“Carbon Copy” Prosecutions: A Growing Anticorruption Phenomenon In A Shrinking World
Andrew Boutros and Markus Funk recently released (here) their article “Carbon Copy” Prosecutions: A Growing Anticorruption Phenomenon in a Shrinking World” published in The University of Chicago Legal Forum. Boutros is an Assistant U.S. Attorney in the N.D. of Illinois and Lecturer in Law at the University of Chicago Law School (who co-wrote the article in his personal capacity) and Funk is a partner at Perkins Coie. Boutros and Funk are Co-Chair’s of the ABA’s Global Anti-Corruption Task Force.
In summary, the authors, using recent enforcement actions, note as follows.
“[I]f a corporation reaches a negotiated resolution with US authorities on international bribery-related charges—whether through a non-prosecution agreement, a deferred prosecution agreement, or a guilty plea—there is a bona fide risk that other countries will initiate prosecutions based on the same facts as, and admissions arising out of, the US investigation and resolution. [I]f an individual corporate officer is even tangentially involved or implicated in a US-negotiated resolution, that corporate officer—even if not named at all in the resolution—faces potential criminal charges overseas. The officer, therefore, has a strong incentive to ensure that the resolution either does not name him or her or describes the officer’s conduct in the most positive light (or at least neutrally). [The] Article examines this growing—but still largely under-recognized—international phenomenon of “carbon copy” prosecutions.”
What is a carbon copy prosecution? The authors define the term to mean “successive, duplicative prosecutions by multiple sovereigns for conduct transgressing the laws of several nations, but arising out of the same common nucleus of operative facts.”
The article then “details the myriad cost-benefit considerations that companies might weigh when deciding whether to make voluntary front-end disclosures to foreign authorities concurrently with their disclosures of potential FCPA violations to U.S. officials.” Among the considerations the authors identify is 5th Amendment double jeopardy issues and the collateral estoppel effect of U.S. resolutions on international enforcement actions and vice versa.
In addition, the authors note as follows. “The net effect of [DOJ and SEC FCPA settlement policies] is that when a company enters into a negotiated resolution with the DOJ – particularly in those cases with parallel SEC enforcement actions – it is essentially powerless to defend against, much less deny, the factual basis on which the resolution is based. This all but ensures that a company that settles with the DOJ – or both the DOJ and SEC in parallel proceedings – will have little or no choice but to settle with foreign authorities, should such authorities choose to exercise jurisdiction and enforce their corollary anticorruption laws.”
Although the notion of carbon copy prosecutions have been known for some time, Boutros and Funk’s article is an important contribution to Foreign Corrupt Practices Act literature and provides an analytical scrutiny to this observable trend. For this reason, the article should find a place on your reading stack.
Friday Roundup
Strange things tend to happen on Halloween, does your foreign local counsel present FCPA risk, insights from the boardroom, checking in on the Wynn-Okada battle royale, tobacco companies in the Middle East, a hat tip, and unmasked. It’s all here in the Friday roundup.
Halloween Hearing Date
Strange things tend to happen on Halloween. Thus, it is fitting that U.S. District Court Judge Keith Ellison (S.D. Tex.) has set October 31st as the hearing date for the motion to dismiss in the SECs FCPA enforcement action against Mark Jackson and James Ruehlen. See here for a prior post linking to the briefs and arguments. How strange is this? It is believed that the last time the SEC stood before a federal court judge to defend its FCPA enforcement theories was in 2002. As noted in this previous post, the SEC lost that case.
Foreign Counsel Risk
A company engages foreign local counsel to help it accomplish a business objective. The company pays thousands of dollars in legal bills to the counsel without probably giving much thought to Foreign Corrupt Practices Act risk.
In this recent article in the Duquesne Business Law Journal, Zachary Cregar (Liberty Mutual Insurance Group, Senior Litigation Auditor) sets forth the need to include foreign legal counsel due diligence and audits within an FCPA compliance program.
