The FCPA’s “Illusory” Facilitating Payments Exception
Facilitating payments. The FCPA is clear, as was Congress when it passed the FCPA. Such payments are excepted from the FCPA’s anti-bribery provisions.
Yet why do so many FCPA enforcement actions concern payments to low-level foreign officials to secure permits, licenses and the like?
In the words of former SEC FCPA enforcement attorney Richard Grime (see here) it is because “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.”
In this piece, Grime and co-author Sara Zbed (here) discuss the FCPA’s facilitating payment exception, how “recent enforcement actions have diminished the availability of the exception,” and why the exception has been “further eroded by the recently-enacted U.K. Bribery Act, which lacks any comparable exception and applies broadly to individuals and companies as long as they carry on some business in the United Kingdom.”
Excerpts from the article appear below.
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“The drafters of the Foreign Corrupt Practices Act (“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” – enacted during the FCPA’s 1988 amendments – is becoming harder and harder to rely on.”
“By excluding facilitating payments from the FCPA’s ambit, Congress acknowledged that such payments – while considered reprehensible within the United States – are “not necessarily [considered reprehensible] elsewhere in the world” and, for that reason, that “it is not feasible for the United States to attempt unilaterally to eradicate all such payments.””
“The FCPA contains no indication of whether permitted facilitating payments are required to be below a certain dollar amount; nor does the statute provide any additional guidance about where a facilitating payment ends and a corrupt payment begins. Federal courts have not squarely confronted the issue, either. To the contrary, only a small handful of decisions even mention the facilitating payments exception, and those that do provide little clarity about the exception’s outer limits.”
“… [T]he Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) have pressed a narrow view of the exception in recent years, and businesses and other defendants, reluctant to test the law’s boundaries at trial, have settled their cases instead.”
“The DOJ and the SEC have stepped into the void created by this absence of relevant case law, and their recent enforcement actions have diminished the availability of the exception in two principal ways. First, the business purpose requirement of the FCPA is being expanded to cover all manner of circumstances regardless whether there is a clear connection between the payment to the foreign official and obtaining or retaining business. For example, payments to obtain tax refunds, expedite inspections, and procure inspections from government officials are being charged as violations of the anti-bribery provisions without any explanation of why those payments satisfied the business purpose requirement of the law. Second, both the SEC and DOJ have charged violations of the accounting provisions for facilitation payments that are not recorded accurately.”
“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 deferred prosecution agreements, non-prosecution agreements, 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.”
Grime and Zbed then shift gears and talk about the FCPA’s facilitating payment exception in light of the U.K. Bribery Act, a law that went live on July 1st.
“Whatever force the facilitating payments exception retains in this environment has been further eroded by the recently-enacted U.K. Bribery Act, which lacks any comparable exception and applies broadly to individuals and companies as long as they carry on some business in the United Kingdom.”
“If the increasing skepticism with which the FCPA’s enforcement agencies view facilitating payments gives pause to companies that permit such payments, so too should the recently enacted Bribery Act – a United Kingdom law that does not permit facilitating payments and whose broad territorial sweep may render the FCPA’s exception even more illusory.”
“The risk associated with permitting facilitating payments are particularly great for companies that do some business in the U.K., because the Bribery Act prohibits such payments and has a broad jurisdictional scope.”
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As to the FCPA’s facilitating payment exception, I previously observed here that some find facilitating payments to be corrupt payments under a different name. However, Congress did not agree, and the fact remains that the FCPA contains an express exception for facilitating payments. The enforcement agencies are obligated to enforce the statute that Congress passed, not a statute they wish they had. If Congress wants to remove the facilitating payment exception from the FCPA, let Congress do that, not the enforcement agencies through its charging decisions.
Carson “Foreign Official” Challenge Moves To Jury Instructions
On May 18th, U.S. District Court Judge James Selna (C.D. Cal.) denied the Carson “foreign official” challenge and concluded that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” (See here for the prior post).
In connection with his pre-trial ruling, Judge Selna ordered the parties to submit their proposed “instrumentality” jury instructions and legal support by June 30th.
Last Thursday, the Carson defendants and the DOJ filed such proposed jury instructions and legal support. See here and here. This post summarizes the dueling jury instructions.
Defendants
Before proposing jury instructions, defendants stated as follows.
“Defendants respectfully disagree with the Court’s May 18 Order denying their Motion to Dismiss (“the May 18 Order”) and continue to believe, as set forth in their Motion to Dismiss (the “Motion”) and the supporting Declaration of Professor Michael J. Koehler, that the FCPA does not criminalize payments made to employees of state-owned enterprises (“SOEs”). Defendants reserve all of their rights to challenge the May 18 Order, if necessary, on appeal. Were it not for the existence of the Court’s May 18 Order, Defendants would propose a jury instruction that states that “a state-owned enterprise is not a foreign government instrumentality within the meaning of the FCPA, and officers and employees of a state-owned enterprise therefore are not ‘foreign officials’ under the FCPA.” But given the existence of the Court’s May 18 Order, and without waiver of their right to challenge all aspects of that Order on appeal, Defendants herein propose a jury instruction that accepts the Court’s premise that “state-owned companies may be considered ‘instrumentalities’ under the FCPA, but whether such companies qualify as ‘instrumentalities’ is a question of fact.”
In preparing their proposed “instrumentality” jury instruction, defendants were “guided by three overarching principles.”
“First, it will not be sufficient to merely provide the jury with a list of nonexclusive, unweighted factors – none of which is dispositive – and ask the jury to “figure it out,” as the government seems to suggest. That will provide the jury with no real standard for making an “instrumentality” determination and will be tantamount to giving the jury no instruction at all on the “instrumentality” issue.”
