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Paper Attempts To Shine A Light Inside The Negotiation Room


Any time an article title contains a word I have never used, don’t know how to pronounce, and have to “look up” to understand its meaning, I am automatically skeptical that the article will provide anything of value. But then again, perhaps my vocabulary is deficient.

Looking up the word “endogeneity” really didn’t even help, but apparently it is a term in econometrics (whatever that term means) that “broadly refers to situations in which an explanatory variable is correlated with the error term.”

Word choice aside, a recent article titled “The Compliance Game: Legal Endogeneity in Anti-Bribery Settlement Negotiations” by Branislav Hock and Elizabeth David-Barrett caught my eye.

The article doesn’t exactly chart new ground. For instance, many of the issues were touched upon in my 2010 article The Facade of FCPA Enforcement and several others have touched upon the same general topics since. Nevertheless, the article attempts to analyze and access what happens during negotiations between counsel and the government leading up to an FCPA (or related) enforcement action.

As explained in the article:

“Collecting data about a negotiation process which happens in private, influenced by motivations that are impossible to observe, is challenging. It is essential to gather first-person accounts because documentary evidence is unlikely to contain all of the information needed. However, it is also difficult to gain access to individuals who have been involved in negotiations and to discern whether they are truthfully reporting their experience.

Our strategy has been to conduct interviews with a set of practitioners who have direct and longstanding experience of negotiating settlements and of conducting related tasks such as internal investigations. Data collection ceased when the point of saturation was reached such that new interviews failed to provide significant additional insights. Non-probability sampling was used to ensure a breadth of perspectives from enforcement authorities as well as lawyers who represent corporations during negotiations. We collected interview data for the purpose of logical inference, and used sequential interviewing so that each experience provided an increasingly accurate understanding of our research question. This approach is, by design, not representative, but such careful selection of participants with adequate experience of the phenomenon can generate rich, dense, and focused data.

Access was initially gained through trusted contacts in an effort to ensure a willingness to speak frankly, and subsequently benefited from snowball sampling, as respondents recommended other contacts. The first author interviewed 13 individuals (see Table 3 below) – nine US experts and four UK experts – who together have more than 240 years’ experience of negotiating settlements and conducting internal investigations. Such careful selection of participants with adequate experience of the phenomenon can generate rich, dense, and focused data . This process was guided by the principles of appropriateness and analytical redundancy whereby, given previous interview material, one will not provide additional insights.

The semi-structured interviews sought to facilitate in-depth exploration of each expert’s experiences about the way that negotiations commence, how the relationship between the Parties develops through the various stages, and how the content of settlements is determined. Our analysis of the FCPA, accompanying guidance, and academic literature on FCPA interpretation and enforcement informed the design of an interview guide, as did the theory of legal endogeneity, which prompted us to pay attention to relevant symbols and how they were deployed. The interviews were conducted face-to-face in London, New York, Washington DC, and online in spring and summer 2019. All but one interviews were recorded, transcribed verbatim and coded for analytically relevant themes.”






Under the heading “Findings,” the article states:

“Our analysis suggests that enforcement authorities and corporations face little incentive to go to trial, and other than in exceptional circumstances, are extremely likely to opt for negotiations aimed at an NTR [non trial resolution – such as a non-prosecution or deferred prosecution agreement]. At each stage of negotiating the settlement, corporations have multiple opportunities for agency: they strategically disclose and display information about their conduct, policies and practices, and take on responsibilities of self-investigation, in an effort to convince the authorities that their behaviour is cooperative and to treat them leniently.”

Even though the authors rightly acknowledge the limitations of their research – and even though the interview participants are anonymous – there are some interesting interviewee comments in the article as highlighted below.

“A corporation can also signal good character via the reputation of the private professionals that it hires to represent it. Defence lawyers, compliance advisors, and other specialists hired by corporations often have prior relationships with enforcement authorities and are concerned about their own reputations. To remain trusted and respected, private professionals seek to represent clients that aim to adhere to symbolic structures and remediate during the course of negotiations. As one defence lawyer based in the UK indicated:

We wouldn’t take a client that we thought was going to commit illegality after we’d taken them on, who wasn’t genuinely looking to remedy the problem, but was looking to use us as a cover to commit further crimes, for instance. That’s not a situation you want to get in as a lawyer. (P13)

Some lawyers are trusted to defend only corporations that aim to negotiate in good faith. Several interviewees confirmed that if enforcement authorities are less familiar with the company and their lawyers, they will likely give the company less space to influence the negotiation process.

