Hail To The Chief
Today is Presidents’ Day.
This post highlights the role of Gerald Ford, Jimmy Carter, Ronald Reagan, and William Clinton in enactment and subsequent development of the FCPA. My article “The Story of the Foreign Corrupt Practices Act” also contains a detailed overview of the roles of the Ford and Carter administrations.
Ford
After watching Congress investigate and hold hearings on the foreign payments problem for approximately nine months, in March 1976 President Ford issued a “Memorandum Establishing the Task Force on Questionable Corporate Payments Abroad” (see here).
The great debate at this time was whether the foreign payments problem should be addressed through a disclosure regime or through a criminalization regime. The Ford Administration favored the former and in June 1976, President Ford released “Remarks Announcing New Initiatives for the Task Force on Questionable Corporate Payments Abroad.” (see here). As noted in the remarks, President Ford directed the task force “to prepare legislation that would require corporate disclosure of all payments made with the intention of influencing foreign government officials.”
Certain bills were introduced in Congress consistent with Ford’s vision and in August 1976 President Ford issued “Foreign Payments Disclosure – Message From the President of the United States Urging Enactment of Proposed Legislation to Require the Disclosure of Payments to Foreign Officials.” (see here).
Neither Ford’s proposal, or any other, was enacted by Congress prior to the 1976 elections in which Ford was defeated by Jimmy Carter.
Carter
Unlike the Ford Administration, the Carter administration favored the criminalization regime that was under consideration in the prior Congress. When Congress reconvened in January 1977 after the election, the movement to adopt a criminalization regime soon picked up speed again.
Certain members of the Carter administration testified at Congressional hearings throughout 1977 in favor of the criminalization regime and in December 1977, S. 305 (the Foreign Corrupt Practices Act of 1977 and the Domestic and Foreign Investment Improved Disclosure Act of 1977) was presented to President Carter.
On December 20, 1977, President Carter signed S. 305 into law – see here for his signing statement.
Reagan
As noted in this previous post, President Reagan’s administration very soon sought decriminalization of foreign payments subject to the FCPA. During the Reagan administration, numerous efforts were made in Congress to amend the FCPA. Soon after the FCPA was enacted, it was widely recognized that while the FCPA had addressed a serious problem, the statute created much uncertainty and was, in the minds of many, unworkable.
Among other things, the FCPA antibribery provisions enacted in 1977 contained a broad knowledge standard (“reason to know”) applicable to indirect payments to “foreign officials”; (ii) did not contain any affirmative defenses; and (iii) did not contain an express facilitating payments exception. Beginning in 1980, various bills were introduced – either as stand alone bills or specific titles to omnibus trade and export bills – that sought to amend the FCPA. This legislative process took eight years.
In August 1988, President Reagan signed H.R. 4848 the Omnibus Trade and Competitiveness Act of 1988. Title V, Subtitle A, Part I of the Act was titled “Foreign Corrupt Practices Act Amendments.” President Reagan’s signing statement does not refer to the FCPA amendments buried in the omnibus trade bill. Among the amendments were a revised knowledge standard applicable to indirect payments and the creation of affirmative defenses and an express facilitating payment exception.
Clinton
In November 1998, President Clinton signed S. 2375, the “International Anti-Bribery and Fair Competition Act of 1998.” Among other things, the Act amended the FCPA by (i) creating a new class of persons subject to the FCPA – “any person” not an issuer or domestic concern to the extent such person’s bribery scheme has a U.S. nexus; and (ii) creating a new alternative nationality jurisdiction test for U.S. issuers and domestic concerns.
See here for President Clinton’s signing statement.
FCPA Reform And The Olympics
The DOJ may think that my “foreign official” declaration “selectively reviews the [FCPA’s] legislative history.” However, the truth is the 152 page declaration is the most comprehensive document ever written on the FCPA’s legislative history relevant to “foreign official” issues. So comprehensive in fact that it highlights Foreign Corrupt Practices Act reform efforts and the Olympics.
You may be asking in your best Gary Coleman voice “whatcha talkin bout.”
This is what I am talking about.
In April 1999, Representative Henry Waxman introduced H.R. 1370, Senator John McCain introduced S. 803, and Senator John Ashcroft introduced S. 797. These bills sought to amend the FCPA by restricting American corporate sponsorship of the International Olympic Committee (“IOC”).
Specifically, H.R. 1370 sought to “amend the FCPA to prevent persons doing business in interstate commerce from providing financial support to the International Olympic Committee until the International Olympic Committee adopts institutional reforms.”
