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Observations From The OECD’s Phase 4 U.S. Review Report

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Recently, the OECD released its Phase 4 review of the United State’s implementation of the OECD Anti-Bribery Convention … in effect a review of the FCPA, its enforcement, and related issues.

The first question one needs to ask themselves is whether they care what “experts from Argentina and the United Kingdom” (as stated by the OECD “the report and its recommendations reflect the findings of experts from Argentina and the United Kingdom”) think about the U.S. Foreign Corrupt Practices Act, U.S. law enforcement (DOJ and SEC) policies and practices, and U.S. jurisprudence.

In any event, the Phase 4 Report “explores issues such as detection, enforcement, corporate liability, and international cooperation, as well as covering unresolved issues from prior reports.” (See here for a 2010 post summarizing the OECD’s Phase 3 review).

My own two cents are similar to what I wrote in the 2010 post.

There is no question that the U.S. has more FCPA enforcement compared to other nation’s enforcement of their FCPA-like laws. However, quantity does not always mean quality and just like the Phase 3 report, an inherent contradiction in the Phase 4 report is that while loudly praising the U.S. for its high level of enforcement, the report quitely criticizes and questions many of the policies, enforcement theories and resolution vehicles which yield that high level of enforcement.

For instance, the Report rightly acknowledges that the U.S.’s “high volume of concluded cases is largely attributed” to the buffet of resolution vehicles used by the DOJ/SEC – few of which are actually subjected to any meaningful judicial scrutiny. Elsewhere, the Report rightly states that in certain instances “the DOJ’s interpretation and related implementation of the FCPA” has not “not been tested in court.” As to an expansive (and common) FCPA enforcement theory, the Report rightly notes:

“One important aspect of the foreign bribery offence in the FCPA is different from the description of the offence in Article 1 of the Convention: the bribery of a foreign public official must be committed in order to assist the briber “in obtaining or retaining business for or with, or directing business to, any person” (known as the business nexus test). Thus, unlike Article 1, the FCPA language does not expressly convey that the case is covered where the purpose of the bribe is to obtain or retain other improper advantage in the conduct of international business, such as obtaining an operating license or permit to operate a business, or a reduction in tax or import duty.”

In other respects, the OECD appears to accept at face value DOJ/SEC questionnaire responses with little independent thought. For instance, the report states that “the U.S. authorities explain that members of the DOJ and the SEC FCPA units are constantly participating in conferences, continuing education programs, and bar events to raise awareness among compliance officials, in-house lawyers, and outside counsels on FCPA related risks and prohibitions. In fact, during the on-site visit, DOJ prosecutors stressed that, to their knowledge, no federal offence is subject to more guidance and communication than the FCPA.” What is missing though is that, as anyone who has attended these conferences and events know, the first words out of the mouth of a DOJ or SEC representative is the “I am expressing my own personal views, not the views of the DOJ/SEC” disclaimer.

In other regards, the Phase 4 Report contains assertions that make little sense. For instance, the report states:

“The lead examiners commend the United States for its sustained and demonstrable commitment to enforcing its foreign bribery offence as well as other related offences against both natural [individuals] and legal [business organizations] persons. In particular, they welcome the U.S. authorities’ clear efforts to hold natural persons responsible for foreign bribery.”

Relatedly, the Report states:

“The DOJ’s emphasis on enforcement efforts aimed at natural persons [individuals] is driven by the notion that sanctioning individuals is a powerful and effective deterrent against foreign bribery. Since the adoption of its current policies, the DOJ has clearly and consistently reasserted this position, including while announcing the revision of the Yates Memo in November 2018 and in public statements by DOJ officials of various hierarchical levels.”

However, as noted in prior posts here and here, approximately 80% of corporate FCPA enforcement actions lack any related individual prosecutions. Moreover, as highlighted in this post, since the Yates Memo, the percentage of corporate FCPA enforcement actions resulting in related individual enforcement actions has actually dropped.

As highlighted below, there are several interesting tidbits in the report. Yet, why should it take a once in a decade OECD report for these interesting tidbits to reach the public domain?

For instance, the Report states:

“The United States could not provide its detection sources for each of its enforcement action in part because the DOJ and SEC expressed concern that the release of such data might hinder future investigations and in part because of legal considerations, such as whistleblower protection laws. In their questionnaire responses, the U.S. authorities indicate that they receive information on foreign bribery and related offences from a wide variety of sources. These include (but are not limited to) SEC filings, media reports, tax authorities, financial intelligence units, international financial institutions, embassies, and foreign authorities. After the on-site visit, the DOJ reported that it previously did not closely track the origin of its cases, but it was able to provide approximate percentages for its concluded enforcement actions. While the SEC does track this information, it does not disclose it to the public.