“Second, in determining an appropriate jury instruction, the Court should not accept any invitation from the government to borrow wholesale from an “instrumentality” analysis used under another statute – such as the “organ” prong of the Foreign Sovereign Immunities Act (“FSIA”), a provision the government highlighted at the hearing on Defendants’ Motion. […] The FSIA may provide some guidance (indeed, Defendants have had to consult FSIA case law, because the FCPA legislative history is devoid of any discussion of SOEs as “instrumentalities,” much less any discussion of which SOEs qualify and which do not qualify), but because it is a different statute than the FCPA – the FSIA is a civil statute aimed at determining, inter alia, when a foreign entity will be considered to be part of a foreign government for purposes of sovereign immunity – its applicability to interpreting the “instrumentality” provision of the FCPA, a criminal statute that by definition must be strictly construed, is necessarily limited.”
“Third, in determining the correct “instrumentality” jury instruction, the goals and structure of the FCPA must be considered. The FCPA is aimed at combating foreign bribery, but it is not a general commercial anti-bribery statute. Rather, the FCPA is aimed at preventing the special harm caused by the bribery of foreign government officials. Accordingly, Congress criminalized payments only to a “foreign official,” a term expressly and narrowly defined in pertinent part as an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Court should provide the jury with an “instrumentality” instruction that accurately reflects Congress’s desire to criminalize payments made to foreign government officials, not payments made to employees of a company that is not, in both form and substance, actually part of the foreign government.”
The proposed jury instruction then states, in full, as follows.
“The FCPA does not criminalize all payments made to foreign nationals, but only corrupt payments made to a “foreign official.” Therefore, in order for a defendant to be found guilty of an FCPA violation, the government must, among other things, prove beyond a reasonable doubt that the intended recipient of the corrupt payment at issue was a “foreign official” at the time of the alleged payment.
The term “foreign official” means any officer or employee of a foreign government (or any department, agency, or instrumentality thereof), or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality.
A “state-owned” business enterprise may, under certain circumstances, qualify as an “instrumentality” of a foreign government. On the other hand, not all “state-owned” business enterprises qualify as “instrumentalities” of a foreign government. It is up to you to determine, weighing all of the evidence, whether a particular business enterprise is or is not an “instrumentality” of a foreign government, and whether the officers and employees of that enterprise therefore are – or are not –“foreign officials” under the statute.
To conclude that a business enterprise is an “instrumentality” of a foreign government, you must conclude beyond a reasonable doubt that the business enterprise is part of the foreign government itself. In order to conclude that a business enterprise is part of the foreign government itself, you must find that the government has established, beyond a reasonable doubt, each of the following four elements:
First, the foreign government itself directly owns at least a majority of the business enterprise’s shares.
Second, the foreign government itself controls the day-to-day operations of the business enterprise, including the appointment of key officers and directors (who themselves may be government officials); the hiring and firing of employees; the financing of the enterprise through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties; and the approval of contract specifications and the awarding of contracts.
Third, the business enterprise exists for the sole and exclusive purpose of performing a public function traditionally carried out by the government. A “public function” is a function that benefits only the foreign government (and its citizens), not private shareholders. A business enterprise that exists to maximize profits rather than pursue public objectives does not perform a public function and therefore is not a foreign government instrumentality.
Fourth, employees of the business enterprise are considered to be public employees or civil servants under the law of the foreign country.
If the government fails to prove each of these four elements beyond a reasonable doubt for the “state-owned” business enterprise at issue in a particular count, and therefore fails to prove that the intended recipient of the alleged corrupt payment was a “foreign official,” you must find the defendant “not guilty” on that count.
A business enterprise is not a foreign government instrumentality if it is a mere subsidiary of a state-owned company. To qualify as a foreign government instrumentality, the business enterprise must, as set forth above, be directly and majority owned by the foreign government itself. Therefore, an employee of a business enterprise that is merely a subsidiary of another entity that is majority owned by the foreign government is not an employee of a foreign government instrumentality and is not a “foreign official.”
A business enterprise that operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, is not a foreign government instrumentality, and its employees therefore are not “foreign officials.”
DOJ
The DOJ’s proposed jury instruction states, in full, as follows.
“The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
An “instrumentality” of a foreign government is any entity through which a foreign government achieves an end or purpose, and can include state-owned entities. In determining whether an entity is an instrumentality of a foreign government, you should consider the following:
(1) the circumstances surrounding the entity’s creation;
(2) the foreign government’s characterization of the entity and the entity’s employees, and whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions;
(3) the foreign government’s control over the entity, including the foreign government’s power to appoint key directors or officers of the entity;
(4) the purpose of the entity’s activities, including whether the entity provides a service to the citizens of the jurisdiction;
(5) the entity’s obligations and privileges under the foreign country’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
(6) the extent of the foreign government’s ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans)
These factors are not exclusive, and no single factor is dispositive. In addition, in order to conclude that an entity is an instrumentality of a foreign government, you need not find that all of the factors listed above weigh in favor of such a determination.”
Breuer On The DOJ’s “Comprehensive Approach To Fighting Corruption”
Last month, Assistant Attorney General Lanny Breuer delivered the Franz-Hermann Brüner Memorial Lecture at the World Bank and focused his remarks on the DOJ Criminal Division’s “comprehensive approach to fighting corruption.” (See here for the transcript).
This post provides an overview of Breuer’s remarks.
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“Corruption corrodes the public trust in countries rich and poor, and has particularly negative effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer tremendously. At a concrete level, roads are not built, schools lie in ruin, and basic public services go unprovided. At a more abstract, but no less important, level, political institutions lose legitimacy, threatening democratic stability and the rule of law, and people begin to lose hope that they will ever be able to improve their lot. As the President put it last week, you cannot reach your potential when you “cannot start a business without paying a bribe.””
