Former DOJ FCPA Chief Supports FCPA Compliance Defense
Before the Department of Justice had a specific Foreign Corrupt Practices Act Unit, it had the Multinational Fraud Branch. Joseph Covington (here – currently with Jenner & Block) joined the Branch in 1977 and served as Chief of the Multinational Fraud Branch from 1982 to 1985. Recently, I contacted the former DOJ FCPA Chief and posed the following question regarding a potential FCPA compliance defense. Covington’s response is set forth below with his permission.
Do You Support Creation of an FCPA Compliance Defense?
“Based on my experience as Chief of the FCPA unit up to 1985 and in my 25 plus years of private practice, I support the concept of an adequate compliance program defense to FCPA liability for corporate defendants. Such a defense would recognize and promote good corporate citizenship, and do nothing for corrupt companies. And from my perspective as a former prosecutor in the field, enforcement of those who engage in corruption would likely be enhanced.
In my almost 40 years of experience, I have rarely seen American companies affirmatively offering bribes in the first instance; rather they are typically reacting to a world not of their making. It is a fact that corruption in government remains endemic worldwide and that is not likely to change. As the world shrinks companies who seek to do the right thing can’t help but confront corrupt officials – as customers, regulators, and adjudicators – and confront them often.
The problem with current laws and enforcement policies is that they do not adequately reward companies for sincere (and expensive) efforts to stop the unwanted misbehavior of their employees. Indeed, under US law, the compliant corporation, try as they might, remains vicariously liable for the acts of any employee. With no possibility of avoiding liability, companies find themselves facing substantial criminal fines. Under current DOJ practice, the most that such a company can expect is a discount – some would say only a modest discount – from the criminal penalty as calculated under the federal Sentencing Guidelines. With the risks attendant to taking a case to trial, with no real ability to contest liability, too much power and discretion ends up in the hands of the government.
In this context, providing an adequate compliance program defense to FCPA liability would be manifestly reasonable. Companies that seek only to be good corporate citizens would have an opportunity to demonstrate not only to DOJ, but also to a federal district court, that they had in fact done everything reasonably required, and that despite that fact an errant employee avoided company policy and violated the law. Affording this type of defense to corporate liability would recognize and reward strong compliance programs; provide a powerful incentive for companies to develop and enforce such programs; may encourage more companies to come forward with voluntary disclosures; and yet still enable prosecution of the culpable individuals. It is time to stop punishing our good corporate citizens and start going after the guilty-both corrupt corporate employees and corrupt foreign officials. “
The Globalization of Anti-Corruption Law
Today’s post is from Juliet S. Sorensen (here) a Clinical Assistant Professor of Law at Northwestern University, where her teaching and research interests include international criminal law and corruption.
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At the annual meeting of the American Bar Association in Toronto last week, the Presidential Showcase Program of the Criminal Justice Section (here) was entitled “The Globalization of Anti-Corruption Law.” Moderated by T. Markus Funk of Perkins Coie (here), the panel included Andrew S. Boutros (here) of the U.S. Attorney’s Office in Chicago (appearing in his personal capacity); Walter H. White Jr. (here) from the London office of McGuire Woods; Tyler Hodgson (here) of the Canadian firm Border Ladner Gervais; and yours truly.
Audience members who braved a driving rainstorm en route to the Metropolitan Toronto Convention Centre on Sunday morning were privy to a wide range of insights and perspectives on the worldwide proliferation of aggressive anti-corruption laws. Funk set the scene and introduced both the topic and speakers, Boutros spoke about the latest trends in FCPA and international enforcement, White discussed the implications of the brand-new UK Anti-Bribery Act, Hodgson talked about Canadian anti-bribery actions, and I examined the global impact of international anti-bribery conventions such as the OECD Anti-Bribery Convention.
The consensus among the panelists was that aggressive enforcement of bribery statutes is an international trend not limited to the U.S., although the U.S. remains the undisputed leader in that regard. Even Canada, which Transparency International has deemed the laggard of the G-7 in its anti-bribery enforcement, has brought a significant indictment in the last year and currently has twenty active investigations into possible violations of the Corruption of Foreign Public Officials Act.
