Archive for the ‘Compliance Defense’ Category

Assignment: Read Former Deputy Attorney General Larry Thompson’s New Article

Thursday, March 27th, 2014

Larry Thompson has experience with the Foreign Corrupt Practices Act from a number of vantage points few can claim:  DOJ Deputy Attorney General, a lawyer in private practice, and a general counsel of a major multinational company.

For this reason, you should read Thompson’s new article -”In-Sourcing Corporate Responsibility for Enforcement of the Foreign Corrupt Practices Act,” 51 American Criminal Law Review 199 (Winter 2014).

In the article, you will find an informed and candid critique of many current aspects of FCPA enforcement.

Thompson laments the uncertainty of the FCPA and states:

“The uncertainty of precisely what the FCPA forbids and allows harbors frightening potential for prosecutorial abuse and over-criminalization – topics that have preoccupied me, both as a private attorney and as Deputy Attorney General of the United States, for many years.  This uncertainty in the FCPA is particularly troubling when one is dealing not just with individuals, who have control over all their own actions, but also with large corporations – artificial ‘persons’ consisting of hundreds, or thousands, or even hundreds of thousands, of individuals for whom the corporation can be held accountable.”

Referencing FCPA congressional hearings in 2010 and 2011, Thompson observes:

“DOJ was unperturbed by the uncertainty surrounding FCPA enforcement.  Indeed, one could be forgiven for suspecting that at least some federal prosecutors favor that uncertainty.  But we must never forget that uncertainty in the law is the antitheses of the rule of law.  There is reason that the Latin word for ‘uncertainty’ is arbitrarius.  That some FCPA enforcement attorneys might relish and exploit the arbitrary enforcement of a federal criminal statute is not merely unseemly – it is illegitimate.”

In short, you can add Thompson’s observation to my own (see here) in countering commentator suggestions that the FCPA is anything other than clear.

On the topic of the 2012 FCPA Guidance, Thompson cites my article “Grading the Foreign Corrupt Practices Act Guidance” and states:

“Its 130 pages appear impressive at first glance, but about two-thirds of that is routine recitation of background information:  the introduction and table of contents consume thirty-five pages, the reprinting of the statute itself accounts for another thirty pages, and a summary of previously issued (and by definition inadequate) guidance and discussion of other statutes fleshes out yet another twenty pages.”

On the general topic of guidance and commenting on NPAs and DPAs used to resolve FCPA enforcement actions, Thompson cites my Congressional testimony and observes:

 ”The FCPA guidance … offered by the Justice Department [in NPAs and DPAs] is less helpful because it may include coerced settlements that record instances where even DOJ itself was not sure that a violation of the FCPA actually occurred.”

Thompson’s observation in this regard is similar to former Attorney General Alberto Gonzales’s observation as highlighted in this previous post.

The majority of Thompson’s article renews calls for an FCPA compliance defense.

I first highlighted Thompson’s call (along with several other former higher ranking DOJ officials) for a compliance defense in my article ”Revisiting a Foreign Corrupt Practices Act Compliance Defense” and in this previous post I further highlighted Thompson’s call for compliance defense at an FCPA symposium.

In short, a hard-to-ignore reality of the current compliance defense debate – against the backdrop of DOJ’s strong institutional opposition to compliance defense concepts – is the chorus of former DOJ officials who support compliance defense concepts.

In his new article, Thompson writes:

“[W]e must create an incentive structure that drives corporations to establish internal compliance programs and to root out foreign corruption within their own organizations.  Only those businesses themselves have the resources to conduct the global investigations that the FCPA requires.  To accomplish this end, I believe that we need to do two things:  first, we must give businesses clear and predictable guidance on what sort of compliance programs they must establish; second, we must give them powerful incentives to engage in self-investigation and self-reporting of the bribery they uncover or suspect.  The incentives I suggest are two:  (1) businesses must be assured that a strong compliance program and prompt and full self-disclosure will ensure that the company itself will not be subject to criminal prosecution under the FCPA; and (2) such self-disclosure will also prevent the company from being debarred from doing business with the federal government or being denied government permits or licenses necessary for the company’s operations.”

