U.S. State Department Anti-Corruption Program
Today’s post is from Danforth Newcomb (Shearman & Sterling – here), a dean of the FCPA bar, who describes his recent trip to Indonesia on behalf of the State Department.
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U.S. State Department Anti-Corruption Program
Danforth Newcomb
There is a least one aspect of the U.S. Government’s anti-corruption efforts that has gone largely unnoticed by compliance professionals. From time to time, the State Department sponsors trips by speakers from many fields and backgrounds to engage international audiences on their topic or specialty. Last month, at the invitation of the U.S. Embassy in Jakarta, Indonesia, I spent two weeks meeting with Indonesian audiences to discuss the U.S. FCPA and respond to questions and comments from those audiences about Indonesian corruption issues. My experience with matters of corruption in Indonesia dates back to the beginning of my practice in this area in the late 70s, and so I was with a good deal of interest that I participated in this program.
The program was conducted by the U.S. Embassy in Jakarta under the auspices of the State Department’s U.S. Speakers and Specialists program. During my two-week visit to Indonesia, I met with approximately 20 different groups that represented a wide range of Indonesian society. The meetings were held in four Indonesian cities: Jakarta, Yogyakarta, Surabaya and Medan. In each city, I spoke at universities, public organizations, government offices, non-government organizations and the media. The presentations generally followed the same format. I spoke for 20 to 30 minutes about the FCPA – how it has been enforced in practiced and the partnership between the private sector and enforcement officials on compliance matters.
After the initial presentations, there was usually a discussion for an hour to an hour and a half ranging over a wide diversity of corruption-related topics. Depending on the audience, my presentation and responses to questions generally emphasized slightly different facets of the topic. For example, when speaking to university students, the discussion usually centered around the role of civil society in anti-corruption efforts. When meeting with the media, I often discussed the role that the media played in the original Watergate hearings that lead to the adoption of the FCPA. When the audience was from business organizations, the discussion usually turned to anti-corruption compliance programs and the relative state of corporate governance in the American and Indonesian companies.
Perhaps most interesting were the meetings I had with Indonesian governmental organizations. I met with representatives of the Indonesian anti-corruption commission (“KPK”), representatives of a local legislative body, judges and leadership of the high court of North Sumatra, representatives of the Ministry of Trade, and two different prosecutors’ organizations. Needless to say, these government meetings led to the most technical and concrete discussions about U.S. anti-corruption methods and experiences. In each of the government discussions, the hardest concept to convey was the role of our private sector in investigating and remediating corruption problems at large corporations. There was a fair amount of surprise when government listeners heard that the Siemens investigation was largely conducted by private law firms paid by the corporation. There was also some skepticism when I described the role that emails play in the typical FCPA corporative investigation. Not surprisingly, there was a good deal of interest in government to government cooperation methods and in gathering evidence from distant jurisdictions.
In all of the meetings I was surprised by the degree of interest and engagement this topic received from the audiences. There is clearly a substantial concern about corruption by a wide swath of Indonesian society. At each of my meetings, it was readily apparent that Indonesians are looking for better tools to deal with what they themselves perceive to be wide spread domestic corruption. While in some cases it seems that foreign investors were often viewed as a source of corruption, it was more common to hear participants’ concerns about Indonesian government officials and domestic organizations. In that regard, there were several spirited discussions about whether it was practical for the anti-corruption forces in Indonesia to enlist the business community in compliance efforts. These audiences were particularly interested in discussing what was an “Effective Compliance Program”, and whether such programs could be expected from Indonesian organizations. It was also interesting to note that most of the participants from business organizations were in some level already familiar with U.S. FCPA and that many of them had been trained by their employers, or other U.S.-based business partners, on the broad purposes of the Act. These business audiences had no doubt that international business players needed to have anti-corruption compliance programs as part of the standard elements of their organization.
It was also interesting to note that several of the universities had anti-corruption and anti-money laundering programs of study that seemed to have a wide student interest.
One of the most interesting meetings was held at an experimental venue sponsored by the U.S. Embassy called “@America.” This is a multi-media auditorium and meeting venue that presents to the Indonesian public many aspects of American culture and is located in one of the larger shopping malls in Jakarta. This presentation and discussion was in fact substantially similar to discussions at various universities and its audience was mostly university graduate and undergraduate students. While my trip to Indonesia coincided with reports in various U.S. media of some unrest directed at U.S. institutions as a result of a film that offended many Muslims, the representatives of the U.S. Embassy and I were welcomed at any number of universities and other public forum with cordiality and interest in my presentation.
