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A Look Back in Time

Literally, Time Magazine that is.

In connection with my work in progress on the FCPA’s legislative / early history, the below articles from Time’s searchable archives caught my eye. (See here).

*****

In November 1979, Time carried a piece (here) about the DOJ’s new program to offer advice on the FCPA – what has come to be called the FCPA Opinion Procedure Release. The article contains this quote from Stanley Sporkin, the SEC’s then Enforcement Chief: “We do not have guidelines for rapists, muggers and embezzlers, and I do not think we need guidelines for corporations who want to bribe foreign officials.” Fast forward 30-some years and Sporkin is still on the FCPA scene. It was recently reported (here) that Sporkin is assisting former FBI Director Louis Freeh as the monitor in the Daimler enforcement action. Among the monitor’s duties is “review[ing] and evaluat[ing] the effectiveness of Daimler’s internal controls, record-keeping, and existing or new financial reporting policies and procedures as they relate to Daimler’s compliance with the books and records, interal accounting controls and anti-bribery provisions of the FCPA, and other applicable anti-corrption laws.” (See here Appendix D).

*****

Almost as soon as the FCPA was passed, concerns were raised that the law was harmful to U.S. business. There was much activity on this issue in the early 1980’s as evidenced in this article from October 1980, this article from March 1981, this article from March 1981 as well, and this article from June 1981.

These articles detail, among other things: (i) that the Carter administration (Carter signed the FCPA into law in December 1977) “sent a hefty 250-page report to Congress on the various ways the U.S. discourages exporters” – one example – “the provisions of the 1977 Foreign Corrupt Practices Act, which have never been clearly spelled out by the Justice Department.” (ii) that the GAO released a report in 1981 (see here for a prior post) detailing how the FCPA “is riddled with complicating ambiguities and shortcomings” including the key “foreign official” element; and (iii) that President Reagan’s “transition team on the workings of the Securities and Exchange Commission […] has recommended decriminalization of bribery.”

At to this last point, Time notes:

“Such a stance by the Administration toward foreign bribery would itself cause problems. By failing to enforce the act as written, the Administration not only would leave the legislation’s ambiguities unresolved, but would show a disrespect for the law, which is itself corrupting. Since the U.S. has adopted a moral position with regard to foreign bribery, neither the Administration nor Congress can now afford to let the subject wither away without compromising its principles in the process.”

*****

In response to Forbes recent FCPA article (see here), the Wall Street Journal Law Blog asked (see here) “is the FCPA just a full employment act for the private bar.” Such a question as it relates to the FCPA is not new. This March 1981 Time piece notes that the FCPA was “dubbed by one Wall Street wag” as the “Accountants’ Full Employment Act of 1977.”

The 1981 GAO Report

The year was 1981.

The FCPA was a mere infant – approximately 3.5 years old. Those living with it were concerned with its ambiguities and complying with it.

In March 1981, the “investigative arm” of Congress, the Government Accountability Office (GAO) released a report, “Impact of Foreign Corrupt Practices Act on U.S. Business.” (See here and here).

The report was based, in part, on a GAO questionnaire survey of 250 companies randomly selected from the Fortune 1000 list of the largest industrial firms in the U.S.

The questionnaire addressed the FCPA’s relationship to the following four areas: (1) corporate policies and/or codes of conduct, (2) corporate systems of accountability, (3) cost burdens, if any, incurred by management to comply with the act, and (4) corporate opinions regarding the (i) acts effect on U.S. corporate foreign sales, (ii) the clarity of the act’s provisions, (iii) the potential effectiveness of an international antibribery agreement, and (iv) perceived effectiveness of the act in reducing questionable payments.

The GAO also discussed the FCPA’s impact with leading public accounting firms, professional accounting and auditing organizations, professional legal associations and business and public interest groups. In addition, the GAO discussed enforcement of the FCPA with DOJ and SEC officials and examined documentation relating to enforcement activities. Also interviewed by the GAO were officials from the Overseas Private Investment Corporation, Department of Commerce, Treasury, and State.