“There are of course many ways in which the U.S. government addresses the problem of corruption abroad. As the head of Criminal Division, I want to focus on three: our criminal prosecution efforts; our work to build the prosecutorial and law enforcement capacity of foreign nations; and our emerging focus on recovering and repatriating the proceeds of foreign official corruption.”
As to criminal prosecution efforts, after highlighting recent corruption cases involving federal, state, and local officials, Breuer talked about the FCPA. He stated as follows.
“The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the Watergate scandal, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government.”
“In 1976, following certain prosecutions for illegal use of corporate funds arising out of Watergate, the U.S. Securities and Exchange Commission issued a report in which it determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the Senate concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the Senate Banking Committee said in its report on the legislation. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.””
“That was true then, and it’s true now. And over the two-plus years of this Administration, we have dramatically increased our enforcement of the FCPA. The numbers speak for themselves. In 2004, the Justice Department charged two individuals under the Act and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16½ million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.”
“And we are only moving forward. Earlier this month, we secured the first jury conviction ever against a corporation in an FCPA case. The case, which also resulted in trial verdicts against the company’s president and its CFO, involved a scheme to pay bribes to Mexican government officials at CFE, a state-owned utility company.”
“Last week, the former CEO of a Miami-based telecommunications company pleaded guilty to conspiring to pay bribes to government officials in Honduras in connection with a scheme to secure contracts from Hondutel, the state-owned telecommunications authority. Last month, the former vice-president of sales for Europe, Africa, and the Middle East at the multi-national valve company Control Components Inc., or CCI, pleaded guilty to conspiring to bribe government officials in Saudi Arabia, Qatar, and other countries.”
” … [T]he point is this: FCPA enforcement matters. When U.S. businesspersons, foreign executives, and even foreign officials know that they risk liability under the FCPA and related statutes, behavior changes. In addition to motivating U.S. and foreign corporations to change the way they do business – something that I believe is already happening – the threat of liability can help corporations resist corrupt demands from foreign officials, which can lead the officials themselves to alter their practices. Beyond that, through our FCPA enforcement, we are also sending a signal to ordinary people – […] across the globe – that we stand with you: we support you in your desire to have fair and transparent institutions, and to have the chance to compete in marketplaces large and small.”
As to the DOJ’s “emerging focus on recovering and repatriating the proceeds of foreign official corruption,” Breuer talked about the DOJ’s “new Kleptocracy Asset Recovery Initiative.”
He stated as follows.
“The goal of the Kleptocracy Asset Recovery Initiative, which Attorney General Holder announced last July and which my team and I have been working to build over the past year, is to identify the proceeds of foreign official corruption, forfeit them, and repatriate the recouped funds for the benefit of the people harmed.”
“In the context of a criminal prosecution, a court can order forfeiture, upon conviction, as part of the defendant’s sentence. Thus, for example, if we were to bring a criminal case against a kleptocrat in the United States, we would be able to seek criminal forfeiture of his or her stolen assets.”
“Often, however, it may be impractical or impossible to bring a criminal prosecution against a kleptocrat. He or she may be immune from prosecution, beyond the jurisdiction of the United States, or otherwise unavailable. In these circumstances, the Kleptocracy Team can bring a civil forfeiture action to recover the stolen property. This is sometimes referred to internationally as non-conviction based confiscation.”
“The Kleptocracy Team recently brought its first cases, and we expect more to come in the near future. Let me provide a specific example. Diepreye Solomon Peter Alamieyeseigha, also known as DSP, was the elected governor of the oil-producing Bayelsa State in Nigeria from 1999 until his impeachment in 2005. According to court papers, DSP’s official salary for this entire period was approximately $81,000, and his declared income from all sources during the period was approximately $248,000. Nevertheless, as governor, DSP accumulated enormous wealth through corruption and other illegal activities. He acquired at least four properties in the United Kingdom worth approximately $8.8 million, he had money in bank accounts around the world, and he also acquired property in the United States. When he was ultimately arrested at Heathrow Airport in 2005, the Metropolitan Police Service in London found approximately $1.6 million in cash in his house.”
“In March and April of this year, we brought two separate civil forfeiture actions to recover over $1,000,000 in what we allege are DSP’s ill-gotten gains. In Maryland, we are seeking forfeiture of a private residence worth more than $600,000, and in Massachusetts we are seeking forfeiture of close to $400,000 in a Fidelity brokerage account.”
“We were able to bring these cases, even though DSP long ago absconded to Nigeria, because the law permits us to bring a civil action against the corrupt proceeds themselves rather than against the person to whom they belong.”
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A good weekend to all.
Summer Reading For Representative Conyers
During last week’s FCPA hearing in the House, Representative John Conyers (D-MI) had a contentious Q&A exchange with Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers). See here for the previous post regarding the hearing.
Conyers asked – “give me some examples of overcriminalization of the FCPA.” He repeatedly interrupted Regon and asked “just give me some examples” “give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization.” Conyers stated, “only 140 cases have been brought in 10 years -that averages 14 cases a year – is that overcriminalization to you?” Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occurred.
There should be plenty of concern regarding prosecutions that have already occurred, but given the glare of the cameras, the stress of testifying, and the disruption of being interrupted, it would have been difficult for any witness to retrieve from their memory bank specific FCPA enforcement actions.
This post provides a summer reading list of FCPA enforcement actions, commentary and analysis, and legal scholarship for Representative Conyers so that he can best seek answers to the question he posed to Regon.