After Funk pointed out that the number of FCPA indictments increased by a power of 10 from 2004 to 2010, Boutros noted that many of the most significant recent U.S. cases were against foreign companies. This points not only to increased commercial globalization—foreign companies that pass bribes overseas possess a jurisdictional connection to the U.S.—but also to increased international cooperation by law enforcement. Boutros also pointed out an increased trend in what he termed “carbon copy” prosecutions, a phenomenon where foreign authorities rely on the factual findings emerging out of U.S. enforcement actions to vindicate the local laws of their own jurisdiction—often the site of the bribe payment or bribe receipt. Indeed, a corporate defendant’s obligation to cooperate not just locally, but internationally is increasingly spelled out in U.S. plea agreements or deferred prosecution agreements. Given that the Double Jeopardy Clause does not bar foreign-federal prosecutions (see, e.g., U.S. v. Jeong), such a term of agreement may well be cause for concern to defense counsel.
That’s not to say, however, that other countries are equal to the U.S. in terms of number or aggressiveness of prosecutions. In my own remarks, I reviewed three G-7 “case studies”—France, Germany, and Japan—and found that France is hampered in its own prosecutions of foreign bribery by an excessively short statute of limitations (three years) and a ban on plea agreements, and in its cooperation with others by a sweeping blocking statute. Germany is vigilant in the enforcement of its own anti-bribery laws, but the OECD has encouraged that country to increase the statutory maximums for its applicable fines and sentences of imprisonment, noting that the sentences imposed in these cases by German courts are too low to act as an effective deterrent. Of the three, it is the anti-bribery landscape in Japan that is the most barren, with scant prosecutions due to a failure to gather evidence both at home and overseas. In a searing self-assessment required by the OECD, Japan pointed to an absence of whistleblower support in corporate and popular culture and the limited foreign language skills of Japanese investigators overseas as two significant reasons for its failure to meet the expectations of the OECD.
Walter White was peppered with questions about the impact of the sweeping UK Anti-Bribery Act, including its impact on Rupert Murdoch’s News Corp, accused of making payoffs to high-ranking law enforcement in the UK. White reminded the audience that the UK Anti-Bribery Act was unlikely to be retroactive, and thus would not apply to the actions of News Corp., although there are other UK statutes as well as the FCPA that could encompass News Corp’s actions.
Another question pointed to the limited scope of the FCPA as compared to the UK law, noting that the payment of a bribe by a U.S. subject to a warlord in Afghanistan or Somalia could not be prosecuted under the FCPA as that warlord is not a public official, but that a similar payment by a U.K. subject was a violation of the Anti-Bribery Act. True, Funk responded, assuming that a warlord operating as a quasi-official in a lawless state was not enough, but don’t forget the Travel Act, 18 U.S.C. § 1952: the Travel Act prohibits the use of a facility of foreign or interstate commerce (such as email, telephone, or personal travel), with intent to promote or distribute the proceeds of an activity that is a violation of state or federal bribery, extortion or arson laws, or a violation of the federal gambling, narcotics, money-laundering or RICO statutes. Thus, for example, if a U.S. businessperson is negotiating a private deal in a foreign country and offers by telephone and wires money to a foreign counterpart to influence acceptance of the transaction–and such activity is a violation of the federal or state law where the individual is doing business–the Justice Department may conclude that a violation of the Travel Act has occurred.
Finally, an audience member pointed out that, U.S. anti-bribery culture notwithstanding, bribes and “grease” are expected in the normal course of business in many Eastern European and former Soviet republics. Does that expectation shield the briber payer?
The panel was unanimous that, unless the payments were in fact legal—not merely expected—in the country in question, the U.S. bribe payer could be in violation of the FCPA. But that’s ok: “leveling the playing field” for honest businesses is one of the stated purposes of the FCPA, the Anti-Bribery Convention, and the UN Convention against Corruption. And who doesn’t want to play on a level field?
A Focus On Sub-Saharan Africa
An article recently caught my eye by Herbert Igbanugo (here) and Raymond Gwenigale (here) of the U.S. based Igbanugo Partners International Law Firm titled “Assessing and Minimizing Customs-Related Corruption Risk in Sub-Saharan Africa’s Ports” (see here).
In this guest post, Igbanugo and Gwenigale provide an overview of their article.
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“In Assessing and Minimizing Customs-Related Corruption Risk in Sub-Saharan Africa’s Ports, we examine the complex maze of Sub-Saharan Africa (“SSA”) ports and maritime commerce, shedding light on the ever present contagion of corruption and bribery in SSA ports and its effect on the region’s economic development. We also touch on methods for reducing corruption and bribery in SSA ports and how companies doing business in the region can protect themselves through the implementation of risk assessment and due diligence programs.”
