When It Wants To, Congress Knows How To Speak
The FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof …”. One of the arguments in the “foreign official” challenges is that “where Congress wants to define ‘instrumentality’ to include state-owned enterprises, it knows how to do so.” (See pg. 30 of the Carson brief summarized in this previous post).
My “foreign official” declaration (see here) notes as follows. “There is no express statement or information in the FCPA’s legislative history describing the ‘any department, agency, or instrumentality’ portion of the “foreign official” definition. Further, there is no express statement or information in the FCPA’s legislative history to support the DOJ’s expansive legal interpretation that alleged SOEs are ‘instrumentalities’ (or ‘departments’ or ‘agencies’) of a foreign government and that employees of SOEs are therefore ‘foreign officials’ under the FCPA’s anti-bribery provisions. However, there are several statements, events, and information in the FCPA’s legislative history that demonstrate that Congress did not intend the ‘foreign official’ definition to include employees of SOEs. […] During its multi-year investigation of foreign corporate payments that preceded enactment of the FCPA, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities. Indeed, in certain of the competing bills introduced in Congress to address foreign corporate payments, the definition of ‘foreign government”’ expressly included SOEs. These bills were introduced in both the Senate and the House during both the 94th (1975-76) and 95th (1977-78) Congresses. […] However, despite being aware of SOEs, despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs, Congress chose not to include such definitions or concepts in S. 305, the bill that ultimately became the FCPA in December 1977.”
As noted in the Carson brief, in the Foreign Sovereign Immunities Act (passed a year before the FCPA), the term “agency or instrumentality of a foreign state means any entity which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision.” In short, Congress knew how to embed SOE concepts in the FSIA when it wanted to.
Similarly, as noted in the Carson brief, Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (which became law in 201o) and imposes requirements on certain resource extraction issues to, among other things, disclose information regarding payments made to “foreign governments” for the purpose of the commercial development of oil, natural gas or minerals, defines “foreign government” to “include [] a department, agency, or instrumentality of a foreign government or a company owned by a foreign government.” In short, Congress knew how to embed SOE concepts in Dodd-Frank when it wanted to.
A bill introduced by Rep. Chris Smith last week further demonstrates that when Congress wants to, it knows how to embed SOE concepts into legislation. The bill, “The Global Online Freedom Act” seeks to “prevent U.S. businesses from cooperating with repressive governments in transforming the Internet into a tool of censorship and surveillance …”. The bill defines “foreign official” to mean (i) any officer or employee of a foreign government or of any department; and (ii) any person acting in an official capacity for or on behalf of, or acting under color of law with the knowledge of, any such government or such department, agency, state-owned enterprise, or instrumentality.” Further, the bill defines “state-owned enterprise” as follows – “a commercial entity in which a foreign government owns or controls, directly or indirectly, more than 50 percent of the outstanding capital stock or other beneficial interest in such commercial entity.”
For the Carson and Lindsey “foreign official” decisions see here and here. Recently the Lindsey convictions were vacated based on prosecutorial misconduct (see here), the Carson case remains pending.
In The Words of John Keeney
Long-time DOJ attorney John “Jack” Keeney recently died. See here for the Washington Post article.
Keeney (as Deputy Attorney General, Criminal Division) testified during Congressional FCPA reform hearings in the mid-1980’s. For instance, on June 10, 1986, Keeney testified at a Joint Hearing Before the Subcommittee on International Finance and Monetary Policy and the Subcommittee on Banking, Housing, and Urban Affairs. The hearing focused on S. 430, a bill to amend and clarify the FCPA. (An interesting aside, so toxic was the political environment to amend a law called the “Foreign Corrupt Practices Act” that several reform bills sought to change the name of the FCPA – S. 430 was titled the “Business Accounting and Foreign Trade Simplification Act”).
In his prepared statement, Keeney presented the “views of the Department of Justice” on S. 430. Kenney stated as follows. “The Department supports S. 430 and its objective of removing unnecessary impediments to foreign trade …”. As noted in this previous post, one of the major items of reform in the 1980’s was revising the FCPA’s third-party provision which, as enacted, was triggered by a broad “while knowing or having to reason to know” standard.
Keeney supported removal of the “reason to know” standard. He stated as follows. “The Justice Department is sensitive to the unnecessary problems that the American business community has encountered in its attempts to interpret and apply the ‘reason to know’ standard. We also know it is difficult to define exactly what constitutes ‘reason to know.’ For that reason, the policy of the Department has been to prosecute only those cases where the evidence of awareness – whether direct or circumstantial – was so clear as to constitute actual knowledge of the bribe scheme. This policy would not be changed by abolishing the ‘reason to know’ standard in favor of a more objective standard and would improve the clarity of the Act.”