From all the reactions that we got, the program seemed to have been well received and effective in furthering the public diplomacy agenda of the State Department. I hope that this will not be the last of such programs as it was very interesting for me and seemed to achieve the State Department’s goals at the same time.
Richard Bistrong Reports To Prison
Today’s post is from Paul Calli (Carlton Fields – here). Calli represented Stephen Giordanella in the Africa Sting case and as noted
in this prior post Giordanella was completley exonerated.
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Richard Bistrong Reports To Prison
Paul Calli
This Johnny Cash song is an appropriate background song for this post.
Following a lifetime of lying , cheating and stealing, Friday night it all caught up to Richard Bistrong and he turned himself in to serve his 18 month prison sentence at the United States Penitentiary in Lewisburg, PA. The Federal Bureau of Prisons makes that information available to the public here and calculates his release date as
January 15, 2014.
Bistrong, as you know from previous FCPA Professor posts, as well as articles in the New York Times and Washington Post, became a member of the team with the FBI and the FCPA unit at Main Justice – then led by Hank Bond Walther – to concoct what will perhaps go down as the most ill conceived and greatest failure ever in the enforcement of U.S. criminal law: the “Africa Sting” case.
Bistrong’s lifetime of drug transactions, bribery, tax evasion, prostitution crimes, predilection for “hard core pornography” (you can’t truly appreciate the impact of that phrase until you hear Mike Madigan from Orrick articulate it to a jury), is second to none and turned out to be merely a lead-in to his staggering moral transgressions and self-inflicted personal failures, all of which came out during the trial or in trial preparation.
Against this backdrop, it was not without drama when sometime in November 2011 during the second trial , after two years of pretrial litigation and DOJ’s unsuccessful prosecution that resulted in no convictions and a hung jury in the first Africa Sting trial (during which the government elected to not call its star witness), Bistrong entered the court room to begin a month of testimony. It really was “all eyes” in the court room on the person about whom everyone had heard so much, and you could hear a pin drop. After all, in a text message later introduced into evidence Bistrong wrote to Chris Farvour, his FBI handler, “tell Hank (Bond Walther) that I’m an ace on cross exam!”
I remember that after a real short time it became apparent that Bistrong was the most narcissistic person I had ever heard. It wasn’t
just that he could not tell the truth – I think everyone expected that eventuality – it was that he seemed to think he was above criticism and above everyone else. He was smug and self-righteous. He didn’t seem contrite at all. He wanted to argue. He gave the impression that he felt he was smarter than everyone else, especially than the lawyers cross examining him. He gave a false portrayal of himself on the witness stand, and tried to get the jury to believe he was someone they could trust. He tried to make forced eye contact with the jurors, and it was uncomfortable to watch him do so. Heck, why wouldn’t he think he could pull off that manipulation one last time? He had been doing it his whole life, including recently. But it was perplexing, because Bistrong’s words, tone and demeanor recorded on tape and in text messages with his BFF’s in the FBI could not be reconciled with the Bistrong that he tried to sell while on the witness stand. After a while many of the jurors turned away from him and couldn’t’ look at him even as he testified. Those who looked at him to me seemed to be interested in him more as a psychology case study than as someone whose testimony they could ever trust. As the jury foreperson wrote in his FCPA Professor guest post (here), “…more than one juror voiced concern that it would be unjust for the defendants in this case to be convicted when the government relied so heavily on Mr. Bistrong who freely admitted on the stand more illegal acts than the entire group of defendants was accused of…” and “the
jury with near unanimity found nearly all of the prosecution witnesses to be evasive and combative.” In the end, Bistrong’s venality and greed got the best of him.
I can’t imagine a more talented, committed, and passionate group of defense attorneys than the ones with whom I had the honor of trying the Africa Sting case. It was a remarkable experience to watch them shine throughout, and vindicate their clients. Notwithstanding all that legal talent, however, the most concise, poignant and important summary of this case came from the bench. As United States District Judge Richard J. Leon wisely cautioned: “We certainly don’t want the moral of the story to be: Steal big. Violate the law big. Cooperate big. Probation.”
