fact that an amended FCPA, or revisions to FCPA enforcement policy, would actually align the FCPA with many FCPA-like laws or enforcement policies of peer nations.
And with that … a good weekend to all.
“We Are Going To Be Drafting A Bill,” But When Will It Be Introduced?
On June 14, 2011, the House Judiciary Committee (Subcommittee on Crime, Terrorism, and Homeland Security) held an FCPA hearing. (See here for the prior post, here for the hearing transcript). During the hearing, Chairman James Sensenbrenner (R-WI) firmly stated “we are going to be drafting a [FCPA reform] bill.”
The force in which the statement was made (as well as the general tone of the hearing) gave the impression that a reform bill would soon follow the hearing. However, over six months has passed and the much anticipated reform bill has not been introduced.
Reasons for the delay could be many. Some have speculated (see here) that the DOJ’s November announcement of FCPA guidance in 2012 (see here for the prior post) stalled the FCPA reform bill on the theory that Congress is willing to let the DOJ issue its guidance before introducing a reform bill.
If that is the reason for delay of the FCPA reform bill, DOJ guidance is unlikely to quiet the growing chorus advocating for FCPA reform. As I observed in this prior post, DOJ’s promise of FCPA guidance in 2012 will not cure many of the issues that are being debated during this new era of FCPA enforcement. DOJ’s guidance is likely to be little more than a compilation in one document of information that is already in the public domain for those who know where to look. Moreover, what the FCPA needs is not guidance, but limited structural reforms (such as a compliance defense) as well as a change in DOJ policy (such as elimination of non-prosecution and deferred prosecution agreements).
Whenever an FCPA reform bill is introduced, and whatever its specifics provisions, FCPA reform in 2012 is far from a sure thing. The topic is a political hot potato, particularly during an election season, and history instructs that substantive FCPA reform can drag on for many years.
ABM Industries Discloses Merger Related Issue
One FCPA reform proposal is to amend the law to provide a period of repose following an acquisition. Championed by George Terwilliger (here – an FCPA practitioner at White & Case and former Deputy Attorney General) the idea, as Terwilliger explains in this piece “is that US companies, with notice to US enforcement authorities, would have a defined period after an acquisition in which to perform a rigorous FCPA compliance review of the acquired entity. If FCPA compliance issues were uncovered, the acquiring company would remediate them, and disclose both the existence of the problem and its remediation to the government. The acquiring company would be immune from civil or criminal enforcement as to matters uncovered during the review period, which could be on the order of 90 to 120 days.”
I was reminded of Terwilliger’s reform proposal when reading ABM Industries Inc. recent disclosure. Before getting to the disclosure, a bit of background. In December 2010, ABM Industries Inc. (a leading provider of facility services) announced its acquisition of The Linc Group LLC (“TLG”). (See here). ABM President and CEO Henrik Slisager described the acquisition as a “game changer” in that the transaction, among other things, would bring ABM “into the $70 billion government marketplace, where TLG brings broad experience and deep client relationships.”
According to the ABM, substantially all of its operations are conducted in the United States, but it does do business internationally through joint ventures. In ABM’s annual report filed last week (see here) the company disclosed as follows. “During October 2011, the Company began an internal investigation into matters relating to compliance with the U.S. Foreign Corrupt Practices Act and the Company’s internal policies in connection with services provided by a foreign entity affiliated with a Linc joint venture partner. Such services commenced prior to the Company’s acquisition of Linc. As a result of the investigation, the Company has caused Linc to terminate its association with the arrangement. In December 2011, the Company contacted the U.S. Department of Justice and the Securities and Exchange Commission to voluntarily disclose the results of its internal investigation to date. The Company cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, the Company does not believe that these matters will have a material adverse effect on its business, financial condition, results of operations or cash flows.”
New York City Bar Association Recommends Reassessment Of The FCPA – “While The Task Is Daunting And The Discomfort Of Admitting That The Current Approach Has Significant Flaws Is Unavoidable, That Does Not Mean That Action Should Not Be Taken”
Last Friday, the International Business Transactions Committee of the Association of the Bar of the City of New York released (here) a report titled “The FCPA and its Impact on International Business Transactions – Should Anything Be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption?”