One provision of S. 430 would have required the DOJ to issue binding opinions with respect to the criminal provisions of the FCPA. Keeney did not support such a provision “since its general purpose is presently being met by the existing Foreign Corrupt Practices Act Review Procedure.”
As to the provision in S. 430 that gave the Attorney General authority to issue guidelines “concerning both the type of conduct which constitutes compliance with the criminal provisions of the Act as well as general precautionary procedures which businesses may voluntarily use to ensure compliance,” Keeney stated as follows. “From a commercial as well as an enforcement point of view, the Department does not believe that issuing guidelines or precautionary procedures would be advisable. Accordingly, we do not feel that this provision is necessary. The Department has determined that such guidelines are impractical for several reasons. No matter how carefully crafted, guidelines would have the effect of unnecessarily restricting business transactions and possibly placing American businesses at a disadvantage with their foreign competitors. Moreover, the Department cannot place simple dollar limits on bribe or gratuties and then apply these limits uniformly. Reasonable business practices differ significantly from industry to industry as well as from country to country. As a matter of policy, the Department cannot publicly ignore a small but otherwise corrupt transaction any more than it can place dollar limitations on the actions prosecutable under the mail or wire fraud statutes. If the Department promulgates guidelines, due process requires that these guidelines govern any position the Department later takes in any criminal action. While arguably helpful to businesses, such guidelines are not really necessary. Under the FCPA Review Procedure , a specific factual situation may be resolved without binding the Department in a case involving a somewhat different factual situation. The Department believes the [Review Procedure] is the least restrictive and most useful process for resolving any instance of perceived ambiguity in the interpretation of the FCPA and should be used in place of guidelines.”
When the FCPA was amended in 1988, Congress did indeed request that the Attorney General issue guidelines, however as noted in this prior post, the DOJ decided not to issue such guidelines.
Following the hearing, Senator D’Amato asked Keeney various questions for the record as to DOJ’s FCPA Review Procedure – such as “has it been used very frequently, how many times since the procedure was put in place?” In pertinent part, Keeney responded as follows. “The Review Procedure has resulted in 18 Department opinions since its inception. On various other occasions, applications for review have been submitted but subsequently withdrawn. [See here for a prior post regarding the FCPA “Mulligan Rule”]. In addition, the Criminal Division of the Department has received frequent telephone inquiries about the Procedure which are not followed by any written request.”
John Keeney may no longer be with us, but the issues he discussed in 1986 (DOJ FCPA guidance and questions surrounding the DOJ’s FCPA Opinion Procedure Program) remain issues today.
DOJ Guidance – Better Late Than Never, But Will It Matter?
The FCPA’s 1988 amendments required that the Attorney General, “after consultation with the [the SEC], the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with [the anti-bribery provisions] would be enhanced and the business community would be assisted by further clarification” of its various provisions. Among other things, Congress requested that the Attorney General consider issuing guidelines as to “general precautionary procedures [companies] may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy …”.
Following the 1988 Congressional mandate, the DOJ did issue a formal notice inviting all interested persons “to submit their views concerning the extent to which compliance with [the anti-bribery provisions] would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines.” However, the DOJ stated that “only 5 responses were received, and 3 of the responses were to the effect that guidelines were unnecessary” and based on this information it declined to issue FCPA compliance guidelines envisioned by Congress. In July 1990, the DOJ stated as follows. “After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”
Off-Target
As detailed in this prior post, in September the Open Society Foundation released “Busting Bribery: Sustaining the Global Momentum of the Foreign Corrupt Practices Act” (here). The white paper was in response to the October 2010 white paper “Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act” (here) released by the Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce. Authored by David Kennedy (Professor of Law, Harvard Law School) and Dan Danielsen (Professor of Law, Northeastern University School of Law), Busting Bribery stated that “the Chamber proposes to change the [FCPA] in ways that would substantially undermine the possibility for successful enforcement of America’s anti-bribery commitments” and that the “Chamber’s proposed amendments would also set back decades of progress in the global struggle against corruption.”
As to a potential FCPA compliance defense, a defense that not only the Chamber supports, Kennedy and Danielsen (the “Authors”) stated as follows in the Executive Summary. “Often seen as the least concerning of the Chamber’s proposals, the creation of an affirmative defense of ‘compliance’ to FCPA corporate criminal liability is actually potentially very dangerous. Compliance is already taken into account at every stage in the investigation and resolution of FCPA violations. In 1988, Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place. A defense of ‘adequate’ or ‘good faith’ compliance makes no sense when, as under the current FCPA, corporate criminal liability requires proof beyond a reasonable doubt that the company acted with actual knowledge and corrupt intent to influence a foreign government to gain an improper business advantage. Creating a compliance defense to knowing and intentional violations of the FCPA would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from their knowing and intentional wrongdoing.” (emphasis in original).