Adopting a similar “baby carrot” / “real carrot” analogy I used in “Revisiting an FCPA Compliance Defense“, Thompson writes:

“I propose two carrots.  First, if a corporation establishes a comprehensive, fully funded, adequately staffed and trained FCPA compliance program, then the rogue employee who circumvents it and violates the FCPA – and is caught and turned over to authorities by his employer – should be deemed to be acting outside the realm of his corporate responsibilities and the self-reporting corporation should not be held criminally liable for his conduct.  This would be an instance of a blameless corporation. For this incentive to work, of course, the carrot must be large and appetizing – hence the absolute necessity for transparency and predictability in FCPA enforcement.  The second carrot is that a genuinely cooperative, self-reporting company with a proper compliance program must be assured that it will not be debarred from contracting with the United States government or receiving the government permits required to run its operations.”

In my “Revisiting an FCPA Compliance Defense” article and elsewhere (see prior posts here, here and here) I have articulated – like Thompson – reasons why the DOJ should be in support of – not opposed to – a compliance defense.  A compliance defense is not a race to the bottom – as government officials have suggested – it is a race to the top.  Like Thompson, I have argued that a compliance defense will better facilitate DOJ’s prosecution of culpable individuals and advance the objectives of the FCPA.

I agree with Thompson when he says that the DOJ and SEC have an “almost wooden attitude” when it comes to the FCPA. Reflecting on the enforcement agencies sense of confidence and the billions of dollars collected in enforcement actions, Thompson states:

“But this supposedly shining vision of FCPA enforcement prowess is a Potemkin village, because without corporations’ own internal policing and self-reporting, the FCPA can accomplish little.”

I sincerely hope that Thompson’s article can renew a substantive – not rhetorical – discussion of a compliance defense and how it can help advance the laudable purpose of the FCPA.  To learn more about my proposal, and how it differs slightly from Thompson’s, see here.

Can the DOJ and SEC soften its “wooden attitude”?  Is the DOJ and SEC capable of diverting attention from enforcement statistics, settlement amounts, and political statements filled with empty rhetoric?

As I wrote in my most recent post about a compliance defense, the FCPA has witnessed courageous moments before and a courageous moment is once again presented..

Rogue Employees Do Exist, Plus A Noticeable Juxtaposition

Tuesday, March 4th, 2014

In the minds of some (see here and here) rogue employees are a myth – a convenient rationalizing for inadequate internal controls and compliance policies and procedures.

The irony of course is that even the DOJ acknowledges the existence and reality of rogue employees.  The U.S. Attorneys’ Manual (9-28.800) states that “no compliance program can ever prevent all criminal activity by a corporation’s employees …” and high-ranking DOJ officials have observed that “there will always be rogue employees who decide to take matters into their own hands.  They are a fact of life.”  As this recent Economist article rightly stated: “fraud by wayward employees, be they high or low, can never be eliminated.”

This post highlights the DOJ’s recent indictment of Asem Elgawhart, the logical relationship this case has to a pending FCPA enforcement action, and how the Elgawhart action further supports the notion that the DOJ’s so-called Morgan Stanley declination was nothing more than a conveniently timed public relations campaign.

Elgawhart Indictment

Elgawhart was employed by Bechtel and was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egyptian Electricity Holding Company (the alleged “state-owned and state-controlled electricity company in Egypt”).

According to the DOJ, Elgawhart “used his position and authority as the General Manager of a power generation company to solicit and obtain millions of dollars of kickbacks for his personal benefit from U.S. and foreign power companies that were attempting to secure lucrative contracts to perform power-related services.”

“In total,” the DOJ alleged, “Elgawhart received more than $5 million in kickbacks to help secure more than $2 billion in contracts for the kickback-paying companies, all of which he concealed from his employer, from bidding companies that did not pay kickbacks and from the U.S. Internal Revenue Service.”

Based on these allegations, and as indicated in this DOJ release, Elgawhart was charged in a 8-count indictment with mail and wire fraud, money laundering and various tax offenses.

Bechtel was not criminally charged and there is a good and obvious reason why.  There was no basis to charge Bechtel with any criminal offense.

Indeed, the DOJ alleges that Elgawhart: “defrauded Bechtel,” ”concealed material facts from executives at Bechtel,” provided to executives at Bechtel annual Representation Letters containing representations that he “knew to be false,” “concealed and misrepresented material facts to counsel for Bechtel” during interviews, and caused certain evidence to be “deleted and destroyed.”

According to the DOJ, Elgawhart engaged in the above conduct against the following relevant background.