The report explores the FCPA and FCPA enforcement, in part, from an economic perspective and states as follows. “Companies that are subject to the FCPA—including all U.S. companies and non-U.S. companies that have equity securities listed on a U.S. exchange—have become increasingly wary of purchasing businesses that have not operated under the Act for fear of acquiring very costly liabilities. Similarly, companies that are not subject to the FCPA express substantial reservations about engaging in transactions that would bring them under the Act’s jurisdiction, including listing their equity securities on a U.S. exchange through an IPO or capital raising transaction or by acquiring a U.S. company in a stock-for-stock merger or exchange offer. The effects of the FCPA on transactions are manifested principally in (1) transaction costs (e.g., increased due diligence efforts), (2) post-transaction integration costs (e.g., adding appropriate FCPA compliance procedures to an acquired company or across a company that was not previously subject to the FCPA), (3) the increased risk of exposure to an enforcement action and related costs (e.g., internal investigations and fines) and (4) as a result of the foregoing and other effects of the FCPA, the nonpursuit or abandonment of transactions that otherwise would have been completed. These FCPA-driven costs and considerations put companies covered by the FCPA (mostly U.S. companies and large, mature European companies) in a distinctively different regulatory position as compared to their non-covered competitors. In our experience, and in particular, recently, this asymmetry in regulation has had significant direct and indirect effects on companies subject to the FCPA as well as knock-on effects on the U.S. markets more generally.”
Noting the rise in FCPA enforcement, including fine and penalty amounts, the report states as follows. “These developments raise various questions: Why has the FCPA become an increasingly important factor in international transactions? What effect is the FCPA having on the various participants in the international transactions arena, including governments, companies subject to the FCPA and companies not subject to the FCPA? What changes, if any, should be made to the U.S. approach to combating foreign corruption? This paper explores these questions and concludes with the findings that (1) the United States has pursued, and is currently pursuing, a virtually stand-alone approach to deterring foreign corruption (at least in terms of enforcement activity and the significance of fines and other sanctions), (2) this approach places significant costs on companies that are subject to the FCPA as compared to their competitors that are not—i.e., there is a significant asymmetry in regulation and enforcement—and (3) if these circumstances are unlikely to change (e.g., through a substantial portion of other relevant countries adopting similar enforcement postures), the United States should reevaluate its approach to the problem of foreign corruption.”
The report explores “three elements to the current approach to FCPA enforcement that are helpful in understanding the costs, risks and other constraints that the FCPA places on U.S. regulated companies vis-a-vis their non-U.S. regulated competitors: (1) the U.S. enforcement agencies’ expansive reading of the scope of the FCPA (both in terms of conduct and jurisdiction), (2) the limited checks on FCPA enforcement (whether judicial or otherwise) and (3) the massive size of the potential direct costs (e.g., fines, sanctions and defense and compliance costs) and indirect costs (e.g., reputational effects and “debarment” from current or future government business) of avoiding or defending an actual or threatened enforcement action.”
A section of the report explores the “asymmetric approach to enforcement” (between the U.S. and other countries) on both private and public actors by using game theory and the “prisoner’s dilemma.” For example, the report states that “if multiple countries ‘agree’ to craft and enforce anti-corruption statutes and some countries make it clear that they will enforce the laws zealously (‘the enforcers’), there are significant incentives for other countries (the ‘non-enforcers’) not to implement or not to enforce their anti-corruption laws.” Such an analysis, according to the report, invites a fundamental question – “why does the United States, almost alone, impose the costs of being an ‘enforcer’ on U.S. firms and the non-U.S. firms that choose to register their securities in the U.S.?”
As to changes to the FCPA, the report details the U.S. Chamber’s FCPA reform proposals as articulated by former Attorney General Michael Mukasey in Congressional testimony and states that Mukasey’s suggestions “would be very beneficial, but they may not go far enough” because “the limited amount of judicial oversight or other checks on enforcement or any mechanism for ensuring a convergence of international enforcement efforts would continue to be problematic.”
The report ends with a section titled “a call for analysis and action.” The section “is not offered in praise of a ‘lighter touch’ on bribery” nor does the section “advocate any specific policy proposal.” Rather the section states as follows. “(1) the competitive landscape of the 21st century global economy warrants the reevaluation of the United States’ strategy in fighting foreign corruption, (2) the current anti-bribery regime—which tends to place disproportionate burdens on U.S. regulated companies in international transactions and incentivizes other countries to take a “lighter touch” —is causing lasting harm to the competitiveness of U.S. regulated companies and the U.S. capital markets and (3) even putting aside the disproportionate costs borne by U.S. regulated companies, the continued unilateral and zealous enforcement of the FCPA by the United States may not be the most effective means to combat corruption globally—in fact, in some circumstances it may exacerbate the problem of overseas corruption.”