I hope that everyone on the Bistrong team understands that.
Reading Bistrong’s recent comments in a Forbes article (here), it is clear Bistrong maintains the belief that he is a “victim” and “fallen hero” who did something noble. In reality, nothing could be farther from the truth. I hope that prison is the place where Richard Bistrong is able to finally right his ship, come clean with himself and learns how to be truthful, and that he comes out prepared and able to be a productive member of society, during his three years on federal supervised release and beyond.
Amendments To Simplify The FCPA For U.S. Businesses
Foreign Corrupt Practices Act reform may be in sleep mode at the moment, but this has not stopped (nor should it) forward-thinking individuals from contemplating FCPA reform.
Case in point, Stephen Clayton, with today’s guest post. Clayton is currently an attorney in private practice specializing in FCPA services. Previously, he was an in-house counsel, including for Sun Microsystems. At Sun, he responsible for all legal work in East and South Asia, Latin America, Australia/New Zealand and Canada, and then became Senior Director, Anti-Corruption Compliance, responsible for Sun’s global FCPA compliance. Sun was acquired by Oracle in early 2010 at which point Clayton established his private practice. Clayton also teaches an FCPA-related course for Golden Gate University’s School of Accounting.
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Amendments to Simplify the FCPA for US Businesses
Proposals for and against amending the FCPA have been percolating in Congress for the past 2 years. The U.S. Chamber of Commerce took a lead role, advocating that substantial changes are needed to promote international business by U.S. companies. Other groups, including the Open Society Foundations, have opposed any revisions that they say would weaken the FCPA or impede enforcement. The amendments that would provide the most help US business people have not been proposed by any of the parties lobbying Congress.
Bribery is still very common in international business and US companies are harmed by it every day. Congress should consider common sense changes to the 35-year-old FCPA that would make the law less confusing and more in tune with anti-corruption compliance practices in 2012. If changes are to be made to the FCPA, they should enable good companies and ethical business people understand and follow the law. It is easier for business people to comply with a clearly worded, strict law than try to deal with a complicated, confusingly worded law that has to be filtered through layers of lawyers. The proposals by the Chamber and its opponents retained all of the complexity and confusion in the current law, so in the end would not benefit business.
There are six changes would substantially reduce the confusion business people and in house lawyers have about the FCPA and thereby enable them to do international business with a clear understanding of their legal risks and implement effective compliance programs.
1. Eliminate the Exception for Facilitating Payments.
This exception creates the illusion that minor bribery of employees of foreign governments can be “legal.” Å corporate policy allowing employees to pay any bribes is morally indefensible. Even if corporate management believes small bribes are a necessary practice, it is extremely difficult to determine which bribes Congress considers “legal.” The facilitating payments exception is offensive to normal US ethical standards for corporate governance. The majority of companies that examine facilitating payments prohibit their employee and agents from paying them. Congress should eliminate the exception.
2. Eliminate the affirmative defense for bribes that are “lawful under the written law or regulation of the country.”
Countries do not have written laws that permit conduct that is illegal under the FCPA. But business people and non-specialist lawyers see this language in the statute and think it must have some meaning. Here again they are forced to guess which types of bribes Congress considers to be “legal.” What difference does it make to good corporate governance if a country rigs its laws to allow bribery of members of its royal family or specific government employees? It is still bribery and clean, ethical US companies would lose business to the bribe payers. This affirmative defense is essentially meaningless and confusing and there is no reason for it to remain in the law.
3. Add provisions to the FCPA making commercial (private) corruption a federal crime.
The most glaring flaw of the FCPA is that it makes it a crime to bribe only certain people, i.e. “foreign officials” including employees of “instrumentalities” of foreign governments. By making that distinction, Congress created the impression that US companies can legally pay bribes to all other people. The FCPA as it is now written causes companies and their lawyers to spend an extraordinary amount of time trying to determine if corrupt payments made on their behalf are legal or illegal. This is the most confusing aspect of the FCPA and puts company management in an ethical conundrum. Amending the FCPA to criminalize all bribery of anyone in international business will end the confusion. In international business in the 21st century, it should not matter if the recipient of a bribe is a government official or works for an instrumentality of a government or is an employee or officer of a commercial company.