The GAO report covers all the topics listed above. However, this post relates to the clarity of the FCPA’s provisions.

Chapter 4 of the Report is titled “Issues Surrounding the Act’s Antibribery Provisions.”

The chapter begins by noting that there is “confusion over what constitutes compliance with the act’s antibribery provisions.”

The report notes that “corporate and governmental officials have criticized the anti-bribery provisions as being ambiguous about what constitutes compliance.”

The ambiguities include confusion or uncertainty about a host of issues, including the “definition of ‘foreign official.””

At the time, the term “foreign official” specifically excluded any employee whose duties are essentially ministerial or clerical.” This exclusion was eliminated in the 1988 amendments to the FCPA. Otherwise the definition of “foreign official” the GAO report found to be ambiguous is same today – “any officer or employee of a foreign government or one of its departments, agencies or instrumentalties.” [Note -the public international organization prong was added in 1998].

The report notes:

“This definition has been criticized as unclear. Lawyers we contacted questioned whether employees of public corporations, such as national airlines or nationalized companies, are considered foreign officials. Similar questions have surfaced in countries – particularly developing countries – where there are small and frequently closely related groups, including both business and government relationships as well as families. Individuals within these groups frequently move between the private and public sectors, often without a clear distinction.”

The report then discusses the DOJ’s guidance program and begins by noting that “President Carter expressed concern over the potential effect of the act’s alleged ambiguities in September 1978 – only 9 months after its passage.” “To reduce this uncertainty, he directed the Department of Justice to give the business community guidance concerning its enforcement intentions under the act.”

The report notes that in March 1980, the DOJ implemented its “long awaited guidance program” but that the “program has yet to effectively address the ambiguities, and it is doubtful it will.”

In concluding Chapter 4 of the Report, the GAO notes:

“the act is an expression of congressional policy, and rigorously defined and completely unambiguous requirements may be impractical and could provide a roadmap for corporate bribery. On other hand, companies, whether registered with SEC or domestic concerns under Department of Justice jurisdiction, should be subject to clear and consistent demands by the Government agencies responsible for enforcing the act.”

An option the GAO recommends is that “the Justice Department, SEC, and other interested agencies […] offer legislative proposals which would amend the act to more explicitly define the antibribery provisions and [such an amendment] could cover concepts such as the definition of “foreign official.”

GAO notes “because of the importance of the act and the questions and concerns about the antibribery provisions, close congressional oversight is needed.”

Not surprsingly, both DOJ and SEC disagreed with the GAO’s findings. In its responses, the agencies attack, not the substance of the findings, but the GAO’s methodology.

The GAO report states:

“Both SEC and Justice disagree with our recommendations that they develop alternative ways to address the antibribery provisions. They contend that our statistics suggest that ambiguities in the act are not a sigifnicaint problem.”

In 1981, the investigative arm of Congress found, based on extensive study, that the FCPA’s “foreign official” element was ambiguous.

Here we are some thirty years later having the same discussion.

[Here is another interesting nugget. In June 1981, John Fedders was named to be the SEC’s Director of Enforcement, replacing Stanley Sporkin who left to become general counsel at the CIA. During a news conference, Fedders “pledged to enforce, with discretion, the Foreign Corrupt Practices Act, which he criticized as being ambiguous.” See Owen Ullmann, “Corporate Lawyer Gets SEC Enforcement Post,” Associated Press, June 29, 1981.]

As We Say, Not Necessarily As We Do

Yesterday Lanny Breuer (Assistant Attorney General – Criminal Division) spoke before the Council on Foreign Relations. The title of his speech (see here) was “International Criminal Law Enforcement: Rule of Law, Anti-Corruption and Beyond.”

Breuer begins, “I am pleased to be able to share with you today how the Criminal Division seeks to promote the Rule of Law in our increasingly global society.” Breuer notes that “perhaps in no area has the Criminal Division’s” approach “had more dramatic results for the international Rule of Law than in that of corruption.”