For starters, what does overcriminalization mean?
To be sure, it can mean different things to different people in different circumstances. In “The Overcriminalization Phenomenon(here) Eric Luna provides this definition – “the overcriminalization phenomenon consists of: (1) untenable offenses; (2) superfluous statutes; (3) doctrines that
overextend culpability; (4) crimes without jurisdictional authority; (5) grossly disproportionate punishments; and (6) excessive or pretextual enforcement of petty violations. In this piece, Jeffrey Parker (while observing that “definitions of “overcriminalization” are a bit fuzzy and debatable”) identifies the following as among the factors that may contribute to overcriminalization: “the vague, arcane, or trivial nature of such prohibitions, as undermining citizens ability to conform, and debasing the moral moment of the criminal sanction” and “the lack of adequate mens rea standards in criminal prohibitions.”
Not all overcriminalization factors are relevant to this “new era of FCPA enforcement” (see here), but in the minds of many, several factors are.
Enforcement Actions
In the 2011 Comverse Technologies enforcement action (see here), the company paid $2.8 million in combined fines and penalties (and no doubt millions more in connection with the investigative and resolution process) to resolve a matter in which the DOJ did not allege that the company even knew about the improper payments at issue. The action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ’s enforcement theory.
In the 2010 Alliance One International enforcement action (see here), the company paid approximately $20 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter in which it did absolutely nothing wrong. Rather, the entire DOJ enforcement action was based on a successor liability theory. Again, the action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ’s enforcement theory.
In the 2010 Noble Corporation enforcement action (see here), the company paid approximately $8 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter involving the import and export of goods into Nigeria. When Congress passed the FCPA, its intent as to so-called facilitating or grease payments was clear. Senate Report No. 95-114 (May 2, 1977) states, in pertinent part, as follows. “The statute does not […] cover so-called ‘grease’ payments such as payments for expediting shipments through customs …”. The relevant House Report (No. 95-640, September 28, 1977) similarly states as follows. “The language of the bill is deliberately cast in terms which differentiate between [corrupt payments] and facilitating payments, sometimes called ‘grease payments.’ […] For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are not necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments.” The Noble enforcement action was resolved via a non-prosecution agreement meaning, again, there was no judicial scrutiny of the DOJ’s enforcement theory.
And then of course there is the issue of “foreign official” and the fact that most FCPA enforcement actions in this new era are based on alleged improper payments to employees of alleged state-owned or state-controlled enterprises (“SOEs”) on the theory that such business entities are “instrumentalities” of a foreign government and thus all employees, regardless of rank or position, are “foreign officials” under the FCPA. Yet, (1) During its multi-year investigation of foreign corporate payments, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities. (2) In certain of the bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOE entities. These bills were introduced in both the Senate and the House during both the 94th and 95th Congress. (3) Despite being aware of SOEs and despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, Congress chose not to include such definitions or concepts in what ultimately become the FCPA in 1977. See here for extensive reading on this issue.
Commentary and Analysis
In 2010, Forbes ran a feature article (here) titled “The Bribery Racket” – “How Federal Crackdown on Bribery Hurts Business And Enriches Insiders.” Lucinda Low, a respected FCPA practitioner, notes in the article that “the scope of things companies have to worry about is enlarging all the time as the government asserts violations in circumstances where it’s unclear if they would prevail in court” and that “you don’t have the checks and balances you would normally have if you had more litigation.” Commenting on the current era of FCPA enforcement, Joseph Covington (who headed the DOJ’s FCPA efforts in the 1980’s) said that the current era “is good business for law firms […] good business for accounting firms, it’s good business for consulting firms, the media–and Justice Department lawyers who create the marketplace and then get yourself a job.”
Here, Michael 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.) talks about what he calls prosecutorial common law. Levy states that “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 …”. Levy notes that “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 this publication, an author group including Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar) noted that in several recent FCPA enforcement actions “the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear.” In other cases, the author group states that in many cases critical elements of the statute were not pleaded or were pled in a way “that is not consistent with established precedent and the language of the statute.”
In a September 10, 2010 interview with the Corporate Crime Reporter, Mark Mendelsohn (the former head of DOJ FCPA enforcement during this era of resurgence who departed the DOJ for private practice in 2010) stated that “some of the factors” the DOJ uses to resolve FCPA cases are transparent, but “there are other factors less easy to see from the outside.” Mendelsohn also noted, in connection with non-prosecution and deferred prosecution agreements (the common way FCPA enforcement actions are resolved) that the “danger” “is that it is tempting for the Department, or the SEC [to use these vehicles] to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.”
In this Q&A exchange, Martin Weinstein (a former DOJ FCPA attorney who prosecuted the Lockheed case in the mid-1990’s and is now a prominent FCPA practitioner) stated as follows. “The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability.”
Legal Scholarship
In “Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act” (here), Amy Westbrook (Washburn University School of Law) argues that the recent “transformation of the FCPA has been brought about by ad hoc enforcement actions, rather than legislation, judicial decision, or regulation” and that “in the absence of formal process or reasoned articulation, the actual scope of the law is unclear.”
In “The Facade of FCPA Enforcement” (here), I argue that “the FCPA often means what the enforcement agencies say it means” and that “even though the resolution vehicles typically used to resolve an FCPA enforcement action are not subject to judicial scrutiny and [thus] the vehicles do not necessarily reflect the triumph of the enforcement agencies’ theories, in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law” which breed “inefficient overcompliance by risk averse business actors fearful of enterprise – threatening liability because of the enforcement agencies’ untested and dubious theories.”