Having the right lawyers might even be a way of ‘buying influence’, in a world in which there is considerable movement through the ‘revolving door’ between legal, regulatory and corporate positions. Some interviewees argued that the representatives of enforcement authorities and representatives of corporations comprise a pre-existing network of contacts that constantly interact, driven by the wish of some public officials to obtain lucrative positions in the private sector and by the legal representatives’ wish to gain access to insider information. It is well documented how such interaction may ‘co-opt’ public authorities or individual officials. For example, one expert with experience in negotiating settlements on behalf of the UK government explained how this professional network interacts:

[…] these are very high-level lawyers, they know prosecutors very well, and unfortunately to say in the US, prosecutors would like to become partners to Forbes [list of the top corporations], and there are revolving doors. They know each other, they frequent each other and they go to trial together, so they are, in a way, acquaintances if not friends. So, because of this, these are the people that speak at the beginning, so very very influential lawyers with the prosecutors. (P11).”

The article continues:

“[C]orporations may offer to take responsibility for investigating the scope of the problem as a way of signalling a cooperative stance, leading to a situation where “Most of our US deferred prosecution agreements are not really investigated by the government but by me, by private lawyers” (P6). Indeed, a company also often has more resources than an enforcement authority to investigate the matter. Participant 6 describes one such negotiation with a non-US enforcement authority:

[…] the facts are in an [region] country. How are you going to get the facts, the documents and the other issues? Oh, said the prosecutor, we have treaties and we have diplomats, it’ll only take us two or three years to get the facts, and I said, well, I have a guy with a visa from that country standing by at the airport in [region] ready to go get those documents and have them back here in [region] in a couple of days. He said, oh, you can do that? I said, yes, we can do that. […] They were completely in control, but I had a lot more resources than they did, and I had a lot more flexibility because the company’s office in that [region] country had the documents and all we had to do was call up the manager from that country and say put them in a box and standby, there’s a lawyer coming to pick them up. (P6).

Of course, it is always a possibility that the corporation will cheat about what it discloses, but our participants took the view that there was little incentive to do so, because both parties are mainly focused on shaping a resolution, rather than necessarily uncovering every aspect of the wrongdoing.

In cases of endemic bribery, involving multiple bribes paid at multiple times in multiple places, enforcement authorities largely focus on the attitude of the corporation to identifying and fixing systemic compliance issues, rather than seeking detailed identification of every single act. This means that a substantial part of negotiations comprises efforts to limit the scope of investigation. Rather than fight for a maximum penalty, prosecutors are interested in swiftly reducing information asymmetries, defining the scope of the case and securing complete information about what violations have occurred. As explained by a lawyer who negotiated multiple large settlements, both parties need to be flexible in their approach:

[…] you know, where you’re finding problems in every corner there may be less of an imperative to nail down all of them and to a certain extent, where a company has systemic issues, if there’s a desire to resolve relatively promptly – and generally our view is a prompter resolution is better – there needs to be some flexibility on the part of the company and the government in terms of where to look. (P8)

Once a corporation has started to signal compliance, it has little incentive to hide particular instances of illicit conduct:

[…] you’re either co-operating or not co-operating and if you’re co-operating, you’ve got to do everything you can to cooperate. It’s rarely an effective strategy to cooperate … say you’re co-operating but then to hold back. You’ve got to be “all in” in those circumstances. […] (P8)

Similarly, one defence lawyer indicated that the outset of an internal investigation provides an opportunity to clean the shield of a corporation:

[…] the goal of the management of the company is to take the cancer out, to have a surgical removal of the cancer. […] Asymmetrical information is not the right premise for a DPA and investigation. Asymmetrical information will result in the case not being dealt with. (P6)

This explains why, as Participant 4 explains, informational gaps are closed relatively quickly:

[…] the balance is struck very quickly because all the DOJ and the SEC have to say is, what else? […] there is an incentive to tell them more to avoid them finding out. And if they ask a direct question, we have to answer honestly. So, the asymmetry, in my head I know there’s Russia, China and India and when I go in and I start talking about Russia, there is still asymmetry in favor of the company. But if you have a good prosecutor, they ask a series of questions. They will make it necessary for us to tell them about China. They will almost incentivize us to tell them about China and India. (P4)

In this stage of negotiations too, a cooperative posture matters more to the authorities than the extent of illicit conduct.

The investigation of every instance of bribery is very costly, hence every complex negotiation must grapple with the question of how, and to what extent, the Parties can limit the scope of investigation. This decision will depend on many factors, including type of company, level of trust between an enforcement authority and corporate representatives, and the complexity of a scheme. Ultimately, nevertheless, the Parties will try to agree upon a common definition of what the scope of investigation should be:

[…] all of this is premised on the notion that there is agreement as to what the real scope is, right. That’s always a huge issue. And, how is the scope defined, right […] they are going to engage in a dialogue to really figure out what is the scope, do we really need to go back to 2010 or not. (P10)

Participant 4 further describes how flexibly the scope of a case can be determined:

They say, okay, thank you for coming in about Russia. We talk about Russia. When we’re done talking about Russia we say, the Government will say, where, what other countries? Do you have any similar issues in other countries? And we’ll say, mm, nothing as serious as Russia. And then they’ll say, what about things that are less serious than Russia? We’ll say, yeah, every company has got things going on. And they’ll say, like what? So I’m trying to answer their questions honestly, but I’m not trying to give them the information. And if they’re a lazy prosecutor, they’ll say, okay, so you’re just talking about normal things? I’ll say, yeah, just the compliance stuff. And then they’ll stop asking the question, if they’re lazy. If they’re hungry, they’ll keep going. (P4)

In some cases, the scope of an investigation may be narrowed so as to include only the most serious instances of bribery while excluding less serious instances. Enforcement authorities conventionally allow the scope of an investigation to be limited provided the corporation signals compliance and they think the gathered data sufficiently characterize the core of its wrongdoing.

This practice of narrowing the scope of a foreign bribery case further exacerbates the ambiguity of the law for corporations and grants enforcement authorities wide discretion over whether or not to police corporate bribery. In large cases, this process results in an agreement about the general nature of a corporation’s bribery problem but with only select examples of bribery being thoroughly documented and investigated. For example, if one part of a company that engaged in foreign bribery was active in 100 countries, the corporation may want to thoroughly investigate conduct only in the 20 riskiest countries, and then discuss the findings with the enforcement authorities. As Participant 6 describes: And at the end of 20 countries, the guys in my plan thought they knew what the facts were pretty well, and the government knew, they didn’t need all 100 countries […] As such, the scope of foreign bribery cases – and the extent to which that scope is narrowed – is up for negotiation:

[…] everything is negotiable. My client had to acknowledge they’d been paying bribes in [X] of the 20 countries […] and the government understood that this was a good company, the part that we were dealing with, was a good company they didn’t want to kill, so they had more than enough to, at the time, charge us with multiple … [X] or whatever those violations […] But they didn’t think it was profitable to go to the next [Y] countries. (P6).

After the internal investigation has been completed and the relevant facts and circumstances established, the Parties enter a phase of determining the resolution. In this phase, a discussion takes place about the extent to which a corporation exhibited compliance and cooperation. The more and better-quality compliance symbols the corporation has been able to signal, the greater its chance to receive a reduction in penalties as well as other advantages. The Parties do not negotiate only the legal consequences of misconduct, but also how facts should be legally interpreted and which facts and how should be interpreted. They arrive at an agreement about the extent of criminal conduct, and then calculate sanctions in accordance with the mathematical formulae set out in government enforcement policies. Where a company has self-disclosed, or demonstrated cooperation and remediation, specific discount thresholds are applied.

One implication of this approach is that the scale of bribery is typically underestimated. The process is presented as one in which the initial determination of criminal conduct is ‘objective’, but this underestimates the extent to which that assessment has already been influenced by the corporation, exercising agency through its investigation. The Parties often agreed to limit the scope of investigation before the true extent of criminal conduct was fully known. Cooperative corporations thus in a sense receive a ‘double discount’. Unlike in standard economic models, enforcement authorities are not primarily motivated by maximising fines and, for individual corporations, more bribery does not necessarily lead to higher sanctions.

This mismatch between the real scope of a criminal scheme and the ‘facts’ established during negotiations is further amplified by the corporation’s interest in protecting its reputation. Participant 4 explains how the publicly available content of settlement documents does not show the full picture:

What you see in the statement of facts is a lot of information, but there’s a lot of information that never goes into the statement of facts. […] What’s included in the statement of facts is usually enough for the Government to show that they have a claim, they have a potential claim. We will say to the Government, you don’t need to say more than that. So if your claim is based on facts one, two, three, four, five, we can say, you don’t need all five. (P4)

Corporations may also suggest an appropriate structure for a case, again playing a role in interpreting relevant laws. Participant 1
indicated that:

You’re going to give me something for that. But I’ll structure this so that [subsidiary in country 1] and [subsidiary in country 2] have to plead guilty. That’s terrible for the businesses and the people in those countries, but those are tiny businesses compared to the business in the US for example, the business in Germany, the business in the UK – those guys aren’t going to have to plead guilty. Country 1, Country 2, or whatever, they have to plead guilty. (P1)

Thus, in deciding how to structure the case, both companies and enforcement authorities are incentivised to focus on ‘easy targets’ that are not ‘too big to fail’.

These practices have implications for the study of bribery in international business. While the Parties negotiate over what facts to publish and how to legally interpret them, and over which instances of bribery to focus on, commentators and academics rely on exactly this information as evidence of the acts of bribery that occurred, and are unable to judge the extent to which the Parties censored the published facts or their legal interpretation. This imposes a serious limitation on the utility of this evidence for academic research. At worst, over-reliance on such documents may lead those analysing the implementation of anti-bribery laws to draw invalid conclusions about the appropriateness of sanctions, the legal qualification of underlying acts, and other important aspects of anti- foreign bribery enforcement.”

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