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Stop Drinking The Kool-Aid

Monday, November 5th, 2012

Since April the Department of Justice has been running a Kool-Aid stand and many people have been drinking the Kool-Aid.

The Kool-Aid being served up and consumed is Morgan Stanley’s so-called declination.

As noted in this prior post, in April in resolving an enforcement action against Garth Peterson (a former managing director for Morgan Stanley’s real estate business in China), the DOJ stated as follows concerning Morgan Stanley.

“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

Since then, Morgan Stanley’s so-called declination has been the talk of the FCPA conference circuit and has been the basis for many FCPA Inc. client alerts and marketing material. It seems as if many (but not all) have merely carried forward the DOJ’s statement without an ounce of analysis. (See here for the prior post “Morgan Stanley’s So-Called Declination”). This recent press release demonstrates that Morgan Stanley’s so-called declination is even being used to peddle compliance products. In this recent webinar, Morgan Stanley and its counsel, Davis Polk, engaged in what seems like a victory lap celebration.

Since opening up its Kool-Aid stand, the DOJ has been on a marketing blitz as to its “product.” In this September speech, Assistant Attorney General Lanny Breuer stated as follows. ”Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation, and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct. That is smart, and responsible, enforcement.”

In this October speech, Breuer likewise stated as follows. “Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct. Prosecutors need to be smart about how they use their discretion in the FCPA context, as in every context. And, as we did in the Peterson case, we always attempt to strike an appropriate balance between vigorous and responsible enforcement.”

An experienced FCPA practitioner, who otherwise holds Breuer in high regard, recently told me that Breuer’s recent speeches on Morgan Stanley’s so-called declination are a “joke.”

I agree and suggest that before anyone speaks or writes another word about Morgan Stanley’s so-called declination, they do something basic and old-fashioned. Read the original source documents.

The original source documents evidence the following as to Peterson’s involvement in a real estate investment scheme with Chinese Official 1.

According to the DOJ’s information (here) and as noted in this prior 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 the DOJ’s release Breuer himself stated as follows. “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.”

Additional original source documents became available in connection with Peterson’s sentencing and shed additional light on information relevant to Morgan Stanley’s so-called declination. As noted in this prior post, in its sentencing submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Morgan Stanley supervisors and co-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer into trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanley. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserted that his attempt to influence the ”father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.

In the recent Morgan Stanley – Davis Polk webinar (here), Morgan Stanley’s counsel specifically said that Peterson was acting “for his own benefit” and that Morgan Stanley had the advantage of facts because Peterson had “personal interests in the transactions” at issue and that he acted for “his own benefit” not “Morgan Stanley’s.”

In the webinar, 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 Davis Polk attorney Greg Andres who called the Morgan Stanley declination “unprecedented and important” and that it was “important and new, it is news that sets precedent.” Andres is not exactly an impartial observer on this issue. Prior to recently rejoining Davis Polk, he was the Assistant Attorney General (DOJ, Criminal Division) during most of the time period relevant to the enforcement action and he seemed to be using the webinar to justify the compliance defense views he offered on behalf of the DOJ during the Nov. 2010 Senate FCPA hearing and the June 2011 House FCPA hearing. (See here and here for the transcripts of the hearings). In short, Andres testified that a compliance defense is not needed because the DOJ already considers a company’s compliance efforts internally when deciding how to proceed in any particular case.

Morgan Stanley may indeed have being doing the right thing in its compliance program and for that it deserves credit.

However, the DOJ’s use of the Peterson enforcement action (a situation in which an individual acted for his own benefit with a person he had a prior close relationship with to recover his mother’s investment) to champion its policy position that a compliance defense is not needed because it already takes compliance into account is off-base.

The reason Morgan Stanley was not prosecuted for Peterson’s actions is because there was no basis to hold Morgan Stanley liable even under lenient respondeat superior standards.

Should you remain unconvinced, consider what U.S. District Court Judge Jack Weinstein (E.D.N.Y.) noted in the case - ”it is likely that [Morgan Stanley] would be considered a victim” of Peterson’s conduct. (See 859 F.Supp.2d 477).