House Hearing – Overview and Observations
Representative James Sensenbrenner (R-WI) today chaired a hearing of the House Judiciary Committee, Subcommittee on Crime, Terrorism, and Homeland Security titled “Foreign Corrupt Practices Act.” (See here for the video).
This post provides a chronological overview of the hearing as well as observations.
Compared to the Senate’s FCPA hearing in November 2010 (see here for the prior post) today’s hearing (approximately two hours) was much more contentious. For instance, during the hearing Chairman Sensenbrenner noted that FCPA enforcement has become a “considerable windfall for the federal government” and he concluded the hearing by telling Greg Andres (DOJ) that it “would behoove the DOJ to realize that the statute needs updating” and that those on the Committee will be drafting a reform bill.
The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980’s in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business.
There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals most notably clarifying the FCPA’s definition of “foreign official” / “instrumentality” and exploring an FCPA compliance defense. In fact, John Conyers (D-MI), who appeared most supportive of the current state of FCPA enforcement, stated he would support such reform proposals. The DOJ supports neither of these proposals.
Other issues explored in the hearing included prosecutorial discretion and DOJ declination decisions – including a request that the DOJ provide further information as to its declination decisions.
What happens next is a good question.
It seems like an FCPA reform bill will soon be introduced and hearings as to the specifics of such a bill may occur. Whether such a bill can get out of committee for full consideration by the House, and whether similar bills will be introduced in the Senate, is the open question. Politically, any FCPA reform efforts are likely, because of the topic at issue, to attract substantial opposition – including opposition that is less than informed as to the actual issues.
It bears noting that the last time Congress enacted significant FCPA amendments, the process took eight years and the statute was amended, not through a stand-alone bill, but through Title V, Subtitle A, Part I of the Omnibus Trade and Competiveness Act of 1988.
Opening Statement of Chairman Sensenbrenner
Sensenbrenner began by noting that when Congress passed the FCPA in 1977 the “world was a different place.” In response to slush funds and secret payments to foreign governments that adversely affected U.S. foreign policy, Congress passed the FCPA and the law “sent a strong signal.” (For an overview of the facts and circumstances motivating Congress to pass the FCPA – see here).
Sensenebrenner next observed that thirty-four years later, the world has turned upside down, China is a power, the nature of overseas business has changed, and many countries have some state-control over business.
Sensenbrenner noted that there has been a dramatic increase in FCPA prosecution and that last year approximately 1/2 of all DOJ criminal penalties were in FCPA cases (see here for the DOJ release) – a dynamic he called a “considerable windfall for the federal government.”
In touching upon themes similar to when Congress held substantive FCPA hearings in the mid-1980’s, Sensenbrenner placed the increase in FCPA enforcement in the context of the current economic downturn. Indeed a theme throughout the hearing was that the current state of FCPA enforcement may be harming U.S. business interests.
Sensenbrenner stated that “FCPA prosecutions should be effective and fair,” but also “predictable” so that the “rules of the road are clear” so that “business can start moving again.”
In closing his opening statement, Sensenbrenner stated that the Committee was well-suited to examine the impact of the FCPA and to ask hard questions – such as whether the FCPA was succeeding in its mission or hurting job creation.
Opening Statement of Ranking Member Scott
Robert Scott (D-VA) next made an opening statement. Scott summarized the reform proposals including providing greater clarity to the “foreign official” definition. As a potential compliance affirmative defense, Scott observed that companies are spending substantial sums – millions of dollars in some cases – on FCPA compliance – a result he indicated may often result in “overcompliance” because companies would rather be “safe than sorry.” Scott stated that “punishing those companies and individuals who are operating in good faith runs counter to the basic tenets of fairness and justice.” He also indicated that successor liability “runs counter” to a system of justice that should only punish the guilty party.
In closing, Scott said that effective enforcement of the FCPA is “crucial” and he applauded aggressive enforcement of the law. At the same time, Scott noted the necessity of periodically reviewing laws to make sure “they remain fair and just.”
Opening Statement of John Conyers
John Conyers (D-MI) also made an opening statement. After a few sentences about unemployment figures and the Obama administration, Conyers asked the following question: will somebody explain to me how 140 cases in 10 years is “overly aggressive prosecution.”
Conyers did indicate in his opening statement that he does support certain FCPA reform proposals. As to clarification of “foreign official,” Conyers said he can “support this one” because it can create a problem when those subject to the FCPA do not have a clear understanding of who a “foreign official” is. Conyers also said that he can support the addition of a compliance defenses so that companies can fight imposition of criminal liability if individual employees and agents circumvent compliance measures. Conyers did not support other FCPA reform proposals – such as limiting successor liability, limiting parent company liability for acts of foreign subsidiaries, and adding a wilful mens rea requirement for corporations.
Statement by Greg Andres
Greg Andres (Deputy Assistant Attorney General) next delivered an opening statement. His prepared statement can be found here.
Among other things, Andres noted that DOJ’s FCPA prosecutions involve “systemic long-standing bribery schemes” not the payment of single bribe payments of nominal sums.
Andres specifically cited the Daimler AG and Siemens FCPA prosecutions to support this point. However, the irony is that neither of these FCPA enforcement actions involved FCPA anti-bribery charges against the parent company or any related individual prosecutions.
As to a potential FCPA compliance defense, Andres stated that the DOJ already considers a company’s pre-existing compliance policies and procedures pursuant to the Federal Principles of Prosecution of Business Organizations (see here).
As to providing guidance, Andres noted that the DOJ’s goal “is not simply to prosecute FCPA cases” and that senior DOJ officials often speak publicly on the FCPA and highlight relevant considerations and practices companies should adopt. Andres also discussed the DOJ’s FCPA Opinion Procedure program (see here for more).