In the substantive section of report, the Authors stated, among other things, as follows. “… [A]n affirmative defense of ‘adequate’ or ‘good faith’ compliance is fundamentally inconsistent with the FCPA’s very high standards for corporate criminal liability which require prosecutors to prove that a company’s prohibited acts be both ‘knowing’ and ‘corruptly’ undertaken with intent.” The Authors then state that “these standards of liability were summarized in the Congressional Report on the 1988 amendments to the Act” and quote a portion of the Congressional Conference Report on the 1988 amendments as follows. “Thus, the ‘knowing’ standard adopted covers both prohibited actions that taken with ‘actual knowledge‘ of intended results as well as other actions that, while failing short of what the law terms ‘positive knowledge,’ nevertheless evidence a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to the high probability of violations of the Act.” (emphasis in original).
The Authors then continue as follows. “From these articulated and clearly-defined standards of corporate culpability under the FCPA, it becomes immediately apparent that an affirmative defense of ‘good faith’ or ‘adequate’ compliance is simply inappropriate. On the one hand, effective, ‘good faith’ compliance is logically incompatible with the requirement under the Act that violations be undertaken with ‘actual knowledge’ or a ‘conscious disregard or deliberate ignorance of known circumstances’ and the requisite ‘corrupt’ intent to induce a foreign official to misuse his official position to wrongfully obtain business or direct business to another. Any compliance program that knowingly permitted, facilitated, or consciously or deliberately turned a blind eye to corrupt, intentional violations of the FCPA must be either per se inadequate or not undertaken in good faith. On the other hand, the existence of a merely formal compliance program is irrelevant to the question of whether knowing, intentional and corrupt behavior took place. Creating a ‘compliance defense’ to knowing and intentional violations of the Act would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from having knowing and intentional wrong-doing.”
To use the Authors phrase of “immediately apparent,” what is immediately apparent upon reading Busting Bribery is how the Authors are off-target when it comes to the FCPA’s 1988 amendments as well as respondeat superior principles of corporate criminal liability.
In asserting that “Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place,” the Authors appear to assume that such was the general standard for corporate criminal liability prior to the 1988 amendments. It wasn’t.
The FCPA, as originally enacted, prohibited those subject to the law from, among other things, providing things of value to “any person, while knowing or having reason to know that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.” (emphasis added). The FCPA, as originally enacted, thus contained a third-party payment prohibition triggered by a broad “while knowing or having to reason to know” standard.
This standard was very quickly criticized by many because companies were “unsure about the degree of their responsibility for questionable payments made by their foreign agents in cases when the companies believe they have instituted reasonable safeguards.” (See GAO Report, “Impact of Foreign Corrupt Practices Act on U.S. Business” at pg. iv). U.S. Trade Representative William Brock candidly stated during a 1981 Senate FCPA hearing that “frankly, nobody knows what it means.” (See “Business Accounting and Foreign Trade Simplification Act,” Joint Hearings Before the Subcommittee on Securities and the Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing, and Urban Affairs, United States Senate, 97th Congress, First Session at pg. 63).
The FCPA reform efforts that began in 1980 and culminated in FCPA amendments in 1988 had, as a core reform proposal, revising the “reason to know” standard relevant to third-party payments. Jonathan Rose (Assistant Attorney General) stated, in connection with a 1983 House FCPA hearing, that the FCPA’s then standard of liability for third-party payments was akin to a “simple negligence standard” and “is plainly inappropriate and inconsistent with the general approach of modern criminal law to state-of-mind requirements.” (See “The Foreign Trade Practices Act,” Hearings Before the Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs, House of Representatives, 98th Congress, First Session at pg. 118).
In 1987, the House Committee on Energy and Commerce stated, in reporting out an FCPA reform bill revising the third-party knowledge standards that the “reason to know standard under current law has been criticized as unclear” and that “some businesses interpret the standard as tantamount to “reason to suspect that an agent will pass on a bribe, or a negligence standard …”. (See Trade and International Economic Policy Reform Act of 1987, House Report 100-49 (April 6, 1987) at pg. 75). The House Report stated that “clearly such an interpretation was not intended by Congress …” and when the FCPA was ultimately amended in 1988, the relevant Conference Report, under the heading “Standard of Liability for Acts of Third Parties (Agents)” stated that the conferees intended to retain the “knowing” requirement for payments to third-parties, to delete the House bill’s reference to “reckless disregard” and to include concepts of “conscious disregard” or “willful blindness.” (See House Report No. 100-576 at 920 (1988) at pg. 919).
