Prosecutorial Common Law
A guest post today from Michael Levy (see here), co-chair of the White Collar Investigations and Enforcement Group at Bingham McCutchen. Levy, a former Assistant United States Attorney in the District of Columbia and law clerk to U.S. Supreme Court Justice Lewis F. Powell Jr., expounds on what he has called “prosecutorial common law” (see here for the recent Corporate Crime Reporter article).
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We have seen this movie before, and it ends with the government’s interpretation of a federal criminal statute knocked down, 9-0, by the United States Supreme Court.
Prosecutors don’t set out deliberately to interpret criminal statutes in ways that convict hundreds of people on the basis of a standard that not a single Supreme Court Justice finds supportable, but it has happened already and may well happen again in the context of the Foreign Corrupt Practices Act because of a phenomenon I’ve referred to for a number of years as “prosecutorial common law” (see here).
There are no law school classes or scholarly papers on prosecutorial common law, yet it governs, as a practical matter, an enormous amount of the daily life of the criminal justice system in white collar cases. Prosecutorial common law can be thought of as the “common law of settlement.” In areas, such as complex white collar crime, in which prospective defendants either are highly unlikely to challenge the government in court (e.g., corporations) or highly unlikely to have both the fortitude and the personal wealth or strong support of another entity advancing fees to be able to challenge the government thoroughly and completely (e.g., most individuals), almost all cases are settled.
But settling cases creates very different incentives for the two sides. The government has a long-term interest in developing the law because it is charged with enforcing that law not just against the settling party, but also against other parties in the future. Thus, the government has a strong institutional interest in pushing ever more aggressive interpretations of the governing criminal statute. On the other hand, the defendant, whether a corporation or an individual, is not particularly concerned about the scope of the statute as it might be applied to others in the future. The defendant wants the least possible punishment, right now.
So, in many white collar cases, the government pushes hard for the defendant to plead guilty pursuant to expansive interpretations of a statute’s jurisdiction and/or scope of liability, and defendants readily accept those interpretations in exchange for what they perceive to be the lowest available penalty.
But what happens next?
In the absence of much decided case law in the area — because so many defendants strike plea agreements rather than litigating their cases — prosecutors start to believe that the law means whatever they have been able to get defendants to agree to in earlier plea agreements. After all, they reason (ignoring the parties’ different interests in settlements), “Why would Global MegaCorp have agreed to plead guilty on this very same theory of liability if it didn’t believe that (1) we had jurisdiction and (2) the conduct clearly violated the criminal statute?”
And when the next case comes around, the government stretches the theory of liability or jurisdiction a little bit further. Again, nobody sets out to develop a statutory interpretation that goes beyond what any Supreme Court Justice would conclude was intended by Congress, but that is consistently what winds up happening because prosecutors (rather than judges) and settlements (rather than well-reasoned judicial opinions) wind up creating the “common law” that prosecutors use to interpret these statutes.
We have seen this before in connection with the interpretation of the honest services fraud and obstruction of justice statutes, and it is certainly happening today with the FCPA. In the honest services context, prosecutors pressured numerous employees to plead guilty to committing or conspiring to commit honest services fraud (18 U.S.C. § 1346) even though they did not personally benefit from the alleged fraud and, indeed, acted at the direction of their corporation’s management. See, e.g., United States v. Calger, No. 05-286 (S.D. Tex. July 13, 2005). So, for the Department of Justice, honest services fraud clearly prohibited such conduct — after all, people had agreed to go to jail under that theory. It took very well-financed and steadfast individuals — Jeffrey Skilling and Conrad Black — both of whom lost in the trial court and the Court of Appeals, to challenge DOJ’s interpretation all the way to the Supreme Court. And, when the Supreme Court looked at the interpretation DOJ over time had come to take for granted, it ruled 9-0that such an expansive interpretation of the statute would render honest services fraud unconstitutional and emphatically rejected the government’s interpretation.