4. Add a U.K. style strict liability crime of failure to prevent bribery to the FCPA and a corresponding affirmative defense for proving an adequate compliance program.
The U.K. Bribery Act of July 2011 contains a new crime that does not exist in the FCPA: Failure by a Business Organization to Prevent Bribery. It’s a strict liability crime – if bribery of anyone occurred in a company’s business, the company has violated this law. To balance strict liability, the UKBA includes an affirmative defense. If the company whose employees paid bribes can prove it had in place adequate processes to prevent bribery before the bribery occurred, it may avoid liability for this specific crime.
Congress should consider amending the FCPA to incorporate this U.K. legal innovation that makes it easy for company management to understand that all bribery by employees and agents is a crime.
5. Amend the FCPA to clarify that a parent company is responsible for the violations of its subsidiaries.
Executives of US companies create, manage and are responsible for their company’s foreign subsidiaries. US management hires the subsidiary’s managers and gives them their instructions and goals. Subsidiaries exist to generate profits and provide business advantages to the parent company. U.S. law should be unambiguous on the point that subsidiaries and their employees cannot be a convenient and easily manipulated shield from criminal liability for bribery.
Limiting a company’s liability for the FCPA violations of its subsidiaries adds to the list of gray areas that perpetuate the argument that Congress intended that only certain types bribes of certain people are illegal. Congress can remove uncertainty by amending the FCPA so it is impossible to doubt that a parent company is always responsible for the bribery, corruption and false records of any of its subsidiaries. This is the kind of clear legal guidance US companies need.
6. Widen the scope of the FCPA’s “reasonable and bona fide expenditures” affirmative defense.
Companies should be able to engage normal sales and marketing operations and be confident this will not violate the law. Congress needs to promote legitimate, properly documented business practices. The current affirmative defense is poorly worded and unnecessarily restrictive. It limits bona fide business expenditures to those “directly related to the promotion, demonstration or explanation of products or services; or the execution or performance of a contract…” That limitation is not necessary and is confusing to business people.
Conclusion:
These six amendments would make it easier for corporate management and in house lawyers to understand what is prohibited by the FCPA and significantly improve their ability to develop reasonable compliance programs. Many major companies already have policies that prohibit facilitation payments, make commercial (private) bribery by their employees and agents a terminable offense and apply their FCPA compliance program to all their subsidiaries. Congress should follow this leadership by business and bring the FCPA into the 21st century. Congress should not enact a slate of amendments that only serve to perpetuate the most obvious flaw in the FCPA – that it prohibits only certain (poorly defined) bribery of certain (poorly defined) people and therefore permits all other bribery. Amendments that merely play with the definitions of who can be bribed in what manner will not help US companies. All bribery in international business harms US companies and must be clearly illegal.
An Update From Australia – Securency Banknote Printing Bribery Scandal Secures First Conviction And Sentence And Pressure Increases On Australia’s Central Bank
Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here). Wyld is the Australia Expert for FCPA Professor.
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Background
According to The Age newspaper, from as early as the late 1990s, Securency International Pty Ltd (Securency) and Note Printing Australia Pty Ltd (NPA), two subsidiaries of Australia’s central bank, the Reserve Bank of Australia (RBA) sought to convince various foreign governments to award them valuable banknote printing contracts, extolling the virtues of the unique polymer plastic note features offered by Securency. Unfortunately, these commercial activities appear to have been associated with substantive allegations of bribes and illegal payments made to public officials to secure these contracts.
Prosecutions
On 1 July 2011, the Australian prosecutor, the Commonwealth Director of Public Prosecutions (CDPP) commenced Australia’s first foreign bribery prosecutions against Securency, NPA and various executives.
As reported in the Australian media, it was alleged that Securency and NPA had, for many years, engaged in widespread bribery and corruption of foreign public officials in various Asian and other countries to secure banknote printing contracts either directly or through intermediaries who received large commission payments from where it was alleged bribes to foreign public officials would be paid. The allegations covered commercial activities in Indonesia, Malaysia, Vietnam, Nepal and other unspecified countries.
The committal hearings against the Securency and NPA executives commenced before the Magistrates Court of Victoria on 13 August 2012 and are scheduled to run for between 2 to 3 months.