“Bechtel maintained a Code of Business Ethics that imposed on its employees certain standards and duties, including: (a) That employees not misrepresent themselves to anyone; (b) That employees not misuse proprietary, confidential or private information of Bechtel, its customers and suppliers; (c) That employees never give, solicit or accept a gift if that gift may create a payback obligation; and (d) That employees not have a financial interest in an actual or potential supplier, competitor, customer or any other organization that could cause a conflict of interest.

In addition, Bechtel maintained an Ethics and Compliance Policy requiring its employees to fully disclose through a conflict of interest revIew process any activity or transaction that might give rise to a conflict of interest.

During the course of his tenure at Bechtel, Elgawhart acknowledged Bechtel’s policies and agreed to comply with them. In or around 2001, in connection with his continued assignment as General Manager at PGESCo, Elgawhart signed a “Recital of International Employment Conditions” that required Elgawhart to comply with published Bechtel personnel policies and stated that Bechtel could discharge Elgawhart for violations of law, conduct that discredited Bechtel, theft and breach of Bechtel policy.”  [The DOJ also made similar allegations as relevant to PGESCO's internal controls].

Logical Relationship to Pending FCPA Enforcement Action

Although some have inaccurately described the Elgawhart case as a “Foreign Corrupt Practices Act prosecution,” it is not.  Nevertheless, it is hard not to notice that at the bottom of the DOJ’s release there is reference to the DOJ’s “FCPA enforcement efforts.”

Indeed, there appears to be a logical relationship between the Elgawhart case and a pending FCPA enforcement action.  The Elgawhart indictment specifically alleges that the kickback scheme involved, among other companies, ”Power Company A” (a French company engaged in the business of providing power generation and transportation-related services around the world”) including “Power Company A’s subsidiary in Connecticut.”

This is the same exact description of Power Company A (widely known to be Alstom) in the April 2013 FCPA enforcement action against current and former Alstom executives, several of which were employed by Power Company A’s subsidiary in Connecticut.”  (See here for the prior post).

A Noticeable Juxtaposition

As discussed above, Bechtel was not criminally charged in connection with the Elgawhart indictment and there was a good and obvious reason why.  There was no basis to charge Bechtel with any criminal offense.

Similarly, there was no basis to charge Morgan Stanley with any criminal offense in connection with the April 2012 Garth Peterson enforcement action.

Like in the Elgawhart action, in the Peterson action the DOJ alleged as follows as highlighted in this previous post.

  • “Peterson and Chinese Official 1 had a close personal relationship before Peterson joined Morgan Stanley.”
  • A shell company used to facilitate the scheme was owned 47% by Chinese Official 1 and 53% by Peterson and a Canadian Attorney.
  • “Without the knowledge or consent of his superiors at Morgan Stanley, Peterson sought to compensate Chinese Official 1″
  • “Peterson concealed Chinese Official 1’s personal investment [in certain properties] from Morgan Stanley”
  • “Peterson used Morgan Stanley’s past, extensive due diligence [as to certain of the investment properties] to benefit his own interests and to act contrary to Morgan Stanley’s interests.”

Consistent with these allegations, in its press release the DOJ stated:  “Mr. Peterson admitted … that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.”  Moreover, in sentencing Peterson the judge stated that ”it is likely that [Morgan Stanley] would be considered a victim” of Peterson’s conduct.  (See 859 F.Supp.2d 477).

Yet, you all the know the story-line in the Peterson case as it has become part of FCPA religion preached by the DOJ and carried forward at every available opportunity by obedient parishioners.  The DOJ declined to prosecute Morgan Stanley because of its pre-existing compliance policies and procedures!

Most everyone was drinking the Kool-Aid, perhaps because taking a sip from the communal cup was convenient in marketing FCPA compliance services and products.

So why the difference in the DOJ’s public statements regarding Peterson / Morgan Stanley and Elgawhart / Bechtel?

Well, the Peterson enforcement action occurred in April 2012 when FCPA reform (including a corporate compliance defense) was still a hot topic and the DOJ was facing pressure to demonstrate something fair about its FCPA enforcement events.