Likewise, DOJ used its own expansive interpretation of the scope of liability for obstruction of justice under 18 U.S.C. § 1512(b) to put Arthur Andersen out of business and thousands of its employees out of work. Yet, once again, when that statutory interpretation was put to the test of nine Supreme Court Justices — rather than a single, scared defendant willing to settle at almost any cost — all nine Justices flatly rejected the government’s interpretation of the statute.
By now, you see where I’m going with this.
Notwithstanding the Andersen and Skilling warning signs, prosecutorial common law appears to be alive and well and indeed thriving in the FCPA context. For example, the government has persuaded a number of corporations and individuals to admit liability under the FCPA for bribing a foreign official even though that official was not employed by the government but was merely an employee of a company in which the government held a financial interest. United States v. Control Components Inc., No. 09-00162 (C.D. Cal. 2009) (“foreign officials” were employees of state-owned companies in China, South Korea, Malaysia, and the United Arab Emirates); United States v. Lindsey Mfg., No. 10-1031 (A)-AHM (S.D. Tex. 2010) (“foreign officials” were employees of a Mexican state-owned entity); United States v. ABB Inc., No. H-10-664 (S.D. Tex. 2010) (same). In recent years, corporations even have settled FCPA enforcement actions with DOJ and the SEC premised on alleged corrupt payments made to employees of business enterprises that were only minority-owned by a foreign government. See, e.g., United States v. Kellogg Brown & Root LLC, No. H-09-071 (S.D. Tex. 2009); United States v. Alcatel-Lucent, S.A., Crim. No. 10-20907 (S.D. Fla. 2010).
Similarly, DOJ also has used prosecutorial common law to stretch the purported reach of the FCPA’s jurisdiction. For example, a foreign company or person is subject to the antibribery provisions of the FCPA if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place “while in the territory of the United States.” See 15 U.S.C. § 78dd-3(a). Although this section has not yet been interpreted by any court, DOJ has persuaded significant foreign companies to settle FCPA cases on the theory that this provision confers jurisdiction whenever a foreign company or person causes any act to be done within the territory of the United States, by any person acting as that company’s or person’s agent. See United States v. SSI Int’l Far East Ltd., No. 06-CR-398 (D. Or. Oct. 10, 2006) (only link to the United States was a request to approve a wire transfer submitted to an affiliate’s office in Portland, Oregon).
Because the stakes of corporate prosecution are so high, because the abilities of most individuals to challenge the government are so limited, and because DOJ and the SEC want to pursue ever more aggressive interpretations of the scope of both liability and jurisdiction, we see an enormous number of FCPA cases settled on grounds that are mutually beneficial to the government and the particular settling defendants. The defendants get certainty and what they perceive to be a lesser penalty; the government gets a major international corporation or other defendant to agree that the FCPA means what DOJ and the SEC want it to mean — and the government then can point to that agreement when negotiating with the next defendant.
When the government for many years, for almost every prospective defendant, for all practical purposes, uses plea negotiations to develop prosecutorial common law, it erodes the ability of the judiciary to do its job and skews the balance of power in the criminal justice system heavily in favor of prosecutors and away from defendants and the courts. Nevertheless, at some point, at some time, one or more well-funded, steadfast defendants will rise up and aggressively challenge the government’s interpretations of the FCPA. Indeed, some defendants finally are testing DOJ’s interpretation of ‘foreign official’ in the courts. See Motion to Dismiss, United States v. Carson, No. 09-00077-JVS (C.D. Cal. Feb. 21, 2011); Motion to Dismiss, United States v. Lindsey Mfg., No. 10-1031(A)-AHM (S.D. Tex. Feb. 28, 2011); Motion to Dismiss, United States v. O’Shea, No. H-09-629 (S.D. Tex. Mar. 7, 2011). At some point, someone will take one of these statutory or constitutional challenges to the FCPA all the way to the Supreme Court.
We know how this movie will end. We’ve seen it before. The Supreme Court will reject the government’s expansive interpretation of the FCPA. The well-funded indefatigable defendant ultimately will prevail.
But how many other defendants, for how long, will spend how many years in jail or pay how many millions of dollars in fines before that day comes?
