Constructive Public-Private Partnerships to Prevent Bribery Solicitation: The High Level Reporting Mechanism
Note: Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama. See here for a live feed of the States Parties’ discussions.
This post regarding the proceedings is by Jessica Dwinell.
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To date, most governmental anti-bribery efforts focus on either the offering or giving of bribes. However, on Monday afternoon, members of governance institutions and the business community discussed an innovative approach to prevent demand-side bribery solicitation by public officials: the “High Level Reporting Mechanism” (HLRM). The Basil Institute on Governance and the OECD developed the HLRM concept—a mechanism dependent on public-private partnerships—in response to company concerns regarding the extent of bribery solicitation and extortion, and their fear of retaliation should they report illicit public official activity. According to the HLRM Concept Brief submitted by the OECD and Basil Institute on Governance, the HLRM seeks to mitigate such concerns by “allow[ing] companies faced with bribery solicitation to report these to a dedicated and high-level institution that is tasked with responding swiftly and in a non-bureaucratic manner to reports.”
Successful implementation of an HLRM depends on several factors, including access to high level reporting, institutional independence, ability of the institution to address concerns quickly, country-specific procedures, and, perhaps most importantly, public and corporate trust in the host institution. However, as panelists Rafael Merchan (Secretary for Transparency in the Office of the President of Colombia) and Enery Quinones, (Chief Compliance Officer of EBRD) underscored, HLRM implementation is not a cookie-cutter process and the mechanism procedures can vary greatly.
For instance, Mr. Merchan explained that prior to implementing the HLRM in the area of procurement, companies faced with bribery solicitation by Colombian officials had three choices: (1) seek a judicial remedy which could take four to five years to resolve and never adequately address corporate concerns; (2) pay the bribe and risk prosecution; or (3) refuse to invest in the country. To address this prisoner’s dilemma—one in which all companies would be better off should they collectively refuse bribery solicitations—Colombian officials proposed an HLRM. Specifically, the Colombian pilot program consists of a group of experts dependent on the Secretary for Transparency (thus providing high level access), yet independent from the agencies that make procurement decisions. Complaints of solicitation are sent directly to Mr. Merchan, who maintains confidentiality and prevents press leakages. In return, companies sign transparency pacts in which they agree to engage only in public procurement meetings, not to offer gifts to public servants and refrain from hiring public officials until two years after the completed transaction. Though the HLRM has yet to receive a complaint, the Colombian government has shown a clear political will to fight corruption and fifteen companies have voluntary signed the transparency pacts.
Ukraine’s proposed HLRM—designed in large part to address private sector concerns in an expedient manner—differs vastly and, as Ms. Quinones explained, its creation “has been a very difficult process.” When the Ukrainian government realized that it was struggling to attract foreign investors, and the European Bank for Reconstruction and Development (EBRD) considered withdrawing its investments entirely, Ukrainian officials had to listen to investor concerns. Thus began the process of detailing an HLRM completely independent of the government. Though such independence proved the “first stumbling block,” Ms. Quinones told government personnel, “businesses will not trust this [HLRM] process if [Ukrainian officials] are controlling it.”
As a result, the proposed mechanism would consist of a director, two deputies and staff members tasked with both receiving and resolving business complaints and publicly monitoring and reporting on the actions—and non-actions—of government agencies. These individuals would not serve as law enforcement, they would not investigate allegations and they would not act in a judicial capacity. Rather, they would focus on providing a “way for businesses to feel confident in bringing complaints,” and would offer the means for resolving bribery solicitation complaints in a timely and effective manner. For instance, rather than seek to blame an individual or assess liability in cases of customs bribery solicitation, Ms. Quinones explained that the HLRM would focus on helping companies delayed at customs for failure to pay a bribe seek release of their goods. Since private sector concerns, rather than State political will, drove the creation of the Ukrainian proposal, its aims focus first and foremost on addressing businesses’ immediate concerns.
The panelist’s business representatives generally supported implementation of HLRMs. Javier Lozada, (Vice President and Regional General Counsel of Philips Latin America) stressed that for business, “any reporting mechanism that can help level the playing field, . . . particularly in growth markets . . . is more than welcome.” Dominique Lamoureux (Vice President of Ethics and Corporate Responsibility of Thalès) likewise recognized that you “need two to tango” and that businesses appreciate the HLRM concept.