Specifically, S. 803 sought “to make the International Olympic Committee subject to the FCPA” by amending the “foreign official” definition – specifically the “public international organization” prong to include the International Olympic Committee.
Specifically, S. 797 sought “to apply the FCPA to the International Olympic Committee” by amending the term “‘foreign official’ [to] include[] any member of, employee of, or any person acting in an official capacity for or on behalf of, the International Olympic Committee.'”.
None of these bills made it out of committee.
You may be thinking, what about the “public international organization” prong of the FCPA’s “foreign official” definition which states that a “public international organization” is
an organization that is designated by Executive Order pursuant to section 1 of the International Organizations Immunities Act (22 U.S.C. § 288); or
any other international organization that is designated by the President by Executive order for the purposes of this section, effective as of the date of publication of such order in the Federal Register
The list of “public international organizations” is here. For more, see here.
And now back to the Games.
The FCPA Turns 36
Happy 36th birthday to our favorite statute, the Foreign Corrupt Practices Act.
Thirty-six years ago today, President Jimmy Carter signed S. 305. President Carter’s signing statement stated in full as follows.
“I am pleased to sign into law S. 305, the Foreign Corrupt Practices Act of 1977 and the Domestic and Foreign Investment Improved Disclosure Act of 1977. During my campaign for the Presidency, I repeatedly stressed the need for tough legislation to prohibit corporate bribery. S. 305 provides that necessary sanction. I share Congress’s belief that bribery is ethically repugnant and competitively unnecessary. Corrupt practices between corporations and public officials overseas undermine the integrity and stability of governments and harm our relations with other countries. Recent revelations of widespread overseas bribery have eroded public confidence in our basic institutions. This law makes corrupt payments to foreign officials illegal under United States law. It requires publicly held corporations to keep accurate books and records and establish accounting controls to prevent the use of ‘off-the-books’ devices, which have been used to disguise corporate bribes in the past. The law also requires more extensive disclosure of ownership of stocks registered with the [SEC]. These efforts, however, can only be fully successful in combating bribery and extortion if other countries and business itself take comparable action. Therefore, I hope progress will continue in the United Nations toward the negotiation of a treaty on illicit payments. I am also encouraged by the International Chamber of Commerce’s new Code of Ethical Business Practices.”
S. 305, of course, did not fall out of the sky onto President Carter’s desk thirty-six years ago today. Rather, S. 305 was the result of more than two years of Congressional investigation, deliberation, and consideration.
If the FCPA is your cup of tea, you owe it to yourself to read the most extensive piece ever written about the FCPA’s history – “The Story of the Foreign Corrupt Practices Act.”
The article weaves together information and events scattered in the FCPA’s voluminous legislative record to tell the FCPA’s story through original voices of actual participants who shaped the law.
Among other things, you will learn: (i) how the foreign corporate payments problem was discovered, specific events that prompted congressional concern, and the policy ramifications of those events which motivated Congress to act; (ii) how seeking new legislative remedies to the foreign corporate payments problem was far from a consensus view of the U.S. government and the divergent views as to a solution; (iii) the many difficult and complex issues Congress encountered in seeking a new legislative remedy; (iv) the two main competing legislative responses to the problem—a disclosure approach as to a broad category of payments and a criminalization approach as to a narrow category of payments, and why Congress opted for the later; and (v) how Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons, but how and why Congress intended and accepted in passing the FCPA to capture only a narrow category of such payments.
In A Way, It Is Like Gambling
Last week Penn National Gaming Inc. Chairman Peter Carlino spoke at the Baron Investment Conference in New York. This article by CNBC’s Lawrence Delevingne states:
“The U.S. government is too restrictive in trying to prevent its companies from corruption abroad and it’s hurting business expansion in Asia and elsewhere, according to Carlino. ‘There’s a little bit of overzealousness in this,’ Carlino said during a speech at the Baron Conference. ‘Those are limitations that American companies face that others don’t.’ Carlino said he wants to get into the lucrative Asian casino market—Las Vegas Sands already has a large presence in Macau, for example—but hasn’t been able to out of fear of violating U.S. rules. […] ‘There’s a problem for U.S. businesses, frankly. We had an interesting opportunity in a country that I won’t name; we were hampered in a major way by the American Foreign Corrupt Practices Act,’ he said. […] Carlino said Penn looked at expanding into the Asian country via an existing company but one of the line items of the business was to pay off the border guards. ‘It seems OK to me, frankly. If that’s the game, we’ll play it,’ Carlino said to chuckles from the mostly retiree Baron fund-shareholder audience. ‘There are problems for American companies trying to do business.’ ‘If it’s there, we’re looking at it. Problem is, the pickings are slim,’ he said of countries like Burma, India and Sri Lanka. ‘So finding the right opportunity, although we look and I trust we will, is tough,’ Carlino added.”