The reporting of these matters has been patchy over the last year due to national suppression orders preventing the publication of material which might prejudice the fair trial of the Securency and NPA executives. However, what is now emerging from the committal evidence is a disturbing tale from within the RBA and its subsidiaries of secret dealings, a refusal to tolerate criticism and a collective amnesia when pressed for an explanation. What have we learned?
Ellery sentencing judgment
On 20 August 2012, David Ellery a former CFO of Securency was sentenced by the Supreme Court of Victoria to 6 months imprisonment, wholly suspended for 2 years (see R v Ellery [2012] VSC 349, available at www.austlii.edu.au). Mr Ellery had been charged with one count of false accounting contrary to s 83(1)(a) of the Crimes Act 1958 (Vic). Mr Ellery did not face any foreign bribery charges.
As Securency CFO, Mr Ellery received copies of various documents concerning the payment of monies as a “special commission” to an agent in Malaysia. An amount of $79,502 was authorised for payment to the Malaysian agent to a nominated bank in Singapore. The Court found that Mr Ellery knew that the invoice for the payment was false and that, relevantly, no “marketing expenses” had been incurred, as described on the invoice. In addition, Mr Ellery took steps to conceal what had occurred.
The Court accepted that Mr Ellery was not actively involved within the “inner sanctum” of Securency, where “secrecy and a denial of responsibility for wrongdoing also seem to have been part of a corporate culture at Securency at that time”. However, the Court reminded Mr Ellery that he was the company’s CFO, responsible for authorising and making payments and that his offending “involved a serious and dishonest breach of trust”.
The Court took into account various mitigatory factors in favour of a lesser sentence, from the 10 year imprisonment as a head sentence for the offence. Mr Ellery’s career had effectively ended. He had demonstrated remorse, he was unlikely to re-offend, his prospects of rehabilitation were high and he had not obtained any personal financial benefit from the offending conduct. Mr Ellery had offered an early plea with ongoing cooperation and the investigating police acknowledged that Mr Ellery would be an important prosecution witness in the other criminal proceedings against Securency and NPA executives.
Sentence
The Court formed the view that the conduct of Mr Ellery was in the mid-range of false accounting offences. Imprisonment for 6 months was the result, but wholly suspended for 2 years.
Lessons for corporate executives
The sentencing of Mr Ellery demonstrates that slowly, Australian courts are starting to reflect what their US counterparts have been doing for some time – treating white collar or economic crime with increasing seriousness, with imprisonment as the probable consequence. This has been an increasing trend in economic crime cases involving, for example, insider trading and revenue or tax fraud prosecutions. It is now being reflected in false accounting offences, often closely associated with allegations of foreign bribery.
The Court accepted that Mr Ellery was not within the group of Securency or NPA executives at the centre of what was alleged by the CDPP to be a conspiracy to bribe public officials for commercial benefit. Rather, as might often be the case with a CFO, Mr Ellery was in the position of knowing enough to contaminate him and then becoming actively involved in creating false records to record (or cover up) the questionable (or illegal) transactions. This reflects the Court’s recent criticism of AWB’s former CFO, in R v Ingolby (see my FCPA Professor post from 16 August 2012 here). Courts are making it clear that there is a need for “denunciation and just punishment” for these economic crime offences.
CFOs can no longer just authorise for payment transactions in circumstances where they in fact know or indeed perhaps, ought to have known, that the underlying transaction was improper or illegal. To remain silent, do nothing, process the finances and approve payment is no longer acceptable. If they do, even many years later, they run a real risk of detection, investigation, prosecution, a criminal conviction and deprivation of liberty.
The role of the RBA – should it have done more sooner?
In May 2009, The Age broke the story of alleged widespread and systemic corruption involving Securency, NPA, its various intermediaries or agents and payments to foreign officials to secure banknote printing contracts. It appears to be the case that Securency and NPA worked closely together, with Securency developing the substrate technology for polymer banknotes (as a 50-50 joint venture between the RBA and a Belgian company, Innovia Films) and NPA being the banknote printer. A former RBA Deputy Governor, Graeme Thompson chaired both companies. In May 2008, Thompson was replaced as chairman of both companies by Bob Rankin, the RBA’s Assistant Governor. It could not be said that the RBA was unrelated to its subsidiaries although its knowledge of their operational activities is far from clear.