Nevertheless, both individuals identified potential obstacles from a business perspective. First, they underscored that it may take considerable time for companies to fully trust that filing a complaint in accordance with the HLRM will not provoke retaliatory action. Second, the HLRM’s failure to offer—or protect—confidentiality in reporting mechanisms may dissuade companies from coming forward. And third, companies may fear that competitors who have lost a tender will simply manipulate the system to delay the procurement process.
How Colombian and Ukrainian officials will react when the first complaint is filed remains to be seen and the mandates of the HLRMs will have to clearly outline measures—if any—intended to protect confidentiality and prevent manipulation. Yet, as Mr. Merchan underscored, the process to combat corruption and discourage bribe solicitations will move forward on a “trial and error” basis. Though the HLRM may not be the solution, it is at the very least an additional piece of the puzzle.
The Anti-Corruption Role Of Global Banks
Note: Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama. See here for a live feed of the States Parties’ discussions.
This post regarding the proceedings is by Akane Tsuruta.
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Once a man walked into Barclays with $8 million in cash. The bank called law enforcement, the man was arrested, and the money was returned to the government from which it was corruptly obtained. That’s an easy case.
Yesterday, the British Bankers’ Association presented on how banks can deal with harder cases, specifically when Politically Exposed Persons (PEPs), or high profile public officials, try to bank in the UK. The heart of the recommendation was enhanced due diligence and monitoring.
Banks will conduct enhanced due diligence on PEPs seeking their services based on several indicators of the risk of corruption, though there may be different levels of due diligence. Banks may consider the PEP’s country and culture; for example, the attitude toward corruption Transparency International’s Corruption Perceptions Index, and whether the country has signed the UNCAC. Banks may examine the nature of the PEP’s public position: the degree of power and if the PEP is involved in areas or industries that are particularly vulnerable to corruption. Banks may also read media stories and reports of misconduct to assess the PEP’s reputation.
After this screening, the bank may turn away the customer or may continue to monitor the PEP’s transactions to look for red flags of corruption (banking in cash, for example, or mixing personal and business funds). PEP transactions are profiled by reference to peer PEPs in order to detect anomalous transactions. Banks will also watch for “trigger events” in the news that indicate corrupt dealings.
If the bank suspects a PEP of banking with ill-gotten gains, the bank will report the PEP to law enforcement. In fact, if a bank turns someone away based on this risk assessment, Stephen Foster, Director of Anti-Money Laundering at Barclays Financial Crime Compliance, explained that UK law requires the bank to notify the authorities. The bank will then try to return the money to the country in cooperation with law enforcement and the country’s government.
Banks undertake this enhanced risk assessment, due diligence, and monitoring for their own benefit, too, said Susan Wright, HSBC Group Head of FCC External Relations, HSBC Holdings. Banks must manage their “reputational risk,” or the risk that they will be seen as a place that allows illicit funds. As Foster emphasized, “We don’t want criminal money in our bank. We don’t want corrupt funds.”
But there are other factors to consider, such as to whom to return the funds, the best level of risk, and the effect on economic development. It may not always clear whether or to whom to return ill-gotten funds. What happens when a new government comes into power, and asks for the return of funds on behalf of its country? How do you know who has the authority to act on behalf of the central bank? Furthermore, banks must balance the obligation to close their vaults to corrupt funds while retaining PEP clients who are “genuinely wealthy.” This balance may affect economic development. For instance, legitimate enterprises in corrupt countries may be deemed too risky to bank in the UK, which would hinder growth in countries that need it.
Ultimately, the Director of Financial Crime (Sanctions and Bribery) of the British Bankers’ Association, Justine Walker, emphasized the need for banks to have proportionality between crime control, customers, and development.
Anti-Corruption World Gathers In Panama
Note: Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama. See here for a live feed of the States Parties’ discussions.
This first post regarding the proceedings is by Jessia Dwinell.
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For the next six days, the anti-corruption world will be centered in Panama City, Panama. Specifically, from November 24th to November 29th, 1,500 state party delegates representing approximately 130 nations and 450 representatives from civil society and intergovernmental organizations will participate in the Fifth Conference of the States Parties (CoSP) to the United Nations Convention against Corruption (UNCAC). Ninety-eight journalists are registered to cover the proceedings.