Stop drinking the Kool-Aid.

DOJ’s Recent Opinion Procedure Release Creates Additional “Foreign Official” Confusion

Thursday, October 4th, 2012

On September 18th, the DOJ issued this FCPA Opinion Procedure Release. Seldom do things go unnoticed these days in the FCPA space, but this post appears to be the first public reporting of the release issued a few weeks ago.

First a summary of the Release which focuses on “foreign official” issues and then some analysis and commentary.

The Requestor was a U.S. lobbying firm who wished to represent the Embassy of a Foreign Country to the United States and the Foreign Country’s Foreign Ministry in its lobbying activities in the United States.

The Release describes as follows. “To facilitate that lobbying representation, the Requestor further wishes to contract with a third party (the “Consulting Company”) to introduce the Requestor to the Foreign Country Embassy, to advise the Requestor on cultural awareness issues in dealing with the Foreign Country’s officials and businesses, to act as the Requestor’s sponsor in the Foreign Country, to help the Requestor establish an office in the Foreign Country, and to identify additional business opportunities for the Requestor in the Foreign Country. One of the partners in the Consulting Company is a member of the royal family of the Foreign Country (the “Royal Family Member”), although he holds no position in the government.”

According to the release, the Consulting Company “is a limited liability company located in both the United States and the Foreign Country” and it has ”three partners, one of which is the Royal Family Member.”

As to the Royal Family Member, the release states as follows.

“The Royal Family Member holds no title or position in the government, has no governmental duties or responsibilities, is a member of the royal family through custom and tradition rather than blood relation, and has no benefits or privileges because of his status. The Royal Family Member has held only one governmental position in the Foreign Country: in the late 1990s, he served for less than twelve months in a position overseeing a governmental construction project. Other than this one previous governmental position, the Royal Family Member does not act—and has never acted—in any capacity for, or on behalf of, the Foreign Country, or any department, agency, or instrumentality of the Foreign Country. The Royal Family Member has also never had any role in any public organization. The Royal Family Member’s position in the royal family does not put him in line to ascend to any governmental post.”

As to why the Requestor would engage the Consulting Company and the Royal Family Member in the first place, the release states as follows.

“Any private sector company planning to open an office or operate a business in the Foreign Country is required by law to have local sponsorship. The Royal Family Member has sponsored numerous foreign companies wishing to do business in the Foreign Country. In his work on behalf of these foreign companies, the Royal Family Member interacts in his personal capacity (i.e., not on behalf of the royal family) with government officials of the Foreign Country who are not themselves members of the royal family.”

The release further states as follows. “The Requestor believes that the Royal Family Member’s experience and expertise in matters relating to the Foreign Country are essential to its succesful lobbying efforts on behalf of the Foreign Country Embassy. In addition to these services, the Consulting Company may also work to identify additional business opportunities in the Foreign Country for the Requestor.”

The release notes that under the proposed engagement, the Requestor would pay the Consulting Company 20% of what it receives from the Foreign Country Embassy which the Consulting Company would then split equally “among its three partner, one of whom is the Royal Family Member.”

Based on these circumstances, the DOJ framed the issues as follows: (1) whether the Royal Family Member is a “foreign official” under the FCPA; and (2) whether the Requestor’s proposed engagement with the Consulting Company would result in any enforcement action by the Department.

The DOJ’s opinion “is that the Royal Family Member does not qualify as a foreign official under [the FCPA] so long as the Royal Family Member does not directly or indirectly represent that he is acting on behalf of the royal family or in his capacity as a member of the royal family.” The DOJ further stated as follows. ” [B]ased on the facts as represented by the Requestor, the Requestor’s proposed engagement of the Consulting Company to assist in its potential representation of the Foreign Country Embassy in its U.S. lobbying efforts may go forward without enforcement action. The Department does not opine about any other aspect of the proposed engagement.”

In terms of the DOJ’s “analysis,” the Release states as follows.