In closing, Andres stated that DOJ is proud of its enforcement record and that it looks forward to working with Congress.
Statement by Michael Mukasey
Former Attorney General and current Debevoise & Plimpton partner Michael Mukasey next delivered an opening statement on behalf of the U.S. Chamber of Commerce. See here for his prepared statement.
Mukasey began by noting that no one favors bribery and that while the FCPA indeed does have merit, “more than 30 years of experience” with the law demonstrates that it can be improved.
His testimony focused on two of the Chamber’s FCPA reform proposals: clarifying the definition of “foreign official” and “instrumentality” and amending the FCPA to include a compliance defense.
As to the later, Mukasey observed that statutory guidance can be found in Title VII of the Civil Rights Act which provides for something akin to a compliance defense. Mukasey stated that “dozens, if not hundreds of cases are resolved under this compliance defense” and that the defense reduces discrimination by encouraging employers to have robust compliance systems.
As to “foreign official,” Mukasey referenced the recent judicial opinions on this issue (see here and here for the prior posts), yet noted that the judges did very little to clarify the limits of the “foreign official” issue other than say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a “foreign official” varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it “impossible” for companies to determine in advance who is a “foreign official” thereby increasing uncertainty and barriers to U.S. business. According to Mukasey, “majority ownership is the most plausible threshold” for whether a state-owned or state-controlled enterprise constitutes a foreign government “instrumentality.”
Statement by George Terwilliger
George Terwilliger (White & Case) next delivered an opening statement. See here for his prepared statement.
Terwilliger opened by stating that he favors “fair enforcement of sensible corruption statutes” and that “leveling the playing field” is essential. He noted that the DOJ and SEC are “realizing their enforcement goal of driving companies into far greater compliance,” but also noted the less desirable effects of stepped-up enforcement. He spoke of the “hidden effect” of foregone business opportunities because of FCPA enforcement concerns and noted that the current state of enforcement may hurt job creation.
According to Terwilliger, the “hidden costs” of FCPA enforcement are the result of uncertainty and that companies sometimes forego deals, take a pass on certain projects and withdraw from other projects – not because such companies are necessarily risk averse – but because of the risk-reward ratio in this current FCPA enforcement environment.
Terwilliger proposed a further FCPA reform proposal related to successor liability and that is a statutory safe harbor provision during which an acquiring company could be shielded from FCPA liability for a defined time period post-closing. During this post-closing period, the acquiring company would undertake a thorough review of the target’s business operations and have the opportunity to self-disclose any FCPA issues to the enforcement authorities.
Statement by Shana-Tara Regon
Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers) next testified. See here for her prepared statement.
She observed that given the general lack of judicial scrutiny over FCPA enforcement, the FCPA says whatever essentially the DOJ says it means and that the FCPA has, in many instances, become a strict liability statute “in ways that those who created the FCPA could never have envisoned.”
Regon stated that NACDL does not advocate bribery and similarly stated that advocating for reform is not akin to advocating for bribery. Her testimony was focused on two reform proposals – clarifying the definition of “foreign official” and strengthening the mens rea requirement for corporate offenses. She stated that the FCPA is “emblematic of the general problem of overcriminalization” and that FCPA enforcement has several “unintended consequences” including over-compliance.
During the hearing, Global Financial Integrity (see here for yesterday’s post) tweeted as follos: ” This group of witnesses is such a sham. All three non-DOJ witnesses spewing disingenuous pro-#bribery #AmChamb talking points #FCPAHearing.” (See here).
Chairman Sensenbrenner reserved his questions for the end and next called on various Representatives present.
Q&A Session
Tom Marino (R-PA) asked Andres (DOJ) about the DOJ’s top enforcement obstacle.
Andres stated that because FCPA violations focus on conduct abroad, the DOJ often needs to rely on MLAT requests which can take longer. He noted that the DOJ is in favor of extending the FCPA’s statute of limitations given that it generally takes a long time to investigate FCPA cases. Andres further stated that while there is much discussion as to the increase in FCPA enforcement, this discussion often “fails to recognize the size and magnitude of the problem.”
Robert Scott (D-VA) next asked Mukasey whether the compliance defense proposed was a total defense or an affirmative defense. Mukasey stated that the proposal was for an affirmative defense and that where there is a proved violation of the FCPA, the question should then become whether the company had a compliance mechanism in place reasonable designed to detect and prevent the conduct. Mukasey noted that this issue may be an “uphill climb” for a company, but that the FCPA ought to at least allow a company to pursue such a defense.
Scott next asked Mukasey about the mens rea reform proposal for corporate liability. Mukasey seemed to be advocating a corporate liability standard similar to the (soon to be old) U.K. standard and the current Canada law standard when he stated that a company should only be held liable if someone in a “policy making position” was involved in or condoned the improper activity.
Scott next asked Andres (DOJ) the general question of whether any de minimis cases have ever been brought by the DOJ. Andres stated “no,” the DOJ has never prosecuted “cup of coffee, lunch, taxi-ride type of cases” and he further stated that because of the FCPA’s corrupt intent element and the affirmative defense for reasonable and bona fide business expenditures, it is an open question as to whether such facts even violate the statute.
Even so, Andres stated that the DOJ is opposed to creating a de minimis exception to the FCPA because small, recurring payments can amount to significant bribery. He stated that the amount of the bribe is not the relevant consideration, rather the intent of the bribe is and that all bribery is inappropriate. Andres said that all the talk of taxi-ride payments and meals being in violation of the FCPA “is not reflected in our enforcement actions.”