A Conversation with Richard Alderman Regarding BAE
In October 2010, I published (here) a detailed Q&A with Richard Alderman (Director of the U.K. Serious Fraud Office).
Given that the BAE matter was still pending in the U.K. courts, Mr. Alderman declined to answer BAE related questions.
In February, I re-submitted my BAE questions (along with a few additional questions relating to the December 2010 U.K. resolution of the BAE matter – see here for the prior post) to Mr. Alderman.
Our Q&A can be found here.
Publication of Mr. Alderman’s BAE-specific responses are timely given recent developments regarding BAE.
WikiLeaks recently published (here) a cable detailing certain information regarding termination of the U.K. inquiry regarding BAE and its relationship with certain Saudi officials, including in connection with the al-Yamamah contract.
Even though the cable adds little to what is already in the public domain regarding this matter (see here for the April 2009 PBS Frontline documentary Black Money – including interviews with several of the individuals referenced in the cable), the WikiLeaks cable has generated significant interest and has prompted a senior MP, Sir Menzies Campbell, to call for a Commons investigation.
The U.K. Telegraph (here) quotes Campbell as follows:
“This leak tells us how strong a case was available. If the information in this document had been before Parliament and the British public, there is no way that the Labour government could have influenced the termination of the investigation. The particular issue which will cause a great deal of annoyance is the fact there was prima facie evidence that a government department had been subjected to fraud. If prosecution is no longer possible, it is open to the Commons’ business innovation and skills committee to conduct a full investigation.”
For additional coverage, see here from Sue Reisinger (Corporate Counsel) and here from Samuel Rubenfeld (Wall Street Journal Corruption Currents).
Returning to my Q&A with Mr. Alderman, the following topics, among others, are explored:
(i) how the U.K. law on double jeopardy significantly affected the SFO’s investigation of BAE and how the “current system [in the U.K.] for dealing with parallel criminal investigations conducted in a number of different countries does not work effectively and needs change;”
(ii) whether the U.K. government was faithful to its OECD obligations in its handling of the BAE matter;
(iii) criticism of the SFO-BAE plea agreement by the U.K. sentencing judge; and
(iv) “shortcomings” in the U.K. system and how Mr. Alderman would like a system that “is far more transparent […] that commands public confidence, together with a much stronger role for the judiciary.”
Regime Change Due Diligence?
Today’s post is from a reader with government experience who wished to remain anonymous.
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“I have read with interest this blog’s prior post (here) relating to the recent political turmoil in Egypt, and the possible implications of those events from the standpoint of the FCPA and other anti-corruption laws and regulations around the world. Also of interest was this blog raising the question whether the next generation enforcement device by anti-corruption officials looking at these regime changes might include the “country sweep” as a corollary to the “industry sweep” that has been used in past corruption exercises. These considerations are brought further under the klieg light when considering the evolving state of affairs in the Middle East and the possible additional regime changes that may take place after certain leaders have been in power for decades and have amassed reported family fortunes that would make the most ardent of capitalists sit up and take notice.
Reading posts on this blog and others (see here for a similar recent post on the FCPA Blog), as well as observing general media reports on the amounts that these leaders have supposedly put in their bank accounts, makes one wonder of the level of criminality that must have occurred. It shouldn’t take one with an overly cynical view to surmise that we must be talking of thousands of crimes by hundreds or more actors.
Surely, there will be investigations galore by new regimes to try to discredit the vanquished and reclaim national funds. It will be easier to determine who were the beneficiaries or recipients of all the funds to the extent tracing is possible. But given the sums that are being bandied about, there will be a far larger number of sources from which such funds may have originated that ultimately found their way to the autocrats and their legion. And it will be interesting to see where the investigations and questioning leads in terms of where all that money has come from. One can only hope that people with important titles on their business cards sitting in governmental agencies around the world are also sitting up and paying attention and are planning to use those titles and the power that goes along with them to further the goals of the laws they have sworn to uphold. It goes far beyond simply freezing assets. It will be a massive undertaking. Where it leads could raise delicate issue for businesses. Perhaps also national security and statecraft.
