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SEC Chairman Schapiro’s FCPA Responses

As noted in this prior post, on June 30th, Senator Mike Crapo (R-ID) sent SEC Chairman Mary Schapiro a letter requesting answers to a number of FCPA related questions.  In this September 23rd letter, SEC Chairman Schapiro responds.

Chairman Schapiro begins as follows.  “Contuined strong enforcement of the FCPA sends the message that American companies operating abroad will not pay bribes as a ‘cost of doing business.’  The deterrence message of the Commission’s FCPA enforcement program incentivizes companies to self-assess and update their compliance and internal controls – all of which benefits companies’ operations overall and provides greater transparency to investors.  While I certainly appreciate and share your concerns about the costs of FCPA compliance in certain circumstances, I believe that the risks to investors and costs to companies posed by outdated or weak FCPA compliance measures are equally significant.”

Compliance Defense?

As to a potential FCPA compliance defense, Chairman Schapiro began by stating a common enforcement agency response … we already consider compliance.   She stated as follows.  “The Commission, in deciding whether to approve the filing of an FCPA enforcement action against a public company, already considers as one mitigating factor whether the company’s compliance program was reasonably designed and operated in a manner to detect and prevent FCPA violations.”  “Similarly,” Chairman Schapiro stated, “companies facing FCPA inquiries can obtain credit for cooperation under the Commission’s new Cooperative Initiative, in which cooperation is defined to include, among other factors, having reasonable internal controls and compliance measures.”    Given the above, Chairman Schapiro states that “it seems unnecessary – and even counterproductive – to recognize a formal affirmative defense for having such a program, given that there are at least three significant costs associated with such a defense.”

Chairman Schapiro then identifies the following three issues.

“First, the reasonableness of a compliance program is best measured not by how it exists on paper, but by how it operates in practice.  Consequently, the ease with which an employee was able to circumvent anti-corruption controls is some evidence – not sufficient evidence, but some evidence – that internal controls were insufficient.  The Commission would not want to be foreclosed from bringing FCPA charges under those circumstances, since holding companies accountable for weak internal controls incentivizes companies to create a robust FCPA compliance environment.”

“Second, providing an affirmative defense for reasonably designed compliance programs could allow companies to retain ill-gotten gains.  A company could engage in bribery or other corrupt behavior, obtain a benefit from such conduct (i.e. securing lucrative contracts), and yet not disgorge its ill-gotten gains.  Enabling companies to retain proceeds generated from the payment of bribes would disincentivize those companies from adopting rigorous anti-corruption programs.”

“Third, sanctioning corrupt behavior sends a strong message of general deterrence to all similarly situated companies that there is a high financial and reputational cost to be paid if they bribe foreign officials.  There is often no substitute for the deterrent impact of financial and reputational sanctions, which prevent improper behavior from becoming ingrained as just another ‘cost of doing business.’  That deterrence message likely would be diluted if such an affirmative defense was adopted.”

“Foreign Official”?

According to Chairman Schapiro, the FCPA “sufficiently defines the term foreign official.”  She stated as follows.  “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.  In addition, Commission and Department of Justice enforcement actions also provide guidance on the meaning of ‘foreign official’ in various contexts.  Finally, companies with a strong compliance culture have policies prohibiting all bribery in order to send a clear corporate message that such practices are not condoned.”

SEC Guidance?

“Both the Commission and the Department of Justice have numerous mechanisms for providing guidance on FCPA matters.  Perhaps the most important guidance comes from the enforcement actions that are brought by the Commission and the Department of Justice.  The Commission uses it pleadings and accompanying public news releases to highlight and reinforce the key elements of each case.  Additionally, senior staff in the Division of Enforcement speak regularly at industry conferences and provide guidance on the FCPA program. ”

For a prior post on “prosecutorial common law” – see here.