Indeed, as noted in this previous post which highlighted a Morgan Stanley – Davis Polk webinar (Davis Polk represented Morgan Stanley), Davis Polk stated that part of its advocacy to the DOJ and SEC was that the agencies needed to publicly send a message on compliance and that the Morgan Stanley – Peterson case provided an “ideal case to do so.”  Interestingly, the webinar was moderated by a Davis Polk attorney who called the Morgan Stanley declination “unprecedented and important” and that it was “important and new, it is news that sets precedent.”  This same attorney of course was the Assistant Attorney General (DOJ, Criminal Division) during most of the time period relevant to the enforcement action and is the same person who testified on behalf of the DOJ at the Nov. 2010 Senate FCPA hearing and the June 2011 House FCPA hearing and stated (see here and here for the transcripts of the hearings) that a compliance defense was not necessary because the DOJ already considers compliance efforts when making its enforcement decisions.

In short, the juxtaposition between the DOJ’s statements in connection Peterson / Morgan Stanley and Elgawhart / Bechtel further supports the notion that the DOJ’s so-called Morgan Stanley declination was nothing more than a conveniently timed public relations campaign.

Yet the Kool-Aid continues to be served and enjoyed by many.

It’s More Like Bronze Dust

Thursday, January 30th, 2014

Recently at the FCPA Blog, Richard Cassin authored a post titled “Gold Dust for Compliance Officers” which began as follows.

“What’s the first thing  compliance officers need to do? We’d say it’s  convincing management and board members they need  an effective compliance program. That’s not easy.  It takes advocacy, and advocacy takes credibility.”


However, I disagree that the sources “compliance officers can find support” in – the DOJ’s Principles of Prosecution of Business Organizations - are the gold dust they are portrayed to be.

Whether the analogy is gold dust – or real carrots vs. baby carrots as I used in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” – the issue remains the same:  are the current incentives business organizations have to adopt best-in-class compliance policies and procedures sufficient, or can policy makers further incentivize corporate compliance with a real carrot – or gold dust if you prefer – through a compliance defense?

In my article, I argue, among other things, that an FCPA compliance defense will better incentivize more robust corporate compliance, reduce improper conduct, and thus best advance the FCPA’s objective of reducing bribery.

A previous FCPA Blog titled “We’re With You On This One, Prof Koehler” stated as follows regarding my article.

“Scholarship at its best can change things. It can cause judges to take a fresh look and lawmakers to  fix problems. We hope  Mike Koehler’s new scholarship will do just that.  [...] We agree with Prof Koehler on the need for the good faith defense. It would give companies the best incentive to work hard at compliance. And if there’s a downside to more compliance, we don’t see it.”

To demonstrate why a compliance defense is the best positive incentive to achieve greater FCPA compliance consider the following demonstration involving two persons:  (i) the general counsel or compliance officer of a company (“compliance officer”); and (2) the board of directors / CEO / or other person who controls the purse strings of the company (“executive”).

Scenario A

Compliance Officer:  Boss, I need more money and resources to devote to FCPA compliance.

Executive:  Why?

Compliance Officer:  Well, boss, if anything ever happens within our business organization, an effective FCPA compliance program can lessen the impact of our legal liability.

Executive:  What do you mean?

Compliance Officer:  Well, the money we spend on FCPA compliance will not eliminate our legal exposure, but the DOJ and SEC have said that the existence of an effective compliance program may perhaps lower our criminal or civil fine or penalty amount and perhaps even persuade an enforcement attorney to go lightly on us in case our compliance program is ever circumvented by an employee.

Scenario B

Compliance Officer:  Boss, I need more money and resources to devote to FCPA compliance.

Executive:  Why?

Compliance Officer:  Well, boss, an effective FCPA compliance program can reduce our legal exposure as a matter of law.

Executive:  What do you mean?

Compliance Officer:  Well, the money we spend on investing in FCPA best practices will be relevant as a matter of law.  In other words, if we make good faith efforts to comply with the FCPA when doing business in the international marketplace, we will not face any legal exposure when a non-executive employee or agent acts contrary to our compliance policies and/or circumvents our policies.

Under which scenario is the compliance officer most likely to receive the budget and resources needed for a best-in-class FCPA compliance program?

Every time I have run this scenario in class, the answer has been unanimous.  Scenario 2 will best allow the compliance officer to receive the budget and support needed to most effectively do his/her job.

I am under no illusion that an FCPA compliance defense will magically result in 100% best-in-class FCPA compliance in all business organizations.

However, I am confident in saying that if 50% of business organizations currently have best-in-class policies and procedures (and survey data seems to suggest that this figure is about right), an FCPA compliance defense will result in 50% + of business organizations adopting best-in-class policies and procedures.