The third-party payment provisions were amended in 1988 (and remain the same today) to prohibit those subject to the law from providing things of value to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.” Knowledge was defined in the 1988 amendments, and still is today, as follows. “(A) A person’s state of mind is ‘knowing’ with respect to conduct, a circumstance, or a result if – (i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur. (B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such a circumstance does not exist.”
In other words, Busting Bribery constructs, as the primary foundation for opposing an FCPA compliance defense, a knowledge standard that was relevant only, and continues to be relevant only, to the FCPA’s third-party payment provisions. The FCPA, when enacted, and to this day, allows corporate criminal liability under respondeat superior principles when an employee acts within the scope of his or her duties intending to benefit, at least in part, the organization. Knowledge (however defined) of the employee’s conduct by the board, executive officers, or other high-ranking executives is not required and, at present, the organization’s pre-existing compliance policies and procedures are not relevant as a matter of law to the organization’s criminal liability.
For instance, the only time in the FCPA’s history that a corporate FCPA charge was presented to a jury was in the Lindsey Manufacturing case early this year. The relevant jury instruction (instruction 16 – entity responsibility – entity defendant – agency) stated as follows.
“To sustain the charge of conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”) or violation of the FCPA against Lindsey Manufacturing Company, the government must prove the following propositions:
First, the offense charged was committed by one or more agents or employees of Lindsey Manufacturing Company; Second, in committing the offense, the agent or employee intended, at least in part, to benefit Lindsey Manufacturing Company; and Third, the acts by the agent or employee were committed within the authority or scope of his employment.
For an act to be within the authority of an agent or the scope of the employment of an employee, it must deal with a matter whose performance is generally entrusted to the agent or employee by Lindsey Manufacturing Company. It is not necessary that the particular act was itself authorized or directed by Lindsey Manufacturing Company. If an agent or an employee was acting within the authority or scope of his employment, Lindsey Manufacturing Company is not relieved of its responsibility because the act was illegal.” (emphasis added).”
So yes, while it is true that the corrupt intent element must be met in order to convict a company of an FCPA offense, that corrupt intent element can be satisfied by singular and isolated acts of any employee, even if their conduct is in violation of pre-existing company policies and procedures. However, you would not glean this significant point from Busting Bribery because the term respondeat superior (or general concept) does not even appear in the lengthy white paper.
An FCPA compliance defense would not, as the Authors suggest, create a wholesale corporate defense to “knowing and intentional violations of the FCPA.” If the board, executives, or other senior personnel were involved in the knowing and intentional conduct at issue, a company could not rely on the compliance defense. If an employee, at any level, engaged in knowing and intentional conduct in violating of the FCPA, a company could not rely on the compliance defense unless it had in place pre-existing compliance policies and procedures reasonably designed and implemented to prevent and detect, insofar as practicable, the conduct at issue.
The notion that creating a potential compliance defense “would amount to eliminating [corporate] criminal liability under the Act all together” is simply false and off-target, as is Busting Bribery’s misleading reference to the FCPA’s 1988 third party payment revisions to support its position.
Despite its obvious shortcomings, others are championing Busting Bribery’s compliance defense rebuttal. For instance, last week Citizens for Responsibility and Ethics in Washington (CREW) issued a release (here) touting the Authors’ work and praising Busting Bribery for “thoroughly debunk[ing] the Chamber’s arguments for amending the FCPA, finding them based on ‘myth.'” See CREW’s letters to both the House (here) and Senate (here).
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How did Aaron Murphy (Latham & Watkins), an FCPA practitioner and author of “Foreign Corrupt Practices Act: A Practical Resource for Managers and Executives” react to Busting Bribery? In this twitter feed he asked – “why are professors with no apparent experience actually investigating corruption used as experts?”
In The Words of Stanley Sporkin
Stanley Sporkin, as Director of the SEC’s Division of Enforcement in the mid-1970’s, played a key role in addressing the foreign corporate payments issues being investigated by Congress and in shaping what would become the FCPA’s books and records and internal control provisions. Calling Sporkin the “Father of the FCPA” (as many have) is, in all due respect, a bit of an overstatement as Sporkin’s SEC was not in favor of what would become the FCPA’s anti-bribery provisions and wanted no part in enforcing those provisions. Nevertheless, Sporkin was a key participant, and has remained a key player, on FCPA issues throughout his storied career.
Sporkin has been talking about FCPA reform for years – long before the U.S. Chamber released its FCPA reform proposals in October 2010.