All this also makes one test their empathy skills by playing the “What-Would-You-Do” game. That game goes something like this: imagine you were standing in the high priced wing-tips of a Chief Risk/Compliance Officer or a General Counsel of any public company that has been doing business in that part of the world. What should you be thinking just about now? Surely you have seen the news reports and heard the stories. Do you just shake your head on the speed with which change occurs? Or would you feel compelled (either because you believe it’s the right thing to do, or, more basically, because you would never want to be in a position of being criticized later for at least never having raised it) to walk down the hall to the CEO’s office or the board room for that matter, and say: “we really should be thinking about running an audit or review or bringing in people to run an audit of everything we’ve been doing in [Insert Country or Countries of Choice] just so we understand what we’ve got in terms of any issues. We should be refreshing and testing our protocols.” Board members should be thinking along these lines too. They should be asking these kinds of questions if their own management teams aren’t raising them. You can bet your shareholders’ bottom dollar that plaintiffs’ counsel are or will be thinking like this and pursuing claims, and D&O insurance providers will be concerned about it too. It may be a long way off, and telescoping is never easy, but it will be surprising if the fallout zone in the aftermath doesn’t include some of this laundry.”
Significant China Law Development
The June 2010 OECD Working Group on Bribery Annual Report (here) notes that China’s “Ministry of Supervision informed the [OECD] Secretariat that China had begun considering how it would establish an offence of bribing a foreign public official, but was not yet at the stage of drafting legislation.”
As this recent Covington & Burling alert highlights: “on February 25, 2011, the legislature of the People’s Republic of China (“PRC”), the National People’s Congress, passed a slate of 49 amendments to the Criminal Law, one of which is a provision that criminalizes paying bribes to non-PRC government officials and to officials of international public organizations (“the Amendment”).” The alert explain that “this Amendment represents the first instance in which PRC law has prohibited PRC nationals and PRC companies from paying bribes to non-PRC government officials.”
Eric Carlson (here), an attorney based in Covington’s Beijing office who specializes in anti-corruption compliance with a particular focus on China and other regions of Asia and one of the authors of the alert, answered the following questions.
Is this China’s version of the FCPA?
At one level, the Amendment’s aim appears to be similar to the FCPA’s — prevent citizens and companies based in the country from bribing government officials outside the country. This is China’s first foray into this area, however, and the provisions are not as detailed or developed as in certain other countries’ anti-bribery laws. The PRC Amendment is a rather high-level law, whereas the text of the FCPA includes considerably more detail, even if the interpretation of those details is being actively debated and litigated. The absence of clear definitions, exceptions, and affirmative defenses also would appear to require PRC prosecutors to exercise somewhat more discretion in interpreting and enforcing the law.
Is China really going to enforce this law against its own companies operating outside of China?
Unclear. China’s enforcement of its domestic bribery laws historically has been somewhat uneven and focused mainly on the demand side (i.e., prosecuting officials who take bribes). Recently, however, the government has shown an increasing willingness to target bribe-payers as well, as corruption remains a primary concern of the general population and thus a concern for the government and ruling Communist Party, which is at its core focused on social stability. It remains to be seen whether the Amendment will actually be enforced in a way that deters bribe-paying by PRC companies and citizens. (To be fair, a goodly number of countries have strict laws criminalizing bribery of foreign officials outside their countries but have done little to enforce these laws.)
How will this new law affect multinationals operating in China?
The impact will obviously depend on how a multinational structures its operations in China. The Amendment (like the underlying Criminal Law) applies to all PRC citizens, wherever located, all natural persons of any nationality within China, and all companies, enterprises, and institutions organized under PRC law, which generally includes, in addition to PRC domestic companies, Sino-foreign joint ventures, wholly foreign-owned enterprises (WFOEs), and representative offices. Under the Amendment, a joint venture between a PRC company and a non-PRC company organized under PRC law, or a WFOE, could be prosecuted for paying bribes to non-PRC government officials. (Paying bribes to Chinese government officials is of course already illegal under pre-existing law.)
