A Positive Correlation Between Bureaucracy and Corruption
Previous posts (see here, here and here) have posed the question several times.
Why do Foreign Corrupt Practices Act violations occur?
Do companies subject to the FCPA do business in foreign markets: (i) intent on engaging in bribery as a business strategy and without a committment to FCPA compliance; or (ii) with a committment to FCPA compliance, yet subject to difficult business conditions?
To be sure, there have been some instances where bribery was used as a business strategy and approved of and condoned by high-level corporate executives. However, the more common reason for FCPA scrutiny and enforcement is that company with a commitment to FCPA compliance is doing business in a foreign country subject to difficult business conditions.
Friday Roundup
Not something you see everyday, Yates Memo related, quotable, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday roundup.
Not Something You See Everyday
It’s not everyday that you see a director of a publicly-traded company publicly resign because the director thinks the company is engaged in improper conduct including FCPA violations.
But that is just what Michael Moss, until recently a director of Malvern Bancorp, did.
Issues To Consider From The VimpelCom Enforcement Action
This prior post went in-depth into the recent Foreign Corrupt Practices Act enforcement action against VimpelCom (and a related entity) that resulted in a net $397.5 million FCPA settlement – the 5th largest FCPA settlement amount of all-time (see here for the current top-ten list).
This post highlights additional issues to consider.
Did VimpelCom Get Off Too Lightly?
The resolution documents contain numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. The allegations in the VimpelCom action are egregious and paint a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.
Yet VimpelCom was offered a DPA, notwithstanding the fact that it did not voluntarily disclosure.
During last week’s conference call announcing the VimpelCom enforcement action (see here for the transcript), Assistant Attorney General Leslie Caldwell was asked why VimpelCom was offered a DPA while Unitel LLC, a business entity headquartered and incorporated in Uzbekistan, was required to plead guilty. Caldwell generally stated that this resulted from the fact that most of the alleged improper conduct was engaged in Unitel, not VimpelCom.
Having read the DOJ’s resolution documents, I question how Ms. Cadlwell could have made this statement as the documents contain numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. Again, the allegations in this case are egregious and paint a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.
The 2010 article “The Facade of FCPA Enforcement” highlights various pillars that contribute to the facade of FCPA enforcement including how seemingly clear-cut instances of corporate bribery, per the government’s own allegations, are resolved without actual prosecuted anti-bribery violations.
VimpelCom joins other corporate FCPA enforcement actions such as BizJet International, Daimler AG and Siemens AG that also involved egregious instances of corporate bribery, yet did not result in actual prosecuted anti-bribery violations.
Was the Unitel Criminal Charge Even Viable?
A former high-ranking DOJ FCPA enforcement attorney once explained to me that the corporate FCPA resolution process often begins in reverse where the DOJ and the company agree on the end result (i.e., which corporate entity will accept responsibility) and then the negotiating parties work backwards to craft a resolution document that will be acceptable to both parties.
Indeed, the “sausage making” metaphor rightly applies to certain DOJ corporate FCPA enforcement actions as the alleged conduct at issue is “sliced and diced” in a way to yield resolution documents that avoid the potential collateral consequence of debarment from government contracting, both in the United States and elsewhere, as well as other negative collateral consequences.
When it comes to this topic, the issue in the VimpelCom enforcement action is not whether egregious bribery took place, again as stated above, it surely did. Rather the issue is the form of the resolution and whether the Unitel criminal charge was even viable.
As highlighted above, Unitel is a business entity headquartered and incorporated in Uzbekistan. In “FCPA-speak” it is thus a “person other than an issuer or domestic concern” under dd-3 and can only be subject to the FCPA’s anti-bribery provisions to the extent “while in the territory of the United States, [there is corrupt] use of the mails or any means or instrumentality of interstate commerce” in furtherance of a bribery scheme.