There are two ways to view Carlino’s comments.
The first is that Carlino meant that the FCPA – the law passed by Congress – is hurting U.S. business abroad. If so, well that is a correct policy decision that Congress knew and accepted when it passed the FCPA in 1977. For instance, as highlighted in “The Story of the Foreign Corrupt Practices Act,” during a Congressional hearing Representative John Moss stated:
“To think that no loss of business would occur in every instance would be unrealistic. Can we allow this to occur? Yes, if that is the small price we must pay to return morality to corporate practice. Yes, if that is the small price we pay to show that U.S. firms compete in terms of price, quality, and service and not in terms of the size of a bribe. Real competition works. The vast majority of American companies have operated successfully in foreign countries without the need to resort to bribery.”
Likewise, Treasury Secretary Michael Blumenthal stated:
“To the very, very small extent a particular company may lose a particular contract because it refuses to engage in this practice, I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”
The second way to view Carlino’s comments is that he conflated FCPA enforcement with the actual FCPA – as Donald Trump also did as highlighted in this prior post. In other words, Carlino confused FCPA enforcement with the FCPA.
Simply put, there is often a difference between FCPA enforcement and the FCPA.
For instance, Congress specifically exempted facilitation payments from the FCPA’s anti-bribery provisions. However, it is an open question whether the facilitating payments exception has any real meaning or whether the enforcement agencies have essentially repealed this exception through its enforcement theories. For instance, the SEC’s former Assistant Director of Enforcement has called the FCPA’s facilitating payment exception “illusory” and stated:
“The drafters of the FCPA recognized that such demands for ‘grease payments’ are a reality in many countries, and accordingly made clear that certain payments made to expedite the approval of permits or licenses, or to prompt the expeditious performance of similar low-level ministerial duties, fell outside the ambit of the statute’s anti-bribery provisions. Yet that exception for ‘facilitating payments’ […] is becoming harder and harder to rely on. […] The DOJ and SEC have pressed a narrow view of the exception in recent years … […] Of course, the fact that the FCPA’s twin enforcement agencies have treated certain payments as prohibited despite their possible categorization as facilitating payments does not mean a federal court would agree. But because the vast majority of enforcement actions are resolved through DPAs and NPAs, and other settlement devices, these cases never make it to trial. As a result, the DOJ and the SEC’s narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts – or Congress – would agree.”
Similarly, the FCPA’s books and records and internal controls provisions are qualified by the term “reasonable” and the only substantive judicial decision on these provisions (see here for the prior post) stated:
“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘reasonable assurances’ contained in [internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness. […] It is also true that the internal accounting controls provisions contemplate the financial principle of proportionality—what is material to a small company is not necessarily material to a large company.”
SEC guidance on the FCPA’s books and records and internal controls provisions stand for the following propositions:
- not all books and records are within the purview of the provisions;
- issuers should not face liability when its management was not aware and reasonably should not have known of the conduct at issue;
- the principal objective of the provisions is to reach knowing or reckless conduct;
- thousands of dollars ordinarily should not be spent conserving hundreds;
- the provisions are not an independent unrestrained mandate to establish novel or unprecedented corporate recordkeeping standards;
- if conduct was engaged in by a low-level employee, without the knowledge of top management, and with appropriate corrective action taken, an enforcement action against the issuer is not warranted; and
- the provisions do not require a company or its senior officials to be guarantors of all conduct of company employees.
Nevertheless, the enforcement agencies frequently bring FCPA enforcement actions against issuers without any allegation or suggestion that the conduct at issue was known or approved by top management (see here for example). In this new era of FCPA enforcement, the position of the enforcement agencies appear to be that indeed corporate officers are guarantors of all conduct of company employees and that fail-safe accounting and internal controls measures are indeed the standard (see here for example).
Against this backdrop, seeking to do business in challenging foreign markets through employees or agents may indeed be- based on the current enforcement theories – in a way like gambling.
If this is what Carlino meant, perhaps he has a point. The Congress that enacted the FCPA in 1977 and the Congress that amended the FCPA in 1988 certainly appeared to empathize.
Should Motivations Matter?
GlaxoSmithKline’s (GSK) scrutiny in China – by the Chinese government – dominated the headlines in July (see here for a prior post).
Shortly thereafter, many began to question the motivations of the Chinese government in investigating GSK and several other multinational pharmaceutical companies operating in China. Did the Chinese government have pure motivations? Or was there something else going on as the scrutiny was occurring at the same general time the Chinese government was seeking price concessions from multinational pharma companies in an effort to make healthcare more affordable for its citizens
See here from Bloomberg, here from Reuters.