After the on-site visit, the U.S. authorities provided the evaluation team with approximate percentages of the origin of cases resolved by the DOJ. As shown in the graph below, these numbers show that approximately 30% of the DOJ’s concluded foreign bribery cases were detected through voluntary self-disclosure of companies, while another 20% came from whistleblower reports. Referrals from foreign and civil authorities accounted for another 20% of the DOJ’s foreign bribery cases. Finally, the DOJ estimated that other law enforcement activities (information provided by cooperating defendants and other sources, such as the review of suspicious activity reporting by financial institutions), and news stories in the media each contributed to the detection of 15% of its foreign bribery cases.”

As highlighted in this recent post, since 2011 43% of DOJ corporate FCPA enforcement actions have originated from voluntary disclosures.

Regarding whistleblower awards in connection with FCPA offenses, the Report notes:

“The evaluation team did not have access to statistics on awards issued solely for foreign bribery, given the SEC’s procedures for protecting the confidentiality of whistleblowers.”

[…]

It is not clear how many FCPA-related whistleblower tips actually resulted in FCPA enforcement actions, as the SEC does not as a policy matter disclose such statistics to maintain whistleblower confidentiality.

[…]

In Phase 3, the U.S. authorities believed that the Dodd-Frank whistleblower provisions would likely increase the detection of FCPA violations. Based on the anecdotal evidence received during the on-site visit, it is clear that Dodd-Frank provides strong incentives to qualified whistleblowers, as further explained below. Nonetheless, the evaluation team could not in fact confirm that the number of FCPA matters uncovered through whistleblowing increased between Phase 3 and Phase 4.”

Regarding voluntary disclosure, the Report notes:

“In their questionnaire responses, the U.S. authorities provide that the notions of “imminent threat of disclosure or government investigation” and “reasonably prompt time after becoming aware of the offense” in the CEP definition of voluntary disclosure depend on the facts and circumstances of each case. They stress, however, that DOJ officials have stated publicly that, although in some instances 3-6 months may be “reasonably prompt”, a year is likely not “reasonably prompt”. If a company chooses to wait even 3 months to voluntarily disclose misconduct, there is a substantial risk that the DOJ will learn of the misconduct through other methods (including, for example, whistleblowers), and the company will lose the ability to obtain voluntary self-disclosure credit.”

Elsewhere, the Report notes:

“[A]ccording to representatives of the private sector met during the on-site visit, the lack of certainty about the medium to long term repercussions of voluntary self-disclosure to the DOJ at both domestic (other national agencies possible jurisdiction) and international level (jurisdictional claims by other countries), would in practice dilute the effects of DOJ’s incentives.”

As to other origins of FCPA enforcement actions, the Report notes:

“In the U.S., law enforcement agencies can open an investigation based on media reports. During the onsite visit, U.S. authorities and companies affirmed that they review allegations both from national and foreign media concerning foreign bribery and related offences. The DOJ states that approximately 15% of the DOJ FCPA cases come from media reports, which is a significant indicator of the detection value of media reports. While the SEC confirmed that it conducts media surveillance on both domestic and foreign vehicles to identify foreign bribery allegations, for legal and policy reasons, it was not able to offer comparable data on how many media reports have triggered SEC investigations on foreign bribery matters.”

Regarding so-called “industry sweeps,” the Report notes:

“Since at least 2007, observers have remarked that FCPA enforcement activity has successively focused on a range of industries.104 This practice is sometimes referred to as “industry sweeps”. The two agencies express slightly different perspectives on this practice.

The SEC reports that it sometimes detects foreign bribery cases by using its regulatory authority to investigate potentially problematic practices in particular industries. In 2016, the then Director of the SEC’s Division of Enforcement reported that the SEC’s FCPA unit had conducted a “sweep” in the financial services and the pharmaceutical industries. During the on-site visit, SEC enforcement officials confirmed that certain financial services cases, including BNY Mellon, JP Morgan, and Och-Ziff grew out of industry sweeps. That said, as industry sweeps can be labour intensive and time consuming, the SEC indicated during the on-site visit that such sweeps would only be conducted in appropriate circumstances.