For most multinationals whose China operations don’t do any business outside of China, the larger risk may be China’s existing criminal and commercial bribery laws. (Many multinationals operating in China are not aware of local commercial bribery laws, which prohibit both public- and private-sector bribery.)
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As suggested above, having a law on the books and enforcing a law can sometimes be two different things. However, based on numerous media reports (see here for instance) there would seem to be plenty of enforcement opportunities when China’s law comes into force.
Robert Amaee on the “The Elusive UK Bribery Act”
In this guest post, Robert Amaee (the former Head of Anti-Corruption and Proceeds of Crime Unit at the U.K. Serious Fraud Office and current counsel with Covington & Burling LLP in London – see here) addresses several issues regarding the U.K. Bribery Act, including its recently announced delay.
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The Elusive UK Bribery Act
The UK Ministry of Justice (the “MoJ”) announced within the past few days that implementation of the UK Bribery Act 2010 (the “Bribery Act”) is to be postponed for a second time; leading to a barrage of criticism from respected sources such as the OECD and Transparency International. The Bribery Act will now not enter into force until three months after the MoJ publishes its guidance on certain provisions of the Bribery Act. The MoJ has not announced a date for the issuance of this guidance.
So, what’s going on?
Some business leaders and their representatives reportedly have complained about the impact the Bribery Act could have on the competitiveness of British business overseas; with the incoming head of the Confederation of British Industry claiming that the Bribery Act is “not fit for purpose”. The Bribery Act also stands accused of leaving too much discretion in the hands of officials at the UK Serious Fraud Office (the “SFO”) to resolve questions that have been posed concerning the Bribery Act’s jurisdictional reach as well as several of its substantive provisions. Others — even within the UK Government — are reported to have complained that the Bribery Act was rushed through Parliament without sufficient scrutiny of the impact on British business. So, what’s going on?
The Bribery Act has had an exceedingly long gestation period by any standard and, like many welcome but overdue arrivals, it is now causing a few birthing issues. You may not like this analogy much but the fact of the matter is that ever since the UK made a commitment in 1998 to fulfill its obligations under the OECD Anti-Bribery Convention and became a signatory to the UN Convention against Corruption, there has been an unremitting flow of effort aimed at transforming the UK’s complex Victorian laws on bribery and corruption into something more readily understandable and enforceable.
Since 1998, there has been, inter alia, in the UK a Law Commission Report, Draft Corruption Bill 2003, Draft Corruption Bill 2006, Law Commission Consultation 2007, a further Law Commission Report, a Draft Bribery Bill published in March 2009, the Joint Committee Report on the Draft Bribery Bill and the UK Government’s positive response to that report, which described the Joint Committee’s scrutiny of the Bill as “thorough.”
It is a fact that the Bribery Act did move through Parliament at breakneck speed in the final hours of the last UK Government in April 2010, receiving Royal Assent with little time to spare. What is also true, though, is that the Bribery Act was extensively debated in Parliament between November 2009 and April 2010 and made its way onto the statute books with resounding cross party support.
Will the Bribery Act ever enter into force?
There remains very strong support, across the UK Government and within the wider business community, for an effective and enforceable statute to combat bribery and other forms of corruption. The UK Attorney General Dominic Grieve QC has expressed publicly his support for the Bribery Act as has the Justice Minister and UK Anti-Corruption Champion, Ken Clarke. I believe that there is practically no prospect of the UK Government reneging on the commitments the UK has made to modernise the laws prohibiting bribery and other forms of corruption or indeed significantly disarming the Bribery Act, as enacted last April.
No one in the UK or elsewhere can assert a legitimate interest in permitting corrupt officials around the globe to continue to amass personal wealth at the expense of their fellow citizens, who often are left to endure abject poverty. Quite apart from the moral repugnance that one feels, it is important to ensure that corrupt officials do not act as an impediment to economic growth and job creation within their often resource rich countries by holding companies to ransom and pocketing their nation’s wealth.