And – as the FCPA Blog previously righly noted – “if there’s a downside to more compliance, we don’t see it.”

It is for this reason, why the DOJ and SEC should be in favor of an FCPA compliance defense.  However, as noted in this previous post, this will take courage.  An FCPA compliance defense may indeed result in less “hard” FCPA enforcement as certain business organizations will be able to avail itself of the compliance defense.

The cheerleaders of more FCPA enforcement (and there are many, including various civil society organizations) who frequently publish enforcement statistics may not be happy.  However, more FCPA enforcement is not necessarily an inherent good and ought not be the singular goal of the FCPA or other similar laws.  The goal ought to be constructing an enforcement regime that best promotes compliance, reduces improper conduct, and best advances the FCPA’s objective of reducing bribery.

The FCPA has witnessed courageous moments before and a courageous moment is once again presented.

Across The Pond

Tuesday, December 24th, 2013

This post highlights recent developments from the United Kingdom.

Enforcement Action

In an enforcement action similar to the 2009 action against Aon Limited (see here) and the 2011 action against Willis Limited (see here), the U.K. Financial Conduct Authority (a regulator of the financial services industry) recently announced that JLT Specialty Limited (JLTSL – a company that provides insurance broking and risk management services) was fined “over £1.8million for failing to have in place appropriate checks and controls to guard against the risk of bribery or corruption when making payments to overseas third parties.”

According to the FCA release:

“JLTSL was found to have failed to conduct proper due diligence before entering into a relationship with partners in other countries who helped JLTSL secure new business, known as overseas introducers. JLTSL also did not adequately assess the potential risk of new insurance business secured through its existing overseas introducers.


JLTSL’s failure to manage the risks created by overseas payments, which occurred between 19th February 2009 and 9th May 2012, breached the FCA’s principle on management and control. During this period, JLTSL received almost £20.7 million in gross commission from business provided by overseas introducers, and paid them over £11.7 million in return. Inadequate systems around these payments created an unacceptable risk that overseas introducers could use the payments made by JLTSL for corrupt purposes, including paying bribes to people connected with the insured clients and/or public officials.”

The FCA’s director of enforcement and financial crime stated:

“These failings are unacceptable given JLTSL actually had the checks in place to manage risk, but didn’t use them effectively, despite being warned by the FCA that they needed to up their game.  Businesses can be profitable but firms must ensure that they take the necessary steps to control the risks in that business.  Bribery and corruption from overseas payments is an issue we expect all firms to do everything they can to tackle. Firms cannot be complacent about their controls – when we take enforcement action we expect the industry to sit up and take notice.”

The FCA release notes that “JLTSL’s penalty was increased because of its failure to respond adequately either to the numerous warnings the FCA had given to the industry generally or to JLTSL specifically.”

Add Another to the Compliance Defense List

What is most striking about many of the opposition pieces written about FCPA reform is that while opponents of FCPA reform warn of a U.S. retreat on bribery and corruption issues should the FCPA be amended, opponents fail to address the fact that an amended FCPA, or revisions to FCPA enforcement policy, would actually align the FCPA with many FCPA-like laws or enforcement policies of peer nations.

For instance, and as discussed in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” many countries have compliance-like defenses in their FCPA-like law.

Add the Isle of Man, a self-governing British Crown Dependency, to the list.  Its recent Bribery Act 2013, largely modeled on the U.K. Bribery Act, states:

“(1) A relevant commercial organisation (“C”) is guilty of an offence under this section if a person (“A”) associated with C bribes another person intending —

(a) to obtain or retain business for C; or

(b) to obtain or retain an advantage in the conduct of business for C.

(2) But it is a defence for C to prove that C had in place adequate procedures designed to prevent persons associated with C from undertaking such conduct.”

Scrutiny Alerts and Updates

As noted in this previous post, Rolls-Royce Holdings has long been under scrutiny concerning its business conduct in China, Indonesia, and other markets.   The Wall Street Journal reports:

“U.K.’s Serious Fraud Office has opened a formal investigation into concerns that employees of the U.K.-based engineering group may have been involved in bribery and corruption. The maker of engines for aerospace, defense and marine customers said a year ago that it had handed over material to the SFO having previously initiated its own independent review into allegations of malpractice in overseas countries, including China and Indonesia. “We have been informed by the Serious Fraud Office that it has now commenced a formal investigation into these matters,” Rolls-Royce said. Rolls-Royce declined to provide further details on the progress of the investigation. An SFO official confirmed that “a criminal investigation into allegations of bribery at Rolls-Royce” is under way but declined to comment further.”