Thanks to a reader, we can all read some of Sporkin’s early FCPA reform speeches.
In a 2004 speech (here), Sporkin spoke of the SEC stumbling upon the foreign payments issue in connection with its Watergate-related investigations. The FCPA was not a singular outgrowth of Watergate – Congress was already actively investigating allegations of overseas bribery and corruption separate and apart from the Watergate scandal – yet Watergate is nevertheless relevant to the FCPA’s origins. In his speech, Sporkin also talks about the relationship between the FCPA and Sarbanes-Oxley Section 404 (a hot-button issue in 2004 when Sporkin delivered the speech). As to “Next Steps,” Sporkin stated as follows. “[W]e need more than Congress passing new statute, and the SEC requiring strict compliance with existing legislation. We need a comprehensive assault on the problem. This means we need the assistance of our government and indeed all the countries of the world along with the world business community, to provide a climate which enables our corporations to compete honestly and fairly throughout the world. There is a way to fix this problem if there is a will to do so.” Among other things, Sporkin proposed – no doubt in recognition that most FCPA issues arise from use of foreign agents – the “establishment of a country-by-country list of agents that have been properly vetted and have agreed to be examined and audited by an independent international auditing group.”
In 2006, Sporkin returned to the podium (see here) as the FCPA neared its 30th year. He stated as follows. “What I envisioned when the law was enacted was a new corporate regime where bribery of foreign officials would be almost completely extinguished at least as it pertained to major U.S. corporations. As all of us here have observed, the wild-eyed-do-gooder predictions never occurred. Instead statistics indicate that bribery of foreign officials has maintained a steady pace over the years.” [Counterpoint – perhaps bribery of foreign officials, as envisioned by Congress and indeed Sporkin’s SEC, has largely been extinguished, but the issue (in 2006 and still today) is that the goalposts have been moved … and not by Congress].
In his 2006 speech, Sporkin did not advocate the FCPA’s repeal, but he did “think the Department of Justice and the SEC can do something forward-looking which would be win-win for both the government and the private sector.” He called it the “FCPA Immunization-Inoculation Program.” Sporkin stated that the “quasi-amnesty program” would consist of the following: (i) “agreement by participating firms to conduct a full and complete review [conducted jointly by a major accounting firm or specialized forensic accounting firm and a law firm] of the company’s compliance with the FCPA for the previous 3 years; (ii) the company would agree “to disclose the results of the legal-accounting audit to the SEC, its investors, and the public; (iii) “if any violations turned up in the process of the audit, the participating [company] would agree to take all steps to eliminate the problems and implement the appropriate controls to prevent further violations; (iv) participating companies “would agree to subject themselves to a similar audit on an annual basis for at least 5 years to ensure that compliance was being maintained; (v) participating companies “would be required to create the position of FCPA compliance officer, whose sole responsibility would be to ensure the company’s compliance with the FCPA” and make an annual certification; and (vi) “in exchange … the SEC and DOJ would give qualified assurances that no actions would be brought for violations exposed by the review.” As envisioned by Sporkin, the “limited amnesty would not apply if violations rose to flagrant or egregious level.”
According to Sporkin, the “immunization-inoculation program would serve the dual purpose of: (1) creating suitable incentives to compliance-minded companies to adopt and maintain high ethical standards in the conduct of their business; and (2) reducing the case load and investigative burden of governmental agencies that enforce the FCPA while reassuring regulators that companies are taking active steps to limit corruption in their foreign contracting and other activities.” Sporkin conceded that “some adjustments may be necessary” but he believed that his proposal “would provide the right-thinking corporate community with the necessary assurances that it needs to develop a vibrant overseas business without having to defend itself against very costly and time consuming investigations.”
At the November 2010 Senate FCPA hearing, FCPA practitioner Michael Volkov (here) resurrected Sporkin’s proposal – see here for Volkov’s prepared statement. [By the way, for those of you looking for the complete transcript of that hearing, along with the prepared statements, and post-hearing Q&A’s – see here].
While Sporkin’s FCPA reform proposals are, in certain ways, different from many of the proposed FCPA amendments being discussed at the moment, the point of this post – other than to highlight Sporkin’s reform proposals, is to demonstrate that the screams of some – that FCPA reform is solely a Chamber issue or somehow akin to waving the white flag of surrender to corporate bribery – are off-base.
What various FCPA reform proposals through the years have in common is experienced and knowledgeable individuals (including many former DOJ and SEC enforcement attorneys who helped shape the FCPA and FCPA enforcement) sharing a belief that the current ad hoc, inconsistent, arbitrary, and largely opaque enforcement only climate is in need of reform.