Taxi-cabs were a recurring issue throughout the hearing. Mukasey stated, in response to a question, that the taxi-cab example is real and that when “nervous counsel” found out that a company may have paid a “foreign official’s” taxi-cab fare, the company disclosed the conduct to the DOJ and the DOJ requested that the company investigate its entire relationship with the “foreign official.” Mukasey stated that this investigation cost the company approximately $200,000, no violation was found, and that the company could have used this money for something more beneficial than conducting in investigation as to these facts.
Louie Gohmert (R-TX) next stated that those subject to the FCPA “ought to have a clear enough line” so that people don’t have to think “is it or isn’t it a bribe” to make this payment. Gohmert said that Congress can define bribery so that companies “can have a clear line” so that a company does not have to spend $200,000 to figure out whehther paying for a cab is an FCPA violation. Gohmert then made an interesting observing that the FCPA allows a “young prosecutor” or an “FBI agent seeking to make a name for himself” the opportunity to pursue all sorts of enforcement actions and that enforcement then ends up being more aggressive than it should be.
Gohmert next asked Andres (DOJ) as follows: why should a company be prosecuted if a company has a compliance program set up according to the standards set forth in Chapter 8 of the U.S. Sentencing Guidelines (see here). Gohmert stated that if a company has done everything it can do, it seems like a strict liability standard if the company is prosecuted because of the act of an employee acting contrary to the company’s policy. Andres stated that the DOJ “does not prosecute companies based on the acts of a single, rogue employee.”
Rather, Andres stated that the DOJ looks at how pervasive was the conduct or whether the conduct involved a high-ranking employee. Andres specifically stated that the DOJ opposes consideration of an FCPA compliance defense. He stated that DOJ already seriously considers compliance programs in its charging decisions, along with other factors such as cooperation and voluntary disclosure.
Andres called a potential compliance defense “novel” and one that is not “well-defined.” He said that such a defense could lead to “paper compliance.” He also referenced the U.K. Bribery Act (which does contain such a compliance defense) yet stated that this defense is not yet in effect and thus there is no precedent to analyze to see whether such a defense is effective.
Given that the DOJ frequently takes FCPA enforcement position that are “novel,” are not “well-defined,” and are not supported by precedent, Andres response on this issue was less than convincing.
In closing, Andres stated that an FCPA compliance defense could “create a loophole” and allow for some bribery to occur. He called such a potential defense “novel and risky” and said that the “time is not right to consider it.”
The floor next returned to John Conyers (D-MI). He stated that ignorance of the law is no excuse and wondered why in the case of bribery does there need to be a de minimis rule. He stated that “corporations have more lawyers than anybody else” and “why do they need to know” how low the bribery threshold should be. He said that “they don’t deserve to know that.”
Conyers also conducted the most contentious Q&A exchange of the hearing with Regon. Conyers asked – “give me some examples of overcriminalization of the FCPA.” He repeatedly interrupted Regon and asked “just give me some examples” “give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization.” Conyers stated, “only 140 cases have been brought in 10 years -that averages 14 cases a year – is that overcriminalization to you?” Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occured.
Ted Poe (R-TX) next launched into a criticism of China. He said that “China, through its government, follows a systematic philosophy of corruption” and that China will “do anything in the world to get their way” including stealing from the U.S. and paying bribes. He suggested that “any means necessary” is the Chinese way to get business. “We on the other hand,” Poe stated, “believe in the rule of law.” Poe stated that the “Chinese are effective in their philosophy” and he observed that he just returned from Iraq where he learned that Chinese companies are going to rebuild Iraqi’s oil system and that he suspected money changed hands in order to get this business.
Poe, a former prosecutor, next said that it “disturbs” him when we give DOJ prosecutors too much discretion. Poe said that he was not advocating loosening the standards, but he did prefer “absolute certainty” about what is a violation of the FCPA as “opposed to too much discretion” by the DOJ on what something means and whether it is a bribe.
Judy Chu (D-CA) next asked Andres a series of questions allowing him to further articulate how the DOJ takes into consideration a company’s compliance program and how compliance expectations are stated in public documents such as Chapter 8 of the Sentencing Guidlines and the OECD Guidelines. (See here). Andres further stated that there are situations where the DOJ does not pursue an enforcement action because of a variety of factors, including a company’s pre-existing compliance program, even if these instances are not made public because the DOJ does not issue a press release. Asked by Chu for reasons why FCPA enforcement has expanded, Andres stated that the “problem is as big as it has ever been” and that “at least one reason” for the increase in enforcement is the result of SOX whereby companies have an obligation to test its internal controls – tests that often uncover FCPA issues that are then often disclosed to the DOJ.
Hank Johnson (D-GA) next asked Regon about prosecutorial discretion and whether it is fair to say that the “looser the law the more prosecutorial discretion and the narrower the law the less prosecutorial discretion.” Regon stated that if the DOJ means what it says (i.e. that it targets only explicit instances of bribery and that it does not prosecute based on the actions of rogue employees), then the DOJ should not mind less prosecutorial discretion. Johnson next launched into an unusual statement about illegal crime (blue-collar crime) and legal crime (white collar crime in the sense that prosecutions of white collar crime tend to be less vigorous). Johnson said he was bothered by the fact there has not been much prosecutorial activity as to white collar crime, he said this “seems kind of fishy” and that some “folks are getting off the hook for legal crime.”
Sandra Adams (R-FL) next asked Andres whether the DOJ has a definition of “foreign official” or “instrumentality.” Andres said, in addition to the statute, there are now several decisions by district courts that further “amplified” the definition of foreign official. Andres stated that DOJ does not support a change to the definition of “foreign official” or “instrumentality.”
Adams next Andres several pointed questions about DOJ declination decisions and whether such decisions are published or transparent. Andres stated that this is a difficult area for the government because the DOJ does not want to “penalize a company or individual investigated by not prosecuted.”