See here for the related U.K. Serious Fraud Office statement.

As noted in this previous post, in June, Data Systems & Solutions, LLC, a wholly-owned subsidiary of  Rolls-Royce Holdings, resolved an FCPA enforcement action.


Interesting snippets from a recent Financial Times article – “GSK China Probe Flags Up Wider Concerns” – concerning GSK in China.

“[A]cross the healthcare spectrum, from doctors to hospital officials to sales representatives for rival local companies, there is agreement that foreign pharmaceutical groups are not the main culprits of corruption in the Chinese healthcare industry. Local companies are far more profligate with so-called “commissions” to doctors because they are not subject to the kind of scrutiny that foreign companies face under global anti-bribery laws. A medical student in a leading Shanghai hospital says: “The supervising doctor in my department sees as many as 80 patients in a morning, and prescribes as much as Rmb100,000 worth of drugs. She definitely takes commissions from drug companies, but that only affects what she prescribes when there are two similar drugs.” That situation normally arises when both are local generic businesses, industry analysts say. “In China, foreign drug companies are the best boys, but the parents beat them first,” says one industry insider, echoing a sentiment heard frequently from Chinese doctors who say foreign drug companies pay for educational activities that no one else will pay for in China.  “Financial flows – both legal and illegal – tied to drug and device sales are funding perhaps 60-80 per cent of total hospital costs,” says George Baeder, an independent drug industry adviser. “Without this funding, the current system would collapse.” Many drug analysts see kickbacks as structural, and therefore hard to eradicate: central and provincial Chinese governments cannot afford to pay doctors a living wage, and many patients cannot afford to pay the true cost of care. Up to now, Beijing has turned a blind eye as pharma companies find ways to subsidise doctor salaries and underwrite their medical education.”

Speaking of GSK, as noted in this New York Times article, the company recently announced that it ”will no longer pay doctors to promote its products and will stop tying compensation of sales representatives to the number of prescriptions doctors write.”

Great Speech, But a Major Contradiction

Ben Morgan (SFO – Joint Head of Bribery and Corruption) recently delivered this speech titled “Striking Tigers As Well As Flies:  Non-Selective Anti-Corruption Law Enforcement.”

Morgan talked about “the widely accepted premise that the law should apply to everyone, equally, regardless of any external factors such as the identity of an alleged offender, their background, their status, who they know or, if they are a commercial organisation, their size, their share price, their line of business or their financial resources.”

Morgan stated as follows:

“So if we’re being asked to discuss the need to be non-selective in the way we enforce anti-corruption legislation – to treat all potential defendants equally regardless of the external factors I have mentioned – that implies, does it not, that we have a problem in the way we currently enforce anti-corruption law.  The implicit accusation we are answering in this session is “you don’t strike Tigers; you only strike flies”.  So let’s test that.

First, let’s look at why it might be tempting not to prosecute certain offenders.  Well, on the one hand, it might be for practical reasons.  Many of our countries have endured difficult financial times recently.  In times of austerity and ever decreasing resources, there might be a temptation to avoid prosecuting the really difficult, complex cases that are likely to consume resources.  Those kinds of cases where the evidence is scattered all over the globe, where there are lots of witnesses and perhaps where specialist skills are needed.  Far easier, surely, to deploy what resources one has into the easier targets, the “low hanging fruit”.

Another reason not to prosecute certain offenders might be for political reasons.  Does a situation appear to involve state officials of one’s own country, or of an important ally?  Does it concern an issue that those with power would prefer not to be investigated?  Or perhaps, in the corporate world, does it involve a company that is of real national significance – a major employer and tax payer?

These are the sorts of situations where it seems to me there is a risk that the Tigers might be treated differently to the Flies.  And while they are not to be underestimated, I hope that one thing we can all agree on here is that as a statement of principle, we cannot accept that for any reason the rule of law should be applied differently to some groups than others.”

Morgan’s points are spot-on of course.

However, the irony is that the U.K. government – in the minds of many – contradicted all of these points in its handling of BAE over the past several years. (See here).  (So too did the U.S. government – see here and here).