While the Unitel criminal information does contain allegations regarding “use of the mails or any means or instrumentality of interstate commerce,” is does not contain any “while in the territory of the U.S.” allegations. Perhaps because of this, Unitel was not charged under dd-3, but rather charged with conspiracy (18 USC 371) to violate the FCPA’s anti-bribery provisions and the information specifically cites dd-1 (the statutory prong applicable to issuers).
The problem with this enforcement theory is that it conflicts with the recent decision in U.S. v. Hoskins (and other decisions both in the FCPA context and otherwise) which hold that a person can not be charged with conspiring to violate a statutory provision that substantively does not apply to the person.
Where Should the Money Go?
This is not so much a legal question, but a policy question that can be asked in connection with FCPA enforcement actions against foreign companies.
Even though the global settlement announced last week involved a Dutch component, the fact remains that net $397.5 million is going into the U.S. treasury because a Bermuda company that was headquartered in Moscow, Russia until 2010 when it moved its headquarters to Amsterdam, the Netherlands (VimpelCom) and an Uzbek entity (Unitel) bribed Uzbek officials.
Against this backdrop, I will repeat what I stated in this 2010 speech: when a non-U.S. company allegedly bribes non U.S. officials, I don’t know exactly where the money should go, but I am pretty sure the best answer is not the U.S. treasury.
Root Causes
An analysis of root causes in FCPA enforcement actions is not meant to excuse the conduct at issue, but rather to better understand why the conduct took place.
The root cause of the VimpelCom enforcement action appears to be that pursuant to local law, or at the very least local practice, VimpelCom needed a local partner in Uzbekistan in order to enter that market. The rest, as they say, is set forth in the resolution documents.
This again demonstrates that trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
In The TPP, The U.S. Government Acknowledges The Commercial Aspects Of SOEs
The U.S. government’s position on state-owned or state-controlled enterprises (SOEs) is amusing to say the least.
Is it too much to expect a uniform, consistent, and principled position from the U.S. government?
For instance, in the “foreign official” challenges (Carson, O’Shea, and Esquenazi / Rodriguez) the DOJ pledged allegiance to the OECD Convention and argued that the OECD Convention compelled a meaning of “foreign official” that included employees of SOEs.
As highlighted in my Supreme Court amicus brief filed in connection with the Esquenazi / Rodriguez cert petition, there were a number of problems with the DOJ’s position. Separately, the DOJ’s position was selective because it ignored OECD Convention commentary 15 which states:
“An official of a public enterprise shall be deemed to perform a public function unless the enterprise 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, without preferential subsidies or other privileges.” (emphasis added).
The recent Trans-Pacific Partnership (TPP) agreement has an entire chapter (Chapter 17) devoted to SOEs which rightly recognizes the commercial nature of most SOEs.
The chapter defines SOEs as follows.
state-owned enterprise means an enterprise:
(a) that is principally engaged in commercial activities; and
(b) in which a Party:
(i) directly owns more than 50 percent of the share capital;
(ii) controls, through ownership interests, the exercise of more than 50 percent of the voting rights; or
(iii) holds the power to appoint a majority of members of the board of directors or any other equivalent management body.
commercial activities means activities which an enterprise undertakes with an orientation toward profit-making and which result in the production of a good or supply of a service that will be sold to a consumer in the relevant market in quantities and at prices determined by the enterprise.
This chapter summary notes:
“[This] chapter provides broad coverage of SOEs that are principally engaged in commercial activity.”
[…]
“The SOE chapter includes commitments by TPP Parties to ensure that their SOEs make commercial purchases and sales on the basis of commercial considerations, except when doing so would be inconsistent with any mandate under which an SOE is operating that would require it to provide public services.”
[…]
“Whereas in 2000, there was only one SOE in the Fortune Global 50 list of the largest companies in the world, now there are close to a dozen.”