The RBA, it seems, was unaware of the alleged corruption. Its reaction was to call in the AFP and KPMG to investigate and ultimately to cooperate with the AFP to the point where criminal charges were laid in July 2011.
However, in June 2007, an NPA senior manager Brian Hood (with responsibility for finance, security and compliance) wrote an extensive memorandum to the RBA’s Deputy Governor, Ric Battellino (a copy of what is now known as the Battellino memo is at www.theage.com.au). The Battellino memo was disclosed in evidence during the Securency committal hearings. It had not been disclosed in any previous statements made by the RBA, which created the impression that the first the RBA knew of the alleged corrupt conduct was when The Age broke the story in May 2009.
The Battellino memo tells a very different story. The crucial features of the memo can be summarised as follows:
- while the NPA Board wanted all agents to sign up to new agency agreements, the NPA management did not see this as important;
- Securency used the same agents and did not change its agency agreements;
- many communications with agents were informal, by mobile or text messages, with little or no documentation;
- numerous overseas trips were not reported outside NPA management;
- commission rates payable to agents greatly exceeded industry average rates;
- there were numerous occasions when agents, particularly those in Nepal and Malaysia, indicated that they had to “service others” and that there were matters that senior executives “didn’t want to know about”;
- all meetings with agents, particularly with the Malaysian agent, had to take place in Malaysia; and
- when Hood tried to take his concerns up with NPA executives, every support was given to the agents and NPA management reacted with hostility to any criticism of their conduct.
What did the RBA do?
Well, it did what AWB did and called in its lawyers, Freehills. As Commissioner Cole noted in the AWB saga, any legal advice is only as good as its instructions. It seems Freehills found “serious problems with business practices” but no illegality (see Black stain of corruption touches RBA in The Australian Financial Review, 22 August 2012). Despite the fact that NPA’s management had, according to Hood, adopted a very secretive culture, and Securency used the same agents and had done so for many years, no one within the RBA (or maybe Freehills) considered a further investigation of Securency was warranted. Life went on and the highly successful and profitable commercial operations of Securency and NPA continued to thrive.
The current RBA Governor, Glenn Stevens faced questioning on these issues before a Commonwealth Parliamentary committee on 24 August 2012. The Age described his testimony as “faltering, defensive and, at time, evasive” (see Still in the dark, with governor on the defensive, The Sydney Morning Herald 25-26 August 2012). The media suggested the Governor’s approach reflected the attitude of the current Australian Treasurer, Wayne Swan, which was “to say nothing and do nothing”. One only has to look at the consequences suffered by AWB to hope that the RBA does not suffer the same ignominious fate, metaphorically speaking!
One might think that in a matter involving such serious allegations, the RBA as Australia’s central bank, might have informed the Australian Treasurer, then Peter Costello. But no, that did not occur. Mr Costello has said that he had no knowledge of these facts and was not told of any RBA suspicions of wrongdoing up to November 2007 when he ceased to be Treasurer after a general election (see Awaiting a true account by Peter Costello in The Age, 23 August 2012). Clearly the RBA had no suspicions or if it had, it relied on its legal advice to satisfy itself that it had acted appropriately.
But had the RBA acted appropriately?
That is at the heart of corruption scandals, the difficult issue facing a corporation when it is faced with alleged corruption on the one hand and a profitable line of business sustained by that corruption on the other hand. Which has to stay and which has to go?
The lack of transparency, the reliance on legal advice (quite common amongst any person or corporation faced with allegations of impropriety) and the inevitable “I do not remember” makes the average person wonder whether anybody involved really cares about the law, about Australia’s international obligations or whether, simply, the pursuit of profit (the means) justifies the ends. Regulators are increasingly requiring corporations to give priority to ethical behaviour which requires, in the words of Richard Alderman, the former Director of the UK Serious Fraud Office, a constant and self-reinforcing cycle of directed behavioural change.
It seems as if the lessons of AWB have not been learned. This story has a long way to go and the ultimate consequences that might be visited upon the RBA, Securency, NPA and its executives is a road where judge and jury views may rule the world of those involved, whose lives will be fraught with unending time, cost and uncertainty.
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.