Compliance Defense Rebuttals Are Unpersuasive

Tuesday, December 17th, 2013

In early 2012, I published “Revisiting an FCPA Compliance Defense.”  As far as I know, it is the most extensive article written specifically about an FCPA compliance defense, how an FCPA compliance defense is not a new or novel idea, and how an FCPA compliance defense can accomplish a host of policy objectives that can best advance the FCPA’s objective of reducing bribery.

While some (such as the Chamber of Commerce) are proposing a compliance defense as an affirmative defense, I am not proposing an affirmative defense.  Rather, and as detailed in the article, I have proposed that compliance is best incorporated into the FCPA as an element of a bribery offense, the absence of which the DOJ (or SEC) must establish to charge a substantive bribery offense.

Some have called this proposal unprecedented and radical.

This is simply not true.

For starters, such a proposal is consistent with the FCPA-like laws of several other peer nations which, like the U.S., are parties to the OECD Convention.  Just as importantly, the FCPA already has features that must be negated by the enforcement agencies to prove a violation of the FCPA’s anti-bribery provisions.  As detailed in this prior post, in SEC v. Jackson et. al, the court ruled, in an issue of first impression, that the government must bear the burden of negating the FCPA’s facilitation payment exception.

As evidenced from the November 2010 Senate FCPA hearing and the June 2011 House FCPA hearing, based on member comments, there appeared to be bipartisian support for an FCPA compliance defense.  As noted in the “Revisiting an FCPA Compliance Defense” article and here, a compliance defense is supported by a host of former U.S. attorney generals, and other former high-ranking DOJ officials including the former Chief of the DOJ’s FCPA Unit (here).

At every FCPA event I have attended over the past few years in which an informal straw poll or show of hands took place, an FCPA compliance defense enjoyed strong majority support.

Yet, there are those who remained unpersuaded that an FCPA compliance defense is wise.

In September, Thomas Fox (FCPA Compliance and Ethics Blog) published a roundtable of sorts on the merits of an FCPA compliance.  My former colleague at Foley & Lardner, David Simon, supported an FCPA compliance defense, while Fox and William Athanas (Waller Lansden Dortch & Davis) rejected an FCPA compliance defense.  Both Fox and Athanas rebutted the compliance defense as an affirmative defense, not a compliance defense as I have proposed.

Fox opined that a compliance defense “could seriously downgrade the effectiveness of anti-corruption programs” and the general thrust of his rebuttal was that a compliance defense would be “useless” because “corporations do not and will not go to trial in FCPA cases because it is not in their interest to do so.  So if a corporation will not go to trial, a compliance defense has as much use as a trial lawyer afraid of the courtroom, in other words it is useless.”  Fox stated that an FCPA compliance defense is “only useful if it is raised as an affirmative defense at trial” and rhetorically asked “do you want to be the first GC to got to trial … or do you want to settle and play it safe.”  In conclusion, Fox stated, “at the end of the day, the compliance defense will not help a company because no company will go to trial and face a fraud finding from a jury … it is always better to settle and obtain certainty than to risk everything.”

Athanas opined that a compliance defense “would actually cause harm to those companies who take seriously the FCPA’s obligations and endeavor to ensure compliance with its mandates, making it more difficult for them to operate in this enforcement environment.”  Like Fox, Athanas stated that a compliance defense is “unnecessary” because “the notion of enabling corporations to raise a defense at trials that will never occur is essentially meaningless.”

As noted in “Revisiting an FCPA Compliance Defense”:

“The present incentives [to adopt pro-active FCPA compliance policies and procedures] represent “baby carrots” [in that they merely lessen the impact of legal exposure] when what is needed to better incentivize more robust FCPA compliance are real “carrots” [that can reduce legal exposure].  An FCPA compliance defense is a real “carrot” that will better incentivize compliance across the business landscape. Organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better. Likewise, organizations currently without stand-alone FCPA policies and procedures—and … statistics indicate there are many—will be incentivized to spend finite resources to implement FCPA compliance policies and procedures. By better incentivizing organizations to implement more robust FCPA policies and procedure, an FCPA compliance defense can reduce instances of improper conduct and thereby advance the FCPA’s objectives.”