For its part, the DOJ FCPA unit does not participate in “industry sweeps”. It reports that it simply follows the evidence, and that a company that is prosecuted may point out other competitors engaged in similar practices. Observers have remarked that the FCPA unit sometimes pursues prosecutions against various entities following the conviction of one participant in a scheme (e.g. TSKJ, Petrobras, Alstom). The DOJ observes that often these cases are developed in parallel, even if the defendants may resolve their matters at different points in time. They also will pursue cases against various entities in an industry that engage in corrupt practices (e.g. pharmaceutical companies bribing doctors, or financial firms hiring Chinese “princelings” for influence).”

Regarding the so-called “reasonable and bona fide expenditures” affirmative defense, the report notes:

“In Phase 4, when asked how frequently the defence is used, the U.S. authorities indicated that the bona fide expense defence is sometimes raised by companies in the context of investigations that involve providing travel and entertainment to foreign officials.”

Regarding facilitation payments, the Report states:

“During the onsite visit DOJ representatives also pointed to the Jackson, Ralph Lauren, and Archer Daniels cases, which all have contributed to further delineate this narrow exception, including clarifying that improper customs payments may not fall within the exception.”

News flash to the OECD.

Enforcement actions resolved in the absence of any meaningful judicial scrutiny do not “delineate” or “clarify” much of anything.

Moreover, is the OECD aware that the in Jackson matter, a court held that the government has the burden of negating application of the facilitation payments exception and the judge stated: “I have such trouble understanding the facilitating payment exception.” (See here).

In any event, the Report notes:

“In its questionnaire responses, the United States indicates that the DOJ does not believe it has ever been confronted with any case in which it thought prosecution was appropriate but was unable to do so as a result of the facilitation payment exception. Nor does the DOJ believe any other jurisdiction has prosecuted a case that the DOJ would not be able to pursue as a result of the facilitation payment exception.”

Regarding resources, the Report states:

“In their questionnaire responses, the U.S. authorities indicate that the Fraud Section’s FCPA Unit currently has approximately 30 attorneys plus additional law clerks, investigators, paralegals, and support staff. This is about twice as many as in Phase 3, where the Unit had the equivalent of 12-16 attorneys working full-time on FCPA matters.

[…]

The FCPA Unit currently has 35 members in various offices around the country. These resources have remained stable since Phase 3.

[…]

At the time of the U.S. Phase 3 evaluation, the Unit only had one squad based in Washington, DC comprised of 13 agents and 1 analyst. In 2015, the FBI established two additional international corruption squads respectively based in Los Angeles and New York. A fourth squad is now based in Miami. In its questionnaire responses, the United States indicates that currently, the FBI Unit is staffed with approximately 43 Special Agents and 17 Investigative Analysts and Forensic Accountants in the above mentioned various offices around the country. In addition, the FBI maintains over 60 legal attaché offices throughout the world, which can assist on foreign bribery cases when necessary. During the on-site visit, the FBI indicated that the International Corruption Units hire senior agents with expertise in international cases. It also affirmed that human resource development is a primary policy.”

Regarding the notion that the DOJ has more specific FCPA policies than the SEC, the Report notes:

“During the on-site visit, legal practitioners and other stakeholders praised the SEC’s trail-blazing initiative to spell out the factors that it will consider for giving cooperation credit to natural and legal persons. Nonetheless, they observed that the SEC does not have an FCPA-specific cooperation policy and that the SEC’s policy does not provide a similar level of certainty as to the likely resolution as the DOJ’s new CEP for legal persons. Furthermore, some legal practitioners and company representatives expressed reluctance to self-report violations to the DOJ even under the CEP without knowing how the SEC would apply its factors to the same misconduct. Representatives of the SEC met during the on-site visit held the opinion that the full Seaboard Report provides extensive guidance, noting that it includes many of the factors reflected in the DOJ’s guidance, and also emphasised that it is supported by regular outreach activities to raise awareness on how the SEC approaches FCPA enforcement. Additionally, SEC representatives noted that drawing the line on the right amount of guidance is a complex exercise and that too much guidance pose the risk of being too prescriptive on enforcement practices.

With a view to further incentivise voluntary self-reporting and cooperation in line with the DOJ policy, and in order to further harmonise the approach to fighting foreign bribery of the leading U.S. law enforcement agencies, the lead examiners recommend that the SEC consider consolidating and publicising its policy and guidance on how it enforces the FCPA.”