“The increase in both containerized and general cargo in SSA Ports over the past decade has served to highlight the issues of corruption and bribery in the region and the need for a more efficient, regulated system to combat corruption. An important contributor to the corruption and inefficiency of SSA ports are the improper and antiquated regulation systems in place. Moving toward modern port-management structures such as the landlord port system and independent port regulator structures, as well as improving automation systems in Customs will help combat corruption at SSA ports.”
“A key element in minimizing customs-related corruption risks of companies doing business in SSA is the development of an in-depth understanding of the unique characteristics of the SSA countries in which they operate. Businesses must also understand and abide by the legal and regulatory regime in place in each country’s ports and create customs compliance strategies that reflect an understanding of the Customs clearance processes in specific countries. In discussing customs-related corruption in SSA ports, one must also keep in mind the impact of the African tradition of patronage. Customs reform must address these traditions and work to reduce the negative impacts of patronage if anti-corruption efforts are to be successful.”
“To protect themselves from FCPA prosecution companies need to adopt and enforce clear policies prohibiting all those who act on their behalf from engaging in bribery. Developing a mandatory exhaustive questionnaire for use by all agents is a good starting point for any risk mitigation effort. When retaining foreign customs clearance agents, firms or consultants, companies must minimize risk by meticulously scrutinizing the background of the consultant and securing a written agreement regarding FCPA compliance. The use of reputable culturally competent auditors and close supervisor of local compliance counsel or general counsel are also paramount.”
“The article is one in a series of African Counsel articles dedicated to eradicating corruption and improving corporate social responsibility in SSA. As a culturally competent SSA focused firm with the in depth knowledge of Africa that only those who call Africa home would possess, we are committed to becoming one of the best information sources for US organizations intent on operating in an SSA environment free of corruption. We are proud of our strong African heritage, SSA focus, and we are quite delighted to share our knowledge of Africa with everyone to whom it matters. Links to our African Counsel newsletter and SSA Practice Brochure can be found here and here.”
Mission Creep At The SEC?
Today’s post is from Bruce W. Bean (Professor and Director, LLM Program at Michigan State University College of Law – here).
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Last week FCPA Professor had a post (see here) describing the SEC’s internal search for the new Head of the Division of Enforcement’s FCPA Unit.
As previously reported (see here), Cheryl Scarboro, Head of the Commission’s FCPA Unit, will shortly join the Washington, D.C. office of Simpson Thacher.
The internal SEC marketing materials for this position state that this “Unit seeks to expand the Commission’s global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes.”
“[E]xpand the Commission’s global reach?” We do not find this concept in the FCPA. Nor is it in the original Securities Exchange Act that established the SEC. Has the Commission really run out of legitimate domestic prosecution targets? Does the Commission actually believe that, having long ignored stock manipulation by Wall Street traders (who can afford to mount a vigorous defense), it should declare victory in the domestic equities markets, shout “Mission Accomplished” and move on to police the rest of the world?
The most revealing aspect of this internal job posting for the new Head of the FCPA Enforcement Unit is this sentence, which encapsulates the SEC’s jurisdictional philosophy. “The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA.”
Certainly “unique legal, evidentiary and policy challenges” are presented each time we have the Commission stretch and distort the language of the FCPA as it “attempts to develop case law.” For example, there is no FCPA language supporting the determination that millions of Chinese employees at State-Owned Enterprises are “foreign officials.” Similarly, we search in vain for the statutory basis for FCPA liability for a foreign company whose foreign subsidiary committed an act which the prosecutor claims violates the FCPA.
This newly developed FCPA “case law,” of course, is largely created by the enforcement attorneys. (See here for a prior post on “prosecutorial common law”). It is seldom fully litigated before the Judicial Branch. After all, few defendants can afford to litigate against the Government, and those that could most often do not wish to risk “debarment” from doing further business with the Government until proven innocent.
FCPA enforcement has come to mean, “Let’s see just how far we can push the inherent ambiguities in the statute.” When that rare defendant does stand up and fight as in U.S. v. Giffen, we see a multi-year, multi-million dollar legal defense during which a Federal Court ultimately did not endorse the prosecutor’s attempt to “develop new case law.”