“A person’s mere membership in the royal family of the Foreign Country, by itself, does not automatically qualify that person as a ‘foreign official.’ Rather, the question requires a fact-intensive, case-by-case determination that will turn on, among other things, the structure and distribution of power within a country’s government; a royal family’s current and historical legal status and powers; the individual’s position within the royal family; an individual’s present and past positions within the government; the mechanisms by which an individual could come to hold a position with governmental authority or responsibilities (such as, for example, royal succession); the likelihood that an individual would come to hold such a position; an individual’s ability, directly or indirectly, to affect governmental decision-making; and numerous other factors. The Department concludes that the Royal Family Member does not presently qualify as a foreign official.”

In support, the DOJ cites the Carson case as follows. “District court decisions addressing whether a state-owned entity may be an ‘instrumentality’ of a foreign government are also instructive for identifying the characteristics of a ‘foreign official’ under the FCPA. In these cases, courts applied a fact-based analysis that focused on several factors, such as those articulated in United States v. Carson:

• The foreign state’s characterization of the entity and its employees;

• The foreign state’s degree of control over the entity;

• The purpose of the entity’s activities;

• The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

• The circumstances surrounding the entity’s creation; and

• The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).”

The DOJ then states as follows. “[W]hether a member of a royal family is a ‘foreign official’ turns on such factors as (i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like; (ii) whether a foreign government characterizes an individual or entity as having governmental power; and (iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government. This inquiry is fact-intensive and no single factor is dispositive.”

The DOJ then states as follows.

“In the Department’s opinion, in light of the representations made by the Requestor recited above, this member of this particular royal family is not a foreign official—so long as he does not directly or indirectly represent that he is acting on behalf of the Royal Family or in his capacity as a member of the Royal Family. As represented by the Requestor, the Royal Family Member presently has no official or unofficial title or role in the Foreign Country’s government, nor does he have any official or unofficial power over any aspect of the Foreign Country’s governmental decision-making process, executive function, administration, finances, or, indeed, any aspect whatsoever of the government, including specifically the direct or indirect power to award the business the Requestor seeks. The Royal Family Member also cannot, by virtue of his membership in the royal family, ascend to a governmental position and has no benefits or privileges because of his status as a Royal Family Member. Further, the Royal Family Member has no relationship—personal, professional, or familial—with the decision-makers in the Foreign Country’s Embassy and the Foreign Country’s government who will decide whether to award the business the Requestor seeks. In light of these representations, the Royal Family Member has no power to affect the Foreign Country government’s award of the engagement the Requestor seeks.”

And now for some analysis and commentary.

The logical import of the DOJ’s opinion is that when a foreign individual “does not directly or indirectly represent that he is acting on behalf” of a foreign government “or in his capacity as a member” of a foreign government, then that individual is not a “foreign official” under the FCPA. The folly of the DOJ’s position is the high likelihood that the vast majority of individuals the DOJ considers to be “foreign officials” under the FCPA (such as employees of alleged state-owned or state-controlled enterprises or employees of certain foreign health care providers) are clueless that they are considered foreign government actors under U.S. enforcement agency interpretations.

Moreover, the DOJ’s conclusion that ”a person’s mere membership in the royal family of the Foreign Country, by itself, does not automatically qualify that person as a “foreign official” is difficult to square with the DOJ’s statement in its FCPA Lay-Person’s Guide (here) that “the FCPA applies to payments to any public official, regardless of rank or position. The FCPA focuses on the purpose of the payment instead of the particular duties of the official receiving the payment …”.

The DOJ’s opinion in Release 12-01 however appears to be based entirely on the Royal Family Member’s particular duties or lack thereof.

Moreover, by focusing on the Royal Family Member’s particular duties or lack thereof, the DOJ actually drifts far-away from the Carson factors it cites to support its decision. The Carson factors all focus on the status of the entity employing an alleged “foreign official” without any reference to a specific individuals particular duties or lack thereof. In its recent 11th Circuit “foreign official” brief (here), the DOJ likewise elevates status over duties in assessing whether employees of Haiti Teleco were “foreign officials” under the FCPA.