The Bribery Act aims to tackle business involvement in corruption by making the boardroom responsible for keeping a tight reign on the company’s employees as well as the actions of “associated parties,” thereby aspiring to stem the flow of corporate funds into corrupt hands. No one will argue against that laudable aim but at the same time it is important to ensure that the law is not so widely drafted that it leaves well meaning and ethical companies in the invidious position of sanctioning technical breaches of the Act in the hope of salvation through prosecutorial pragmatism.
What’s all the fuss about?
The Bribery Act runs to a mere 17 pages and contains only four substantive offences. But it is the scope of two offences in particular that has caused business leaders to reach for the nearest packet of aspirin.
The major criticism has focused on the offences in sections 6 and 7 of the Bribery Act, both of which stand accused of being too widely drawn and introducing novel concepts that the Bribery Act fails to define. In relation to both of those sections, implementing policies to deal with corporate hospitality, facilitation payments and the extent of a company’s exposure to third party folly are regularly cited as problematic by company representatives.
In essence, the section 6 offence of “bribery of a foreign public official” makes a person liable if he or she offers, promises or gives a financial or other advantage to a foreign public official with the dual intention of influencing the official and obtaining or retaining business or a business advantage. The concern that has been raised is that for an offence to be made out under this section there is no requirement to show that the person trying to win the business had a corrupt intent or an intent to induce “improper performance” on the part of the official (as is required for the section 1 offence) and that many routine innocent interactions with foreign public officials could, as a consequence, amount to technical breaches of the Bribery Act.
Section 7 of the Bribery Act creates a wholly unprecedented UK offence of “Failure of a commercial organisation to prevent bribery.” A UK registered company or a non-UK registered company that “carries on a business or part of a business” in the UK, with no “knowledge” of or involvement in bribery could find itself in the uncomfortable position of having to explain to a UK prosecutor how a rogue employee or “associated person” in a remote part of the world could have paid a particular bribe. If facing such a charge, the company would have to convince the prosecutor and, if it came to it, a court that the policy and procedures that it had developed and implemented amounted to the only defence available under section 7, namely the much talked about “adequate procedures”.
The Bribery Act stipulates that a person is associated with a company if that person “performs services” for or on the company’s behalf. The Bribery Act states that an employee, agent or subsidiary “may (for example)” be deemed to be an associated person but goes on to say that in determining the question of who performs a service on for you or on behalf of a company one would have to look at “all the relevant circumstances” and not just the ”nature of the relationship.”
The manner in which an “associated” person is treated in the Bribery Act certainly does give prosecutors wide discretion in deciding whether a company should be held to account for the conduct of those who are representing the company. In addition, whether a company is “carrying on a business or part of a business in the UK” is not defined or circumscribed in the Bribery Act itself. Rather, it has been left — according to the Bribery Act’s legislative history — to the judgment of prosecutors and the UK courts, grappling with the pertinent facts on a case by case basis and applying “common sense.”
In relation to the “adequate procedure” defence under section 7, the Bribery Act obliges the UK Government, through the Secretary of State, to publish guidance on procedures that companies “can put in place to prevent persons associated with them” from engaging in bribery. This will, in due course, be supplemented by prosecutorial guidance setting out the elements of each of the Bribery Act offences and the public interest considerations that prosecutors will take into account in deciding whether to prosecute.
The MoJ’s draft guidance on “adequate procedures” was published in September 2010 and was followed by a short consultation period, which ended in November 2010. The MoJ had been expected to publish in January 2011 its final guidance on “adequate procedures,” leaving thereafter a three month window for companies to digest the guidance and refine their anti-bribery procedures.
What’s next?
In postponing release of the final guidance and implementation of the Bribery Act, the UK Government appears to have taken note of the cumulative effect of the concerns outlined above, albeit rather late in the day, and put off implementation of the Act until the guidance can be shaped to address those concerns. The MoJ is reported to have explained the delay in issuing the statutory guidance by stating that it is assiduously working on the guidance to make it “practical and comprehensive for business.”
Practical and comprehensive guidance certainly would be a step in the right direction and would be welcome by all British businesses as well as by those non-UK registered companies carrying on a business, or part of a business, in the UK who are working hard to compete globally whilst staying on the right side of the law.