Unquestionably, there is marvelous deterrent value when the SEC makes clear that it aggressively pursues FCPA violators. Prosecutors also find good value in high profile prosecutions, since this accelerates their passage through the SEC’s revolving door to much more lucrative private practice.
A closing note of warning. As outrageous as it may seem, the SEC’s jurisdictional and enforcement philosophy is comparatively good news. On Friday, July 1, the former Head of the Unit, Cheryl Scarboro, is likely to start at Simpson Thacher. That is also the date the U.K. Bribery Act comes into force. The Bribery Act actually does purport to give British prosecutors statutory authority to pursue bribery anywhere on the planet Earth. Stay tuned!
Global Financial Integrity Responds
The goal of FCPA Professor (see here) is to foster a forum for critical analysis and discussion of the FCPA (and related topics) among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.
With that goal in mind, I asked Heather A. Lowe, Esq. (Legal Counsel & Director of Government Affairs, Global Financial Integrity (“GFI”)) to consider a guest post to respond to my criticism last week of certain of GFI’s statements in connection with the House FCPA hearing (see here for the prior post).
I am glad she accepted and below is Ms. Lowe’s guest post.
If other readers want to make their voice heard on the topic of FCPA reform as well, please consider FCPA Professor as a suitable forum.
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I appreciate the invitation from Prof. Koehler to provide some comments on this forum as a guest blogger.
On June 14, 2011, Prof. Koehler commented (here) on documents provided by Global Financial Integrity and other civil society organizations and GFI’s press release (here) circulated on Monday, prior to the House of Representatives’ hearing on the FCPA. Additional arguments are included in GFI’s formal submission (here) for the record at the hearing. Karen Lissakers, Director of the Revenue Watch Institute, and Corinna Gilfillan, Head of U.S. Office at Global Witness, each provided statements (see here and here) for the hearing record as well. I am sure readers will find our full submissions to be of interest.
One of the primary reasons that GFI wanted to provide a submission for the hearing was to ensure that Members of Congress were aware that (a) businesses and the Department of Justice were not the only stakeholders with views to be considered in this discussion, (b) proposed changes to the FCPA must be considered within an international context, and any changes will have international implications, and (c) there are strong economic arguments for carefully considering changes to the FCPA that might lead to a reduction in enforcement.
Anti-bribery laws are not enacted in this world without years of blood, sweat and tears from anti-corruption campaigners around the world, and I don’t expect that they will be willing to lose ground on this flagship anti-bribery legislation without making their voices heard. When I say “blood, sweat and tears” I literally mean blood, sweat and tears. There are activists around the world who have been threatened with violence, jailed and even killed over the years to achieve the progress that has been made. It would be inaccurate, therefore, to believe that corporations are the only ones with “skin” in this game.
GFI would not presume to speak on behalf of these organizations without their permission, but we did not want to miss the opportunity to provide at least one civil society submission as a place-holder for a critical group of stakeholders.
We appreciated Prof. Koehler’s comments on the documents he posted. We are trying to begin a meaningful dialogue on these issues that more civil society organizations with direct experience in the field, around the world, can join. His comments demonstrate that we have been successful in starting that conversation.
Prof. Koehler did not invite me to blog for my motivational comments, however. He would like me to respond to his post of June 14, 2011.
Apart from quoting the opinion of a former SEC Commissioner in a statement made 20 years ago
• during a hearing on bills proposing changes that the Professor considers to be similar to changes being proposed today,
• which were ultimately never adopted by Congress, and
• during a time preceding the international proliferation of anti-bribery conventions and national laws that we have to support our FCPA enforcement efforts today,
Prof. Koehler seems to be focusing on two main subjects: the proposed amendment to further define “foreign official” and the proposal to include a compliance defense in the FCPA.
The Professor refers to the UK Bribery Act Guidance to shore up his position in support of creating a compliance defense for companies. The U.S. Chamber refers to the UK Bribery Act (the “UK Act”) itself to support its position that a compliance defense is a reasonable amendment to request. The compliance defense in the UK Act should not be taken out of context, however. It must be viewed in light of the other provisions of the UK Act. The UK Bribery Act criminalizes ALL forms of commercial bribery. The FCPA criminalizes only payments made to foreign officials. The UK Act does not permit facilitation payments. The FCPA permits facilitation payments and has an express provision creating an affirmative defense for reasonable travel and lodging and other types of expenses one might incur as a “host” of a trading partner. The UK Act’s extraterritoriality provisions have been described as more far-reaching than the FCPA’s.