Breuer then sketches a brief history of the FCPA and notes that “when the U.S. enacted the [FCPA] in 1977, and as recently as the 1990’s, some developed countries continued to argue that a certain amount of corruption might be desirable in developing nations; and it has been only in the last decade that some developed countries have eliminated tax deductions for foreign corrupt practices.”

On this point, I fully agree that the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit.

Breuer then “spreads the FCPA gospel” (as Christopher Matthews at Main Justice recently termed it – see here).

Verses included: the “increased emphasis on charging individuals is part of a deliberate enforcement strategy to deter and prevent corrupt practices in the future;” “gone are the days when we relied solely on tips from whistle-blowers to build cases – instead we are now bringing the tools of organized crime investigations to white collar investigations.”

The speech ends – “I would welcome any questions you might have.”

I’ve got some questions.

During Breuer’s tenure, two signature enforcement actions were the BAE and Daimler bribery, yet no bribery enforcement actions (see here and here for prior posts).

In both actions, the DOJ alleged facts sufficient to charge the companies with FCPA anti-bribery violations. Yet in both cases, no anti-bribery violations were charged.

Included in the Rule of Law is the notion that the law is to be applied equally to all subject to the law. Under the Rule of Law, certain companies in certain industries who may sell certain products to certain customers are not immune from the law.

Yet, in the eyes of many, the BAE and Daimler enforcement actions stand for the proposition that certain companies are indeed “above” the FCPA and essentially immune from FCPA anti-bribery charges.

So, my questions are:

How was the Rule of Law advanced in the BAE and Daimler enforcement actions?

How was the Rule of Law advanced when a company (BAE) that “provided support services to [a Saudi official] while in the territory of the U.S.” including “ the purchase of travel and accommodations, security services, real estate, automobiles and personal items” (these are the DOJ’s words) is not charged with FCPA anti-violations? [Particularly when the DOJ alleges that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period.]

How was the Rule of Law advanced when a company (Daimler) that “engaged in a long-standing practice of paying bribes to ‘foreign officials'” (these are the DOJ’s words) is not required to plead guilty to anything?

As noted above, the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit. However, with leadership comes responsibility and accountability.

When preaching, the preacher is subject to criticism, particularly when urging his parishioners to do as he says, not necessarily as he does.

The DOJ did some FCPA / Rule of Law preaching yesterday.

For extolling the virtues of the Rule of Law in the face of several recent high-profile examples where Rule of Law principles were seemingly ignored, the DOJ has set itself up for criticism.

Happy Birthday!

I was born in 1977.

Yet for most of my life, I was neglected and nobody cared or talked about me.

However, about ten years ago, my caretakers suggested that I change my look (get a new haircut, change my wardrobe, those sort of things).

Boy did that help.

In some circles at least, I am now the most popular person in the room.

Lawyers travel to the far reaches of the globe just to determine if I am relevant, corporations publicly disclose potential dates with me, there are seminars and training sessions about me, lawyers run to Washington D.C. (my birthplace) to tell my caretakers how relevant I am (when in fact I may not be relevant at all) … and, I even hear there are a few blogs devoted to me.

Who am I?

Why of course I am the FCPA and today is my 32nd birthday!

*****

On December 19, 1977, the FCPA was enacted. On December 20, 1977, President Carter signed the FCPA into law.

Hosting an FCPA birthday party?

Here is the signing statement to read just before the candles are placed on the cake. After cake, instead of a game of “pin the cash-filled suitcase on the foreign official” how about a discussion as to whether the enacting Congress and President Carter would even recognize certain enforcement theories which have become a hallmark of current enforcement of the FCPA.

S. 1700 … A Bad Bill

[Warning – this post may cause your head to spin]

Bribery and corruption are bad.

That does not mean, however, that every attempt to curtail bribery and corruption is good.

Case in point – “The Energy Security Through Transparency Act of 2009” (S. 1700)(the “Act”) introduced in the Senate on September 23, 2009 by Richard Lugar (R-IN) and co-sponsored by several other senators – both Democrats and Republicans. (see here and here).