As to statute of limitations, the Report notes:

“In its questionnaire responses, the United States indicates that neither the DOJ nor the SEC maintain statistics on enforcement actions terminated due to the expiration of the statute of limitations. During the on-site visit, the SEC explained that an FCPA investigation typically lasts three to five years. Data shared by the United States with the evaluation team shows that the average time between the day the act ended and the case was resolved by the SEC is around 5 years. In their questionnaire responses, the U.S. authorities acknowledge that the statute of limitations has at times limited their ability to investigate and prosecute historical conduct, and that it can pose challenges when the bribery schemes are complex, well-concealed, and involve multiple foreign jurisdictions. Enforcement practice suggests that several enforcement actions were terminated on this basis since Phase 3. For instance, in 2018, the SEC’s civil suit against two former executives of Och-Ziff Capital Management Group was deemed statute-barred because it challenged transactions that took place between May 2007 and April 2011.

Nonetheless, the U.S. authorities stress that the statute of limitations rarely impedes them from pursuing FCPA enforcement actions, because in the face of their considerable caseload, they prioritise the investigation of the most recent schemes that are usually easier to prove as evidence tends to become more unreliable and difficult to obtain over time. They also stress that the Corporate Enforcement Policy, by incentivising companies to report misconduct to the DOJ’s attention when the company learns of the misconduct, allows the DOJ to begin its investigation earlier than if it learned of the misconduct through other means, which can be years later.

Additionally, the DOJ and SEC have been using various mechanisms to extend the 5-year limitation period. First, the DOJ regularly pursues foreign bribery actions under conspiracy charges. The statute of limitations for conspiracy does not start running until the last overt act by any conspirator. As a result, if the defendant does not withdraw from the conspiracy, the limitations period will not expire even if the defendant stopped playing a role in the scheme years before. This theory was already commonly used at the time of Phase 3 but the proportion of foreign bribery cases pursued under conspiracy charges has grown substantially with the enforcement increase since Phase 3. Second, the DOJ and SEC commonly conclude tolling agreements, under which alleged offenders agree to a suspension of the statute of limitations, leaving the authorities more time to conduct their investigations. Under these agreements, the two parties agree on the scope and length of the tolling agreement. During the on-site visit, the U.S. authorities explain that these agreements typically last one year, but parties can conclude several agreements in the course of the same proceeding. They also specified that tolling agreements are commonly used in proceedings against legal persons, but not individuals, who rarely agree to them.”

Regarding the Supreme Court’s 2017 unanimous decision in Kokesh that disgorgement is a penalty and thus subject to a five year limitations period, the Report states:

“The SEC explains that while no investigations were fully or partly terminated due to Kokesh, the ruling has become a factor in deciding whether to open or forego an enforcement action, and several cases were not opened as a consequence of the ruling.”

Elsewhere, the Report states:

“The lead examiners are concerned with the significant limitation of the SEC’s ability to impose disgorgement following the 2017 Supreme Court Kokesh and Liu decisions. In Kokesh, the Supreme Court held that disgorgement is subject to a five year statute of limitations, which means that proceeds of misconduct obtained by a wrongdoer outside the limitation period are insulated from disgorgement by the SEC. In Liu, the Supreme Court held that the SEC can impose disgorgement if the funds recovered are awarded to victims while expressly stating that it did not pronounce on other possible circumstances. It thus remains to be seen how disgorgement will work in FCPA cases that often do not have identified victims.”

In a line sure to draw a chuckle from certain experienced FCPA practitioners, the Report notes:

“The U.S. authorities explained that the DOJ does not enter into resolutions of any kind (NPAs, DPAs, or guilty pleas) where there is insufficient evidence to prove the case beyond a reasonable doubt at trial.”

Regarding the buffet of resolution vehicles used by the DOJ/SEC – few of which are actually subjected to any meaningful judicial scrutiny – the Report states:

“The lead examiners acknowledge that non-trial resolutions are an important contributory factor to the U.S. high volume of concluded cases through the better detection of foreign bribery and because it allows the U.S. authorities to address enforcement challenges, in particular complex investigation and statute of limitations.”

Time out.

Alternative resolution vehicles not subjected to any meaningful judicial scrutiny, allow U.S. authorities to ignore enforcement challenges, in particular in complex investigations and statute of limitations.”

Regarding the potential for political interference in FCPA investigations, the Report states:

“[A]s in Phase 3, [U.S. authorities] also reported that politically appointed officials have never sought to improperly influence an FCPA enforcement decision. If that were to occur, they believed that the prosecutors or enforcement staff involved would likely report any impropriety or resign

For their part, the SEC enforcers reported that they did not need approval to commence investigations. The SEC Commissioners, who are not removable at will, however, ultimately have to decide whether the SEC will bring an enforcement action. Furthermore, the Commission’s decisions are recorded even though the decision is non-public. According to the United States, the Commission’s files reflect no instance in which the Commissioners have ever declined to authorise an FCPA investigation.”

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