I’ve argued before (see here for the prior post) that the DOJ should publish its declination decisions in a manner similar to its FCPA Opinion Procedure decisions. Given that most declination decisions would seem to follow disclosure by a company of FCPA scrutiny (in its SEC filings), Andres’s rationale for not making declination decisions public is less than convincing.
Adams asked – in the last year, how many instances of FCPA conduct have been disclosed to the DOJ where no enforcement action resulted. Andres did not offer any specific number, but retreated to the FCPA Opinion Procedure and noted that if a company ever has a question about the FCPA, it has the ability to ask the DOJ and the DOJ is obligated to give an opinion.
Adams next asked Andres whether the DOJ is defining what the law means. Andres said that “everyone of these cases is negotiated with experienced defense counsel” and that counsel has “ample opportunity” to address any issues concerning the DOJ’s enforcement.
Mukasey then answered that while resolved FCPA enforcement actions make for interesting case studies, such resolutions are not binding in other cases.
Before her time expired, Adams requested that the DOJ provide the Committee with more detail as to its declination decisions, including the DOJ’s reasons and rationale for why enforcement actions did not result. Chairman Sensenbrenner then followed up and said DOJ’s responses will be made part of hearing record.
Shelia Jackson Lee (D-TX) next asked Andres how many attorneys and staff are assigned to FCPA enforcement. He stated that the DOJ’s FCPA unit, includes a core unit in D.C. of 15 to 20 enforcement attorneys and that assistance in trials is given by local prosecutors. Jackson Lee asked “is this an excessive amount” and Andres said “certaintly not in light of the size and magnitude of the bribery problem … it is significant.” Jackson Lee next received a tutorial from Andres as to the FCPA’s jurisdiction over foreign companies.
Ben Quayle (R-AZ) next asked a question very much based on current events and that is the scrutiny of the Macau gaming industry. [Las Vegas Sands recently disclosed that it received subpoenas concerning its conduct in Macau]. Andres stated that it was not appropriate for him to comment on any ongoing investigations.
Quayle next asked Andres whethr General Motors would be considered a U.S. government “instrumentality.” Andres said that in addressing this issue, the DOJ considers government ownership or investment as only one factor. Other factors include characterization of the entity under foreign law, the purpose of the entity, and that under these factors General Motors would likely not qualify as a U.S. government “instrumentality.” Quayle next asked whether it is relevant if the government has communications with the company’s board and the government has the ability to control or influence the entity (a presumed reference to GM’s relationship with the U.S. government). Andres again stated that control and ownership is but one factor and he specifically referenced the recent Lindsey prosecution where the Mexican entity at issue was specifically addressed in the country’s constitution.
Quayle next asked Terwilliger whether he has any knowledge of companies conceding markets to foreign competitors because of the FCPA. Terwilliger stated that “conceding markets” may be a bit strong, but that American companies have become much more circumspect in dealing with foreign business opportunities because of FCPA enforcement. In particular, Terwilliger said that companies may bypass “smaller opportunities” (that might become bigger opportunities) because of the FCPA in that the cost-benefit analysis and FCPA compliance are too much to worry about.
Chairman Sensenbrenner was the last person to ask questions and he began his time by stating as follows. There is “no question in my mind that we have to bring this law up to date.” “No one is in favor of bribery, but there has to be more certainty.” Sensenbrenner said he was “a bit befuddled” by Conyer’s statement that corporations don’t deserve to know what bribery is and he stated that “everyone has a right to know what is illegal.”
Sensenbrenner’s only question (a long one at that as he basically summarized the Chamber’s FCPA reform proposals) was directed to Regon and Andres. Regon focused mostly on the corporate mens rea issue and stated that her organization is supportive of “anything Congress does” to clarify the FCPA. Tara Regon failed to see the rationale for not providing greater clarity as to the FCPA and noted that “we have many bribery statutes on the books, and some of those are written tightly and work well.”
Sensenbrenner then asked Andres – which of Regon’s suggestions do you agree with and Andres said “I don’t agree with any of them.” For instance, Andres said with the definition of “foreign official” that “one thing you need to take into consideration is that the statute covers the whole world” and that what might constitute a “foreign official” in China may be different than what constitutes a “foreign official” in Brazil or France.
Sensenbrenner grasped onto this issue and noted that this part of the uncertainty that people are complaining about.
Andres followed with two points. First, that if there is concern, companies subject to the FCPA can ask for a DOJ opinion. This only seemed to enrange Sensenbrenner further as he stated “come on, China is a communist country – they are not going to tell you what the government involvement is” in a company “they don’t have the type of disclosure we have.”
Andres second point was that the FCPA makes illegal paying a bribe and that if companies aren’t paying bribes they have nothing to fear.
Sensenbrenner then seemed to pose a question at the end of the hearing as to whether the DOJ would support an FCPA amendment that simply makee bribery (all bribery) illegal (perhaps akin to the UK Bribery Act). Sensenbrenner did not pause for Andres to respond and he (Sensenbrenner) concluded the hearing by saying “it would behoove the DOJ to realize that the statute needs updating.” Andres said that the DOJ is “more than willing to work with Congress” to which Sensenbrenner said “see you later we will be drafting a bill.”
Sensenbrenner then commented that if Andres were the general counsel of a corporation advising the CEO and everyone else, he would likely be advising the company in the “most narrow way” and “exercising the greatest amount of caution.” “As a result,” Sensenbrenner stated, legitimate business activity is not pursued and U.S. companies are put in a significant disadvantage compared to foreign companies.
Sensenbrenner then told Andres – “get the message sir and tell that to the AG.”