The general issue gained plenty of traction in the blogosphere and editorial pages.
See here (“The decision of the Chinese government to act against Glaxo is likely motivated by a desire to make a strategic example of an international pharma company in China”).
See here (“With national healthcare expenses expected to reach $1 trillion annually by the end of the decade, China is looking for ways to reduce costs. The country’s National Development and Reform Commission has targeted the drug pricing policies of GSK, Merck, Novartis, Baxter, Astellas Pharma and almost 60 other international drug manufacturers for investigation. […] Growing drug costs in China thus appear to have provided the Chinese government with the motivation to institute and “go public” with the GSK investigation, as well widening the probe into other pharmaceutical companies.
See here (“Still to be seen, however, is what’s motivating the crackdown. Drug makers have faced increasing pressure by Beijing to cut prices and share intellectual property, but neither aim should be accomplished through prosecuting bribery.”)
If GSK and other foreign firms operating in China did indeed violate Chinese law, should the real motivations of the Chinese government in investigating GSK and other companies even matter? What if the motivations of the Chinese government are less than pure?
Bringing the question home, if a company subject to the FCPA violates the law, should the real motivations of the U.S. government in bringing an enforcement action even matter? Are the motivations of our government always pure when it comes to FCPA enforcement? After all, the lack of FCPA anti-bribery charges against Siemens and BAE was hardly pure. The DOJ’s sentencing memorandum in those cases make clear that the settlements were structured in such a way as to avoid debarment issues for the company (and for the U.S. government). That is hardly a pure motivation for enforcing a law.
The mysterious end to the James Giffen enforcement action (see here for the prior post) – in which he asserted a public authority defense and that his actions were undertaken with the knowledge and approval of the highest levels of U.S. government – was hardly pure.
Impure motives are improve motives whether the impurity leads to lax enforcement or aggressive enforcement.
And certainly the U.S. is not alone. When the U.K. Serious Fraud Office dropped its investigation of BAE concerning business conduct in Saudi Arabia because the Saudis allegedly threatened to cease cooperation on terrorism issues, that was not a pure motive.
The interesting thing is this. With increased competition among nations in enforcing anti-bribery laws (an issue frequently discussed on these pages – see here instance), we can expect to see more motives being questioned.
This makes it all the more important – as I highlighted several years ago – in “The Facade of FCPA Enforcement” that we get things right here in the U.S. when it comes to FCPA enforcement.
But then again, this is not merely an enforcement issue.
Let’s not forget that the real reason the U.S. ended up with the Foreign Corrupt Practices Act in 1977 was not exactly pure.
Sure, one will find certain statements in the legislative history to support the notion that what motivated Congress to enact the FCPA was so-called post-Watergate morality. However, as detailed in “The Story of the Foreign Corrupt Practices Act,” the main motivation of Congress in enacting the FCPA was clearly foreign policy.
Senator Frank Church, an FCPA leader, was clear in opening initial hearings as to the so-called foreign corporate payments in May 1975. He stated.
“For what we are concerned with is not a question of private or public morality. What concerns us here is a major issue of foreign policy for the United States. […] It is time to treat the issue for what it is: a serious foreign policy problem.”
In chairing another Congressional hearing in 1975, Senator Church likewise stated: “I have focused on the foreign policy aspects of this issue because that is the chief concern of my subcommittee.”
Representative Solarz, who emerged as an FCPA leader in the House, stated:
“What is in fact at stake is the foreign policy and national interest of the United States. It is clearly in our interest to put a stop to these pernicious practices. […] We simply cannot permit activity which so damages U.S. foreign policy.”
Representative Moss stated:
“Business practices of these corporations abroad often impact directly on U.S. foreign policy. Disclosures have shown that United Brands dealings with the Honduran Government and Lockheed’s relationship with the Dutch Crown, Italian political parties, and former key leaders of the ruling Japanese party had an impact as great as the Department of State might have had. Surely the public expects more than to have foreign policy made in the board rooms of United Brands or Lockheed. Not only is a publicly owned corporation unaccountable to the public when it uses its assets to bribe foreign governmental officials, but also it is unaccountable to its shareholders, the ones to whom the assets belong.”
In short, Congressional leaders wanted foreign governments and foreign political parties accountable and answerable to the U.S. government itself, not to private enterprise because of the bribe payments. This was not a pure or altruistic reason for enacting the FCPA, it was a power play tied directly to foreign policy.
Should motivations matter?