Cregar concludes the article as follows. “Foreign outside counsel supervision and legal bill auditing is not only a successful method of detecting corrupt payments, but it pays dividends beyond the realm of FCPA compliance. Cost savings from discovered billing irregularities will likely justify the cost of the program itself. While companies’ bottom lines are impacted by over-billing or fraudulent legal invoices, the financial stakes grow ever higher within the purview of the FCPA. Corporate anti-corruption and due diligence policies may be helpful in reducing hefty FCPA violation penalties after the fact. However, only vigorous, real-time auditing and detection of corrupt payments at the onset will avoid foreign corruption from even occurring.”
Current instances of FCPA scrutiny which involve, at least in part, questions regarding foreign legal counsel include Wal-Mart’s conduct in Mexico and Las Vegas Sands conduct in Macau.
Insights From the Boardroom
PwC’s Annual Corporate Director Survey, “Insights from the Boardroom 2012,” is available for download here. It contains a few FCPA / bribery / corruption related statistics.
Which of the following has your company done in response to the 2011 SEC whistleblower rules? 43% of respondents indicated that their companies have expanded the role of internal audit for bribery and corruption compliance and 11% of respondents indicated that their companies scheduled more board discussions regarding bribery and corruption.
I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” here that, among other reasons, the FCPA should be amended to include a compliance defense because such a defense will better incentivize corporate compliance and thus reduce improper conduct. I state that organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better and that organizations currently without stand-alone FCPA policies and procedures (and statistics indicate there are many) will be incentivized to spend finite resources to implement compliance policies and procedures.
Imagine the FCPA is amended in 2012 to include a compliance defense. What would the numbers in PwC’s 2013 survey look like if respondents asked “which of the following has your company done in response to the FCPA compliance defense amendment.” I can only speculate as to the exact numbers, but I am confident in saying that more than 43% of respondents would indicate that their companies expanded the role of internal audit for bribery and corruption compliance and that more than 11% of respondents would indicate that their companies scheduled more board discussions regarding bribery and corruption.
Another question in the survey was the following. Indicate if you would like your board to devote more time in the upcoming year to considering the following matters? As to bribery and corruption concerns, 2% said yes, much more time and focus than in the past; 20% said yes, but not a great increase from the past; 75% said no, a change is unnecessary; and 3% said no, decrease our time and focus— we spend too much time on this.
The PwC survery occurred this past summer and was based on responses of 860 public company directors (70% of whom serve on the board of companies with more than $1 billion in annual revenue).
Wynn-Okada
As noted in this previous summary post, it is one of the strangest instances of FCPA scrutiny one can imagine. A corporate board member accuses the company of conduct that could implicate the FCPA, which then causes the SEC to open an inquiry, which then results in the company accusing the board member of separate and distinct conduct that could implicate the FCPA.
Its the Wynn-Okada battle royale.
Earlier this week Kazuo Okada (President of Aruze USA, Inc. – Aruze is the largest stockholder of Wynn Resorts with current ownership of approximately 20% of the outstanding shares) released this letter to Wynn’s shareholders concerning various corporate governance changes.
The letter states, under the heading “Suspicious $135 million donation to the University of Macau Development Foundation” as follows.
“In April 2011, the Board met, discussed, and approved a pledge by Wynn Macau, Limited (“Wynn Macau”), a subsidiary of the Company, to donate HK$1 billion (roughly $135 million) to the University of Macau Development Foundation, at a time when Wynn Macau was seeking local government approval to develop a third casino. This donation is suspicious for a number of reasons, including its enormous size, the fact that the 10-year term of the pledge matches precisely the length of the casino license Wynn Resorts was seeking, and the fact that the lead trustee of the University of Macau Development Foundation also has a position in the Macau government which enables him to influence the issuance of gaming licenses. Mr. Okada questioned and objected to the donation and was ultimately the sole director to vote against it. Mr. Okada has noted that “I am at a complete loss as to the business justification for the donation, other than that it was an attempt to curry favor with those that have ultimate authority for issuing gaming licenses.” Following the April 2011 board meeting, pursuant to his rights as a director of the Company and in furtherance of his fiduciary duties to stockholders of the Company, Mr. Okada, sought to further investigate the Wynn Macau donation and requested additional information from Wynn Resorts concerning the donation and related matters. When the Company refused to provide the information, Mr. Okada took legal action and was vindicated by a court order requiring Wynn Resorts to comply with Mr. Okada’s reasonable requests. As Mr. Okada feared, the questionable Wynn Macau donation has already spawned at least four stockholder lawsuits against the Company and investigations by both the United States Securities and Exchange Commission (for possible violations of law including the Foreign Corrupt Practices Act) and the Nevada Gaming Board. Not only is this enormous financial commitment a drain on the Company’s coffers, but now Wynn Resorts stockholders will be saddled with the added costs associated with responding to the regulatory investigations and lawsuits. If the results of these investigations and lawsuits include the development of facts regarding legally questionable practices by the Company, stockholders will be at still further risk.”