Switching from the “analytical to the proactive,” the report discusses ways in which the U.S. could address the enforcement asymmetry. Specifically, the report states that “the United States could intensify the regulatory scrutiny of firms not currently subject to the FCPA through various means, including (1) convincing a substantial number of key countries to enact and enforce regimes that are as rigorous and punitive as the FCPA, or (2) unilaterally expanding U.S. jurisdiction to cover as many companies as practicable.” However, the report states that these options are either difficult, not practicable or not possible.
“Alternatively,” the report states that “the United States could take steps to reduce the regulatory costs for firms currently subject to the FCPA without undermining any of the Act’s fundamental objectives. For example, the U.S.
could decide to (1) dial back the scope of FCPA enforcement with respect to companies and focus more on individuals engaged in foreign corruption, (2) encourage other countries to do the same and (3) agree with other countries to cooperate on international matters such as information sharing, investigations, and extradition.” Yet, the report acknowledges the “political difficulties” as to these alternatives.
The report then states as follows. “While the task is daunting and the discomfort of admitting that the current approach has significant flaws is unavoidable, that does not mean that action should not be taken. Any such action should begin with an assessment of the current circumstances and a recognition that, in today’s global economy, meaningful international alignment of the world’s leading economic powers is a necessary condition for combating foreign bribery.”
The report concludes as follows. “While accepting and fully embracing the ultimate policy goal of the FCPA—the prevention of corruption worldwide—the purpose of this article is to call for an assessment of (1) the ability of the United States to achieve that goal unilaterally and (2) the direct and indirect costs of continuing such an effort. This paper has identified several factors, including the incentives of the various participants and the decrease in the relative importance of the U.S.-regulated companies in the international marketplace, that strongly and clearly suggest that the United States cannot continue to do it alone. The costs of pursuing such an approach are substantial and, in certain cases, irreversible and, consequently, a realignment of the U.S. position in the global anti-bribery enforcement regime is necessary.”
The “Overseas Contractor Reform Act” … It’s Still Impotent
Another week, another FCPA reform bill (and again, no it’s not that bill). See here for last week’s post.
Representative Peter Welch (D-VT) once again demonstrated that he has very little understanding of how the Foreign Corrupt Practices Act is actually enforced, or if he does, that he is more interested in creating the illusion that he is addressing an issue. See here for the press release.
As reported by Samuel Rubenfeld on the Wall Street Journal Corruption Currents page (see here), yesterday Welch introduced the “Overseas Contractor Reform Act.” The bill (here) is a revised version of the impotent legislation Welch previously introduced in May 2010 – see this prior post, a bill that unanimously passed the House in September 2010 – see this prior post.
The bill Welch introduced yesterday, along with Representative Jason Chaffetz (R-Utah), states that “it is the policy of the United States Government that no Government contracts or grants should be awarded to individuals or companies who violate the FCPA after the date of the enactment of this Act.”
This is a sound policy statement. As I discussed in my November 2010 Senate testimony (here) a debarment penalty for egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation represents sound public policy.
However, the problem with the bill, as with the previous bill, is its trigger for debarment – “any person found to be in violation of the [FCPA – defined to include only the FCPA’s antibribery provisions] shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after the judgment finding such person to be in violation becomes final.”
As silly as it may sound, in this “new era” of FCPA enforcement or this “facade era” of FCPA enforcement if you prefer (see here) few companies are actually ever “found to be in violation of the FCPA.”
The reason is because of how the DOJ is allowed to enforce the FCPA and it is two-fold. First, most corporate FCPA enforcement actions are resolved through a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA). These resolution vehicles do not result in findings of FCPA violations or judgments of FCPA violations. Second, debarment under the bill is triggered only for violations of the FCPA’s anti-bribery provisions. In the most egregious cases of corporate bribery the DOJ rarely charges FCPA anti-bribery offenses, but rather FCPA books and records or internal controls violations or other non-FCPA offenses (see Siemens, Daimler, BAE, etc.). Why? For the stated reason (see here) of avoiding debarment considerations – both in the U.S. and elsewhere.
Thus, Welch’s new bill again represents impotent legislation despite the fact that there was extensive commentary and analysis of the previous bill’s shortcomings for the above reasons.
While substantively similar to the prior bill, the bill introduced yesterday is different in the following ways: the new bill contains a less restrictive definition of “person,” the new bill defines FCPA to include all three prongs of the statute (78dd-1, 78dd-2, and 78dd-3) and, most important, the new bill has an “exemption for self-reported violations” which specifically states “upon a determination by the head of a Federal agency that a person has reported a violation of the [FCPA] voluntarily to the Federal Government, the head of the agency may exempt the person from the applicability of this Act.”
As noted in this prior post, the DOJ is opposed to “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.”