[…]
“SOEs exist in all TPP countries, are used for different purposes, and are regulated and managed in widely varying ways. Some SOEs provide public services, but other times, extensive government participation in economies through SOEs can distort competition to the detriment of private American firms and their workers. This can occur through SOEs that receive advantages from governments, such as preferential financing, including through State-owned banks; provision of goods or services from the government or from other SOEs at preferential prices or free of charge; direct subsidies and debt forgiveness, or other preferences. These preferences can tilt the playing field in favor of SOEs and against U.S. workers and businesses. Even where enforcement against SOEs in foreign markets has been pursued for anti-competitive behavior or other unlawful behavior, commercial SOEs have avoided prosecution by claiming sovereign immunity.”
“Concerns about the role of SOEs have grown in recent years because SOEs that had previously operated almost exclusively within their own territories are increasingly engaged in international trade of goods and services or acting as investors in foreign markets.”
The TPP And Corruption
Trade barriers and distortions are often the root causes of bribery.
This has long been recognized, including by Congress in the mid-1970’s when it was considering various legislative approaches to the s0-called foreign corporate payments problem.
As highlighted in “The Story of the Foreign Corrupt Practices Act,” in November 1975 Senate Resolution 265 passed 93-0 and called for executive branch agencies to pursue remedies to the corporate payments problem within the framework of the General Agreement on Tariffs and Trade (GATT).
At the same time, Congress realized that multilateral trade agreement were “largely hortatory in nature and do not include reliable enforcement machinery or sanctions for violators” and that the then-existing trade discussions already included “a large number of complex and difficult negotiating objectives” and that it was not in the U.S. interest “to add yet another major problem” into the trade discussions.
Nevertheless, trade barriers and distortions remain a frequent root cause of bribery.
A long-awaited developed occurred in the trade space last week as the Obama administration released the full text of the Trans-Pacific Partnership (TPP) agreement. As highlighted here:
“The TPP would arguably be the largest free trade agreement in history when considering the economies of the 12 Pacific Rim member countries, covering approximately 40% of the global economy. The agreement must now be individually approved by each of the 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.”
The TPP is massive document and its potential to reduce trade barriers and distortions is country specific and indeed industry specific.
If the TPP does indeed reduce trade barriers and distortions, then it can help reduce the root causes of bribery and the reason is fairly straight-forward.
- Trade barriers and distortions create bureaucracy.
- Bureaucracy creates points of contact with foreign officials.
- Points of contact with foreign officials create discretion.
- Discretion creates the opportunity for a foreign official to misuse their position by making bribe demands.
While the potential of the TPP to reduce trade barriers and distortions is found deep within the country and industry specific information in the document, the TPP does contain an “aspirational” chapter (Chapter 26) devoted specifically to anti-corruption.
As highlighted in this U.S. government summary:
“The chapter ensures that U.S. exporters, service suppliers, investors, and other interested stakeholders in TPP have ready access to information about the laws, regulations, and other rules affecting trade or investment in TPP markets; guarantees due process rights; commits TPP Parties to have and enforce anti-bribery laws; and promotes rules against conflicts of interest in government. The chapter guarantees the full rights of governments to regulate for public health, environmental quality, and other public-policy goals.”
“The [chapter] requires TPP Parties to ensure that, to the extent possible, their laws, regulations, and administrative rulings related to any matters covered by the TPP Agreement are publicly available and that regulations are subject to notice and comment.”
Similar to the OECD Convention, the summary document highlights the following “aspirational” portion of the TPP.
“Each TPP Party commits to adopt or maintain laws that criminalize the offering of an undue advantage to a public official (or the solicitation of such an advantage by a public official), as well as other acts of corruption in matters affecting international trade or investment. Parties also commit to effectively enforce their anticorruption laws and regulations.”
One final note regarding the TPP anti-corruption chapter.
Unlike the FCPA’s definition of “foreign official” which is silent as to state-owned or state-controlled enterprises (SOEs) – as highlighted here competing bills introduced in Congress, but rejected by Congress, did contain explicit reference to SOEs – the TPP has no problem in explicitly capturing SOEs in its definition of “foreign public official” which includes “any person exercising a public function for a foreign country, at any level of government, including for a public agency or public enterprise.”