In response, Wynn Resorts issued this statement which states as follows. ““Aruze has not been a stockholder of Wynn Resorts, Limited since February 18, 2012 when its shares were redeemed by the Wynn Board after a lengthy, third-party investigation uncovered prima facie evidence of improper conduct under the Foreign Corrupt Practices Act by Mr. Okada, Universal Entertainment and Aruze in their dealings with Philippine officials. This most recent filing is a regrettable attempt to divert attention from the issues facing Mr. Okada and Aruze. Given the fact that Aruze was ejected seven months ago as a Wynn shareholder based on conduct unacceptable for a gaming licensee, it has absolutely no rights as a shareholder to nominate directors and its invalid nominations have been rejected on this basis.”
Tobacco Companies in the Middle East
An interesting article (here) from the Saudi Gazette.
The article states as follows. “In most countries, public smoking is banned. Taxes on the sale of cigarettes and other tobacco related products are high, and labeling on cigarette packs is often very graphic and clear: Smoking kills! From the United States to Australia, governments are clamping down on tobacco companies with regulations to throttle consumption and it seems to be working. And so, tobacco companies have to seek other markets. The Middle East is fertile ground as anti-smoking legislation is weak at best, and a fast growing birthrate means a higher number of potential smokers. As a result, big tobacco companies quickly established regional headquarters for the GCC market in the UAE and set to work.” The article then describes how a source tells of companies reaching out to “area [government] officials to lessen any impact on tobacco sales.”
As noted in this prior post, in August 2010, U.S. tobacco companies Alliance One International and Universal Corporation resolved FCPA enforcement actions.
Hat Tip
A hat tip to Christopher Matthews, Samuel Rubenfeld and others associated with the Wall Street Journal’s Corruption Currents page on their two-year anniversary. Corruption Currents (here) is a daily read for me and should be for anyone interested in FCPA and related topics.
Who is that Masked Man?
A small town Midwesterner who saw the world and became interested in a law is who. Thanks to Tom Fox (FCPA Compliance and Ethics Blog) for the opportunity to tell my story. See here for the Q&A.
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A good weekend to all.
Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure
I am pleased to share my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” recently published in the Bloomberg BNA White Collar Crime Report.
The abstract is as follows.
High-profile instances of Foreign Corrupt Practices Act scrutiny focus attention on the law and its enforcement across a broad spectrum. In spring 2012, arguably the most high-profile instance of scrutiny in the FCPA’s 35-year history occurred as Wal-Mart’s alleged conduct in Mexico dominated the news cycle. Wal-Mart’s scrutiny has been instructive in many ways at a key point in time for the FCPA. The article uses Wal-Mart’s potential FCPA exposure as a prism to view the current FCPA enforcement environment.
Among the issues discussed in the article are the following: whether Congress intended in passing the FCPA to capture the type of payments at issue in Wal-Mart; what caselaw instructs as to the payments; whether what Congress intended or what courts have concluded even matters; the impact of Wal-Mart’s scrutiny on the company as well as industry peers; and the politicization of Wal-Mart’s scrutiny and its impact on FCPA reform.
The complete article can be downloaded here.
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.