The UN General Assembly adopted the UNCAC in October 2003, an international anti-corruption instrument now ratified by 167 state parties. When first adopted, the UNCAC provided the first global framework aimed at harmonizing anti-corruption measures across borders. Acknowledging the importance of both preventive and punitive measures, the General Assembly included provisions requiring the criminalization of corruption in domestic laws, asset forfeiture, mutual legal assistance and the provision of technical assistance and training to personnel responsible for combating corruption. Participants in the Fifth CoSP will seek to improve the capacity and cooperation between States Parties, strengthen asset recovery mechanisms and review the current implementation of the UNCAC provisions.
In preparation for the Fifth CoSP’s official opening and the States Parties’ general remarks, members of the UNCAC Coalition, civil society organizations and the United Nations Office on Drugs and Crime (UNODC) met on Sunday, November 24 to discuss the role civil society will play at this year’s conference. Members from all of the organizations stressed the need for patience, cooperation between States Parties representatives and civil society and a coherent, focused agenda. For instance, John Sandage, Director of the Division for Treaty Affairs at the UNODC, stressed that combating corruption and strengthening the UNCAC is “a process, not a destination.” Vincent Lazatin, the UNCAC Coalition Chair, mirrored this sentiment when he acknowledged that “these things [changes] are glacial” and called for patience.
The UNODC, an organization that according to Mr. Sandage, “helps civil society participate in States who welcome their participation,” often works with Transparency International to organize civil society training sessions. In preparation for the week’s proceedings, Mirella Dummar-Frahi, the Civil Affairs Officer and Team Leader, Civil Society Team of the UNODC advised civil society representatives, “[i]n normal life, there is the right way and the wrong way, and then there is the UN way. And the UN way is to build consensus.” Mr. Lazatin further underscored that it is often difficult for civil society organizations to find the boundaries without overstepping them. Patience, once more, appeared to be the solution.
As the proceedings commence tomorrow, the States Parties will debate draft resolutions, seek stronger guidelines on what the UNCAC requires in the realm of criminalization and enforcement and push for mandatory access to information laws. Civil society members, likewise, will advance key initiatives—such as to increase transparency, protect whistleblowers and enact measures to better return fruits of corruption to the victims—all measures which fall within the framework and the text of the current Convention. Though only time will tell, hopefully the Fifth CoSP will lead to the productive consensus building that defines the “UN way.”
The Equity Facade Of SEC Disgorgement
A guest post today by Russ Ryan, a former Assistant Director of the SEC’s Division of Enforcement, who has spent the last ten years as a partner in the Washington, DC office of King & Spalding where he represents clients in FCPA and other SEC investigations.
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This post concerns my article “The Equity Facade of SEC Disgorgement” (a title I readily admit was inspired and partially borrowed from Professor Koehler’s article “The Facade of FCPA Enforcement“) recently published in the online edition of the Harvard Business Law Review.
As most FCPA practitioners know, it is now common for the SEC to demand disgorgement of tainted profits in FCPA enforcement actions (for instance, as noted in this FCPA Professor post, 86% of SEC FCPA settlement amounts in 2012 consisted of disgorgement and prejudgment interest). In parallel SEC and DOJ resolutions involving issuer defendants, it is often the case that disgorgement is ordered in the civil SEC case while any fines and penalties are paid in the DOJ criminal case. Of course, the SEC also seeks disgorgement in many kinds of other cases involving tainted profits, not just FCPA cases, and the prevailing truism is that this is a remedy in equity. My article suggests this truism is actually a fallacy in many SEC cases, particularly those where the defendant does not, for whatever reason, still actually possess or control the tainted profits when the court orders them disgorged.
The issue is most likely to arise in cases against individuals rather than companies, but it could arise in either. For instance, in the FCPA context, a potential scenario could include some or all of the following: foreign subsidiary in X country realizes profits from a tainted transaction, parent sells the subsidiary to another company which temporarily benefits from the tainted contract(s), but the subsidiary is ultimately shut down because it eventually starts losing money overall, and whatever profits were once realized have long since been redeployed elsewhere within both the prior owner and current owner.