The notion that this “real carrot” as opposed to the present “baby carrot” will “seriously downgrade the effectiveness of anti-corruption programs” - in the words of Fox – or “actually cause harm” to companies – in the words of Athanas - are unpersuasive for the same reason it is unpersuasive to say that the greater incentive a parent provides a child to clean her room will result in fewer clean rooms or that the greater incentive a teacher provides a student to do well on an exam will result in worse exam scores.

The notion that an FCPA compliance defense is “useless” or “meaningless” because it could only be invoked at trial is a red herring because it does not address the merits of a compliance defense, but is rather a general comment as to the current state of government enforcement dynamics.  The implication is that reforming any law enforced by the DOJ or SEC is “usless” and “meaningless” because corporations are risk averse, and because of this risk aversion, legal elements that must be proven at trial will not matter.

On a related note, in opposing a compliance defense, Fox also raised the point that if a company under FCPA scrutiny raises “compliance defense” issues it might agitate a DOJ prosecutor and make the “DOJ even more aggressive in negotiations.”  If the FCPA were to be amended to include a compliance defense, and if company under FCPA scrutiny would in good faith raise this legal issue but risk agitating a DOJ prosecutor, gosh – we have more fundamental problems concerning our criminal justice system that just one statute – the FCPA – could possibly address.

More fundamentally, opposing an FCPA compliance defense for the reason that it is “useless” or “meaningless” because it could only be invoked at trial improperly views a compliance defense only through the narrow prism of hard enforcement, wholly ignoring the soft enforcement effect of an FCPA compliance defense.

As distinguished from “hard” enforcement of a law by enforcement agencies, “soft” enforcement generally refers to a law’s ability to facilitate self-policing and compliance to a greater degree than can be accomplished through “hard” enforcement alone.   In passing the FCPA, Congress anticipated that the “criminalization of foreign corporate bribery will to a significant extent act as a self-enforcing preventative mechanism.”  Likewise since the FCPA’s earliest days, the DOJ has recognized that the “most efficient means of implementing the FCPA is voluntary compliance by the American business community.”

This voluntary compliance can be better achieved by increasing the incentives to comply – a fundamental logic recently recognized by a host of SEC officials – see here, here and here.

My two-fold FCPA reform proposal (a compliance defense coupled with abolishing NPA and DPAs) – see here for a prior post – will result in the following enforcement landscape.

If a payment is made in violation of the FCPA’s anti-bribery provisions within a business organization, two issues will be relevant.

First, if the payment was made, authorized or condoned by a director or executive officer, the business organization will not be able to avail itself of an FCPA compliance defense.  Second, if the payment was made by any employee or agent in the absence of pre-existing FCPA compliance policies consistent with the best practices, the business organization will not be able to avail itself of an FCPA compliance defense.  In these scenarios involving corrupt directors or executive officers or business organizations without a commitment to FCPA compliance, the enforcement agencies will have two choices:  do not prosecute or prosecute the business organization for violating the FCPA.  This is a just and reasonable result and the third option of an NPA or DPA is not needed in such a scenario. As even the DOJ has acknowledged and empirical research has demonstrated, it is extremely unlikely that actual criminal prosecution of such a business organization will result in its demise.

Conversely, if the payment at issue is made by a non-executive employee or agent contrary to the business organization’s pre-existing FCPA compliance policies, the organization will be able to avail itself of an FCPA compliance.  Thus, as a matter of law, no FCPA prosecution of the organization will be able to proceed.  This too is a just and reasonable result and aligns FCPA enforcement with enforcement regimes in several other peer countries.

The above FCPA reforms will take courage, both by Congress in amending the FCPA and by the enforcement agencies in abolishing the resolution vehicles they created.  The reform proposals may indeed result in less hard FCPA enforcement actions as certain business organizations will be able to avail itself of the compliance defense and as enforcement agencies are once again mindful of their burdens of proof in prosecuting alleged FCPA violations.

However, more FCPA enforcement is not necessarily an inherent good and ought not be the singular goal of the FCPA.  The goal ought to be constructing an enforcement regime that best promotes compliance, reduces improper conduct, best advances the FCPA’s objective of reducing bribery, increases transparency and better aligns FCPA enforcement with rule of law principles.

The above FCPA reforms will accomplish these goals as well as increase public confidence in FCPA enforcement.  The proposals will also allow the enforcement agencies to better allocate limited prosecutorial resources to cases involving corrupt business organizations and the individuals who actually engage in the improper conduct.

The FCPA has witnessed courageous moments before and a courageous moment is once again presented.