S-1700 seeks to amend Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section (m) “Disclosure of Payment by Resource Extraction Issuers.”

Under this proposed new section, no later than 270 days after enactment of the Act, the SEC shall issue final rules that would require:

• a “Resource Extraction Issuer”( a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary or partner” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, an officer or employee of a foreign government, an agent of a foreign government, a company owned by a foreign government, or a person who will provide a personal benefit to an officer of a government if that person receives a payment, as determined by the [SEC].”

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

The final rules to be issued by the SEC would require that the annual report include: (i) the type and total amount of such payments made for each project” of the issuer “relating to the commercial development of oil, natural gas, or minerals;” and (ii) “the type and total amount of such payments made to each foreign government.”

Thereafter, the Act requires that “to the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted” under the above rules.

Wow, there is a lot here, so let me try to break this down a bit – to the extent I am able.

First, this much is clear. The disclosure/reporting requirement would apply to more than just U.S. “Resource Extraction Issuers” and, in this way, is really no different than the FCPA’s books and records and internal control provisions which apply to all issuers – not just U.S. issuers.

According to one analysis (see here), of the thirty largest internationally operating oil and gas companies, twenty-seven of the companies (including those in Europe, Canada, Russia, China and Brazil) would be covered by the Act based on their issuer status.

Thus, a concern one often hears expressed with the FCPA … that it puts U.S. companies at a disadvantage … would not seem credible if made in connection with this Act. (Of course, because the FCPA – including both its anti-bribery provisions and books and records and internal control provisions – apply to more than just U.S. companies, that argument is not credible in the FCPA context either; but that is an issue for another day).

Beyond the fact that the Act will apply to more than just U.S. “Resource Extraction Issuers,” not much else about the Act is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, as the Act provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes the acquisition of a license, exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, as determined by the [SEC].

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

Is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?” Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?”

What is a payment? That’s an easy one and the Act provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees, licenses, production entitlements, bonuses, and other material benefits, as determined by the [SEC].”

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to perhaps require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps the Act is a good piece of legislation.

But the Act seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to, well, just about anybody in connection with the “commercial development of oil, natural gas, or minerals” if the money ultimately makes its way to a foreign government, an officer or employee of a foreign government, a company owed by a foreign government, or any person who will provide a personal benefit to an officer of a government.

What’s the knowledge requirement in the Act?

There isn’t one!

So if a “Resource Extraction Issuer” makes a payment to person who then unbeknownst to the “Resource Extraction Issuer” makes a payment to a person “who will provide a personal benefit to an officer of a government” there is a disclosure obligation.

But how the heck is the “Resource Extraction Issuer” supposed to disclose something it doesn’t know about?

Here is the real kicker though. The Act requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments!

Here is another mind bender. Say you are one of those foreign “Resource Extraction Issuers” such as Petrobras (Brazil) that also doubles as a so-called “company owned by a foreign government.” Under this Act, because the SEC already considers all Petrobras employees to be “foreign officials,” such companies would presumably be required to disclose the salaries and benefits provided to all of its employees.

How silly is that?

To those who support this Act, I’ve got this to say – “we’ve been down this road before.”

It’s called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA, of course, as enacted, contained (and still contains) an outright prohibition on improper payments (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) however, started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI – a Congressional leader on the “FCPA” issue), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report (see here) on what would become the “FCPA” is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected):

“Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

The words of the late Senator Proxmire and the reasoned conclusion reflected in the House Report are equally applicable here.

The Act (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in the Act to the extent those payments are made to “obtain or retain business.” Do we really now need a law that requires “Resource Extraction Issuers” to disclose ALL such payments, even perfectly legitimate and legal payments?

For the record, S-1700 has been referred to the Senate Banking, Housing, and Urban Affairs Committee.

For the record, similar legislation was introduced in Congress in 2008, but no action was taken on the bills.

For the record, this post has left me dizzy just thinking through the ramifications. I can’t imagine being a corporate counsel actually tasked with ensuring compliance with this Act.

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