In the individual context, a common non-FCPA scenario is insider trading cases against “tippers” who are ordered to disgorge not only their own profits (if any) but also those of their direct and indirect tippees. Another is the classic case of the defendant who quickly spends or squanders his ill-gotten gains from a violation before getting caught by the SEC. In the FCPA context, for example, suppose an issuer’s agent makes a big payday from a transaction tainted by his own bribery, but then promptly squanders all his loot on an unrelated deal that fails miserably before the bribes are discovered and prosecuted.
In all these cases, the named defendant holds none of the tainted profits when the government comes along, and thus is hardly in a position to “disgorge” anything. The SEC and the courts typically ignore this fact and order disgorgement anyway, but that renders the whole notion of disgorgement a misnomer, and in any event the remedy is simply not a remedy in equity. It is quintessentially a remedy at law – a personal obligation to pay a sum of money to a plaintiff based on a violation of law.
Anyone who doubts this should read Justice Scalia’s majority opinion in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), an ERISA case I confess I was not even aware of until a few years ago when first considering the issue that led to my article. The Great-West case dealt with restitution, but clearly distinguished between restitution in equity (where the defendant actually still possesses the funds ordered returned to the plaintiff) and restitution at law (where, as in Great-West, the defendant no longer possesses the funds and the court is simply ordering the defendant to pay a sum of money as a substitute for the actual tainted profits).
So what’s the big deal?
Plenty. The securities laws don’t authorize the SEC to seek, or courts to order, money damages or any other similar remedies at law, although of course the statutes do provide separately for punitive relief in the form of civil penalties. The only two sources of legal authority for disgorgement are that (1) it is included among the ancillary equitable remedies inherently available to the court once its equitable powers are invoked by the SEC’s request for an injunction and (2) it is authorized by a provision in the Sarbanes-Oxley Act – codified at Exchange Act section 21(d)(5) – saying the SEC can obtain any “equitable relief.” In either case, however, so-called “disgorgement” is authorized only if it is truly a form of equitable relief rather than legal relief. Removing the façade of equity from many SEC cases could also affect whether the putative disgorgement claim was subject to any statute of limitations or entitled the defendant to a jury trial (both of which protections are now typically denied to defendants facing SEC disgorgement claims).
If you are an SEC expert and thinking “but wait, can’t the SEC also order disgorgement in administrative proceedings without going to court at all?,” go to the head of the class.
You’re right, the SEC can indeed do so, because Congress has said so in the parts of the securities laws dealing with administrative proceedings. But think about it: If Congress can bestow this power to order disgorgement upon an independent Executive Branch administrative agency acting in its law enforcement role, without the involvement of an Article III court, doesn’t that undermine – if not completely negate – any premise that the remedy is inherently an equitable one, i.e., something typically ordered by an Article III court exercising its core judicial powers in equity?
If you’re still reading at this point, I encourage you to check out my entire article and see what you think.
The Erosion Of Corporate Criminal Liability
A guest post today from David Uhlmann (University of Michigan Law School) regarding his article “Deferred Prosecution and Non-Prosecution Agreements and the Erosion of Corporate Criminal Liability,” recently published by the Maryland Law Review.
Professor Uhlmann served for 17 years at the DOJ, the last seven as chief of the Environmental Crimes Section, where he was the top environmental crimes prosecutor in the country.
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Over the last two years, there has been significant media coverage of Securities and Exchange Commission settlements that contain no admissions of wrongdoing—sometimes referred to as “Neither Admit, Nor Deny” agreements—and the lack of criminal charges for the 2008 financial meltdown. Both are troubling developments given the role that Wall Street played in bringing about the Great Recession.
But there has been far less scrutiny of a disturbing shift in corporate prosecution policy that began in the Bush administration and has accelerated during the Obama administration: the increased use of deferred prosecution and non-prosecution agreements to address corporate wrongdoing. Under these agreements, corporations can avoid criminal charges if they pay large penalties to the government, improve their compliance programs, and cooperate in the investigation of individuals who engaged in wrongdoing. Yet plea agreements—the preferred approach prior to the last decade—offer the same benefits without making it appear that large corporations can buy their way out of criminal prosecution.