As relevant to Chairman Schapiro’s “guidance” response, readers may be interested in my “Facade of FCPA Enforcement” article  (here) in which I discuss  the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones statements of facts or allegations or conclusory legal statements; the increasing trend of FCPA enforcement actions resolved based on untested and dubious legal theories, as well as enforcement theories seemingly in direct conflict with FCPA’s statutory provisions; and the opaque nature of FCPA enforcement and how similar enforcement actions, based on the government’s own allegations, are resolved with materially different charges and penalties.

In short, the notion that settled SEC civil complaints or administrative orders (or now SEC NPAs or DPAs or DOJ NPAs or DPAs for that matter) provide meaningful guidance or should serve as FCPA caselaw is absurd.  In my Facade article, I detail cases in which the SEC admits that the terms of an SEC settlement “do not necessarily reflect the triumph of one party’s position over the other.”  I also highlight statements from former SEC Commissioner and current Standford law professor Joseph Grundfest that, among other things, SEC complaints “typically omit mention of valid defenses and of countervailing facts or mitigating circumstances …”.  In the words of Professor Grundfest, the “natural result” of settling an SEC enforcement action “is a one-sided record in which the Commission asserts its version of the facts and the law, and the settling defendants commit not to challenge that rendition.” 

On the same general topic, albeit in the DOJ FCPA context, see this recent piece from Michael Volkov “The FCPA & Voluntary Disclosure An Engimatic Threat to Due Process” (“the Justice Department has started to cite as precedent its own decisions respecting the outer reaches of the law”).

Strict Parent Company Liability for Foreign Subsidiary Actions?

Chairman Schapiro’s response states in full as follows.  “A U.S. parent company may be liable under the FCPA for bribes paid by its foreign subsidiary in certain circumstances, such as where the parent company had knowledge of the foreign subsidiary’s bribery or where the subsidiary acted as the parent’s agent.  ‘Knowledge’ under the FCPA’s anti-bribery provisions encompasses actual knowledge, conscious disregard of, or willful blindness to the subsidiary’s illicit activities.  In addition, under agency law, an agent’s knowledge can be imputed to the principal (parent).  Accordingly, in the absence of the requisite evidence, the Commission does not charge a U.S. parent company with a violation of the FCPA’s anti-bribery provisions in connection with the foreign subsidiary’s actions.  In addition, the Commission may, based on its analysis of the particular facts and circumstances of some cases, charge the foreign subsidiary directly with violation of the FCPA’s anti-bribery provisions while separately charging the parent company with violations of the books and records and internal control provisions of the FCPA.  This is because the public company parent typically is responsible for the accuracy of the books and records of its overall operations, including those of its controlled foreign subsidiaries.  While the FCPA’s books and records and internal controls provisions do not contain a ‘knowledge’ requirement, the Commission exercises its discretion and flexibility in charging these provisions.”

For previous posts on the issue of strict liability see here and here.

Double-Dip Penalties?

Chairman Schapiro stated as follows. “The Commission and Department of Justice do not obtain duplicative penalties in FCPA cases.  Typically, the Commission will obtain monetary sanctions in the form of disgorgement (ill-gotten gains) while the Department of Justice obtains monetary sanctions in the form of penalties.  In those rare cases where both the Commission and the Department of Justice obtain penalties, the total penalty assessed against the company is no greater than it would be if either the Commission or DOJ alone obtained the penalty.”

However, DOJ penalties are calculated by reference to the advisory U.S. Sentencing Guidelines where an important factor in determining the ultimate penalty amount is value of the benefit received by the company from the conduct at issue.  


For your viewing pleasure here – an October 5th rountable program sponsored by the Heritage Foundation on corruption, economic growth, and freedom.

For the calendars of Indianapolis area readers see here.  A luncheon address – “Compliance in a New Era of FCPA Enforcement” I am giving next Tuesday (Oct. 11th) to the World Trade Club of Indiana.   The event, sponsored by Butler University College of Business, begins at 11:30 at the downtown law offices of Baker & Daniels.

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