The U.S. Chamber’s proposals to amend the FCPA are entitled “Restoring Balance.” The UK Act’s compliance defense could conceivably be seen as an attempt to balance provisions that go well beyond those of the FCPA. A compliance defense in the FCPA would, in fact, be out of balance when viewed in full context. However, if there is a genuine move to bring the FCPA in line with the UK Bribery Act then let’s talk!
I also found it interesting that the Professor referenced the UK Bribery Act Guidance in his support of the compliance defense. The Guidance he refers to is the Guidance from the UK Ministry of Justice. At the very beginning of that document, in paragraph 4, the Ministry states, “The question of whether an organisation had adequate procedures in place to prevent bribery in the context of a particular prosecution is a matter that can only be resolved by the courts taking into account the particular facts and circumstances of the case. The onus will remain on the organisation, in any case where it seeks to rely on the defence, to prove that it had adequate procedures in place to prevent bribery. However, departures from the suggested procedures contained within the guidance will not of itself give rise to a presumption that an organisation does not have adequate procedures.”
So, what does a compliance defense actually accomplish in the UK? A company still has to prove that it had adequate procedures in place to prevent the criminal activity (which means all of the investigation into what actually took place must still be undertaken) and the matter still has to be adjudicated by the courts. Compliance in the UK is not an absolute defense that can be relied upon to avoid the cost of investigation and litigation at all, as seems to be the idea behind the U.S. Chambers’ proposal! The burden on a UK company is, in practical terms, the same as that of a company defending an FCPA violation under the current form of the statute.
Prof. Koehler characterized some of my statements as “unsophisticated” and “naïve,” so I was surprised by his argument that the real reason that companies want a clearer definition of “foreign official” is so that they can more easily determine who they can take out for a round of golf and a few drinks at the 19th without thinking too hard about it. While I do not doubt that this is something companies do have to think about, I stand by my statement that a clearer definition of foreign official can just as easily be used to determine who a company can bribe and who it can’t bribe and I am not naïve enough to think that this isn’t a frequent question. Let’s get on board with the UK on this one and just not bribe anyone.
I will say, however, that I think I have a fairly accurate view of what motivates corporations. Corporations are motivated by their bottom line and their cost/benefit analysis. There are externalities that also factor into decisions, like reputational risk, but in the end the externalities are quantified and factored in. This is not a bad thing – corporations exist to make money and are vital to support a strong economy.
For the reasons set forth in GFI’s submission, I don’t think that most companies set out to engage in bribery, unless they do not have the attributes to be truly competitive in the market they are entering in the first place (which should not be overlooked as a possible motivating factor). When faced with a bribe, however, the choice on the spot may be perceived to be one of paying a bribe or losing business worth many times the value of the bribe. A strongly enforced FCPA makes that bribe much more expensive in any cost/benefit analysis.
The perception that the choice a company is making is whether to pay a bribe or lose the business is where we should be focusing our energy, however. Many companies have created strategies, policies and outreach to governments in the countries in which they operate in order to ensure that it is understood by those with whom they do business that they are subject to the FCPA and cannot pay bribes. We are pretty sure that the whole notion of the FCPA isn’t a surprise to their business counterparts when the subject is raised.
As I stated in GFI’s submission for the hearing, “Some companies, like Newmont Mining, view the FCPA in a positive light. Newmont Mining, based in Colorado, is the second largest gold mining company in the world. Newmont’s Director Corporate & External Affairs for Africa, Chris Andersen, stated during a panel discussion at the Extractive Industries Transparency Initiative Global Conference in March of this year that,
“…Newmont’s experience, particularly in Africa, has been that FCPA has been an enormously valuable protective device for us…when you have a government person saying…‘we’ll give you that license if you buy us a car or something’…it’s not about look ‘I’m a mean guy and I don’t value our relationship, and therefore I’m not going to give it to you,’ you say ‘look, there’s a law out there that means I’m going to go to jail if I do that, I’m not going to go to jail for you or anybody else.’”
There are many more arguments to be made on all sides of this debate, I have no doubt. Let’s make sure that all relevant voices are being heard moving forward.