The recent announcement that SAC Capital Advisors will plead guilty to insider trading charges and pay a $1.2 billion criminal fine provides a stark contrast with the larger trend. From 2004 to 2012, the Justice Department entered 242 deferred prosecution and non-prosecution agreements with corporations, after entering just 26 in the preceding 12 years combined (half of which occurred from 2001 to 2004). The use of such agreements has become routine in the Justice Department’s Criminal Division, which now resolves most of its corporate criminal cases using what it calls “non-criminal alternatives” to prosecution. From 2010 to 2012, the Criminal Division entered more than twice as many deferred prosecution and non-prosecution agreements with corporations (46) as plea agreements (22).
Nor are these small cases involving technical violations of the law. The Justice Department agreed to a deferred prosecution with HSBC even though the bank was involved in nearly a trillion dollars of money laundering, much of it from drug trafficking. The Justice Department entered a non-prosecution agreement in the Upper Big Branch Mining disaster even though 29 miners died, and the Labor Department found that Massey, the company that owned the mine, committed over 300 violations of federal mine safety laws and kept a double-set of books to hide its misconduct from safety inspectors.
The failure to prosecute corporations like HSBC and Massey sends the wrong message about how our society views corporate misconduct and sows doubts about the Justice Department’s commitment to address corporate crime. The Justice Department would never allow individuals who committed such serious crimes to escape prosecution. So why the double-standard for corporate defendants? Why has the Obama administration continued the questionable corporate crime policies of the Bush administration?
The Justice Department has offered shifting rationales for its embrace of deferred prosecution and non-prosecution agreements, from preventing collateral consequences, such as the demise of Arthur Anderson after the Enron debacle, to rewarding corporations for cooperation, including attorney-client privilege waivers. Those justifications have been debunked. Arthur Anderson was the exceptional case, because it could not survive as an accounting firm after its conviction for accounting fraud. In 2008, after heated protests from the defense bar, the Department beat a hasty retreat from requesting privilege waivers. The Justice Department now argues that it needs a middle ground between criminal prosecution and declination of charges. But the Department already has the middle ground of civil enforcement for the antitrust, environmental, fraud, securities, and tax violations involved in most corporate crime.
With no consistent or compelling justification for the Justice Department’s approach, it is hard to escape the conclusion that the Justice Department is ambivalent about the role of corporate criminal prosecution and therefore too willing to offer non-criminal alternatives to corporate defendants that it would never allow to individual defendants. Perhaps the Department believes, as some of my colleagues in academia assert, that corporate prosecution serves no purpose because companies cannot go to jail. Yet those views ignore the role of the criminal law in making clear what conduct is not acceptable in our society, as well as the stigmatizing effect that rightly accompanies a criminal conviction for a company.
In my recent article, Deferred Prosecution and Non-Prosecution Agreements and the Erosion of Corporate Criminal Liability, I argue that the widespread use of deferred prosecution and non-prosecution agreements erodes corporate criminal liability and undermines the rule of law. I assert that such agreements limit the punitive and deterrent value of the government’s law enforcement efforts and extinguish the societal condemnation that should accompany criminal prosecution. I side with those within the Justice Department who have resisted the trend toward deferred prosecution and non-prosecution of corporate crime and agree with critics who claim that the Department may lack sufficient policies to ensure that abuse of power does not occur in negotiating such agreements.
Prosecutors can and should be expected to make principled decisions about whether a particular violation warrants criminal prosecution. If the law and the facts justify prosecution, charges should be brought; they should not be sacrificed to non-criminal alternatives that lack the punitive, deterrent, and expressive value of criminal charges. On the other hand, if prosecution is not justified, the matter should be declined; companies should not be threatened with prosecution to secure a large, financial settlement.
Deferred prosecution and non-prosecution agreements, if they occur at all, should be limited to relatively minor cases where civil or administrative enforcement options are not available or the exceptional case where innocent third parties would suffer significant harm as a result of criminal prosecution. Non-criminal alternatives should never be allowed in egregious cases like HSBC or the Upper Big Branch mining disaster—or countless other major cases where criminal charges were dropped.
The Justice Department should amend its corporate prosecution policies to limit the use of deferred prosecution and non-prosecution agreements. By developing such guidelines, the Justice Department will ensure a principled and consistent approach to the prosecution of corporations, uphold the rule of law, and restore confidence in its efforts to combat the harmful effects of corporate crime.