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Wall Street Firms Push Back Against FCPA Scrutiny

Push Back

For the past several years, a number of banks have been under FCPA scrutiny based on alleged hiring practices in China and elsewhere.  (See here among other prior posts).

Among the banks under scrutiny are the following: JP Morgan, Bank of New York Mellon Corp., Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sach Group Inc., Morgan Stanley, and UBS AG.

The Wall Street Journal reports:

“Wall Street banks are embroiled in an intense dispute with the U.S. government over its “aggressive” interpretation of foreign-bribery laws, a flurry of legal wrangling in a probe with broad implications for how corporations do business overseas, according to people familiar with the matter.

The previously unreported campaign by banks goes to the heart of a wide-ranging inquiry into whether they ran afoul of U.S. antibribery laws by giving jobs to relatives of managers of state-owned companies and other well-connected officials, including the kin of high-ranking Chinese government officials known as “princelings,” allegedly to curry favor in getting deals.

In a series of meetings, calls and letters to regulators and federal prosecutors, banks have accused the government of overreaching by threatening to criminalize standard business practices in some countries, according to people close to the firms. The pushback differs from the normal squabbling over settlement terms, in part because the outcome is likely to set a blueprint for future cases, according to people familiar with the matter.

The government maintains its approach, which the banks have privately called “aggressive,” is within the confines of the law.”

According to the article, JP Morgan “is preparing a white paper to submit to the Securities and Exchange Commission and Justice Department, setting out the bank’s concerns about their approach.”  The white paper is being written by Mark Mendelsohn.

Mendelsohn’s assignment is most interesting as the former DOJ FCPA Unit Chief describes himself on his law firm bio as the “architect and key enforcement official of DOJ’s modern Foreign Corrupt Practices Act (FCPA) enforcement program.” As highlighted in prior posts here and here, when Mendelsohn left the DOJ in April 2010 others stated as follows.

  • “Mr. Mendelsohn has overseen a hot field in prosecution in recent years” and that “it has been up to the Justice Department – and specifically to Mr. Mendelsohn – to interpret the law.”
  • “Mark Mendelsohn transformed the FCPA from a legal backwater to a headline practice” and during his “term, no corporations mounted a courtroom defense against FCPA charges; instead all made deals with the DOJ to settle their cases.” “That gave Mendelsohn extraordinary power — in the FCPA realm, he and the DOJ became prosecutor, judge, and jury.”

His own law firm, which is now representing a major Wall Street firm in the midst of FCPA scrutiny, issued a release at the time stating Mendelsohn “built the DOJ’s modern FCPA program.”

In certain respects, the FCPA scrutiny of JP Morgan and other Wall Street banks is a reflection of the DOJ (and SEC’s) modern FCPA enforcement program.

According to the Wall Street Journal article, Bank of New York Mellon Corp. “is expected in coming months to settle an SEC inquiry that includes allegations the firm gave internships to relatives of officials at a Middle Eastern sovereign-wealth fund.”

As I told the Wall Street Journal in the article, in FCPA history only one public company has forced the DOJ to carry its burden of proof as to the elements of an FCPA anti-bribery violation and the government will likely get away with pushing the envelope on the legal boundaries in the hiring probe. When push comes to shove, these banks are not going to risk a criminal indictment to litigate a disputed legal issue.

Chalk it up to another potential example of the “facade of FCPA enforcement.”

Indeed, in many instances of FCPA scrutiny in this new era two distinct questions can be asked.

The first is whether, given the DOJ’s and SEC’s enforcement theories, the conduct at issue can expose a company to FCPA scrutiny and an FCPA enforcement action?  The second is whether Congress in passing the FCPA intended to capture the alleged conduct at issue and whether a court would find the alleged conduct to be in violation of the FCPA?

As a practical matter, risk-averse corporations care more about the first question than the second.

However, those who value the rule of law should care more about the second question. As former Attorney General Alberto Gonzales rightly noted:

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

Corporations often complain about the expansive enforcement theories that have come to define this new era of enforcement.  However, the business community itself is, at least in part, responsible for the current aggressive FCPA enforcement climate.  Indeed, as Homer Moyer, a dean of the FCPA bar rightly observed:

“One reality is the enforcement agencies’ [FCPA] views on issues and enforcement policies, positions on which they are rarely challenged in court. The other is what knowledgeable counsel believe the government could sustain in court, should their interpretations or positions be challenged. The two may not be the same. The operative rules of the game are the agencies’ views unless a company is prepared to go to court or to mount a serious challenge within the agencies.”

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