However, in Release 12-01 the DOJ switches gears and elevates duties above status. In doing so, the DOJ actually goes back to the FCPA’s original definition of “foreign official” which categorically excluded certain bona fide traditional government officials based on their duties. The FCPA’s original definition of “foreign official” stated as follows “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of such government or department, agency or instrumentality. Such terms does not include any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”

In short, the DOJ’s recent Release further adds to existing confusion of a key element of the FCPA.

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The DOJ’s Opinion Procedure Release is also notable given the following sentence. “In declining to take enforcement action, the Department has also considered the steps that the Requestor and the Consulting Company have taken here to comply with the FCPA and other anti-bribery laws.”

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here), I argue that despite DOJ’s institutional opposition to an FCPA compliance defense, the DOJ currently recognizes a de facto compliance defense in a number of ways including its FCPA Opinion Procedure Releases. I highlight that in many FCPA Opinion Procedure Releases, the DOJ recognized a Requestor’s good-faith efforts to comply with the FCPA through pro-active compliance measures designed to reduce liability. I then argue that good-faith efforts to comply with the FCPA through pro-active compliance measures should be recognized as a matter of law and not just when an organization decides to engage in the formal FCPA Opinion Procedure Release Program.

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A final point regarding Opinion Procedure Release 12-01 deserving of attention is the time it took the Requestor to obtain a DOJ opinion. The Requestor submitted the release on February 15, 2012 and it took the DOJ (after requesting supplemental information) until September 18, 2012 to issue its opinion. The DOJ frequently cites the Opinion Procedure Release as a panacea for business concerns regarding FCPA ambiguity (i.e. if business is confused submit to the Opinion Procedure Release program). Seven months may seem like a short time period in government, but in the real-world where business decisions and contracts can be won or lost in a matter of days, it is not practical for a Requestor to wait seven months for a decision. If the DOJ wants its Opinion Procedure Release program to be taken seriously, it must issue more prompt opinions.

FCPA-Palooza

Wednesday, October 3rd, 2012

I first began using the term FCPA Inc. in April 2010 (see here).

I then coupled FCPA Inc. with Business of Bribery in this February 2012 post to describe a presentation I gave at Indiana University Robert H. McKinney School of Law regarding a work in progress of the same title.

I am glad to see that the terms have caught on as yesterday the Wall Street Journal ran a series of FCPA related articles, an FCPA-Palooza of sorts, including a lead article titled “FCPA Inc.: The Business of Bribery” (see here).

The article is spot-on and contains the following quotes from industry participants. “It’s one of the few sort of crown-jewel practices right now.” “When you get these situations and you have a young enforcement attorney…telling you to look under every rock, you do it.” ”If you get two of these [FCPA investigations] a year as a partner, you’re pretty much set.”

Assistant Attorney General Breuer is quoted in the article as follows. ”We absolutely need companies through their firms to provide us with their investigations.” The article states that “prosecutors test information they receive from the companies and conduct parallel investigations” with Breuer stating that “we’re not simply relying on what the companies give us.” Many FCPA practitioners (including this former one) are likely to disagree with this statement. In representing corporate clients in an FCPA inquiry, it is common for counsel to hand over to the enforcement agencies witness interview memos, key documents in chronological order, and investigative reports (if done). While it is difficult to assess what the DOJ and/or SEC did after that, I never once got the sense that the enforcement agencies tested the information or conducted a parallel investigation.

The Wall Street Journal FCPA-Palooza also included an article (here) concerning compliance costs, an article (here) concerning prosecution of individuals, and an article (here) regarding the FCPA’s history and certain reasons for the increase in enforcement.

The WSJ compliance article notes that as “part of the corporate cost for stepped-up enforcement of the Foreign Corrupt Practices Act over the last several years has been the creation of new compliance structures at companies that hope to avoid indictments and million-dollar fines under the U.S. antibribery law.” Of course, not even the most robust, state-of-the-art FCPA compliance program will allow a company to avoid indictment as a matter of law. Such programs merely best position companies for leniency as determined by the enforcement agencies behind closed doors in Washington D.C. This needs to change and I have set forth the reasons for an FCPA compliance defense in my recent scholarship “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here).

The WSJ individual prosecutions article notes the absence of individual prosecutions in most corporate FCPA enforcement actions, the DOJ’s difficulty of extraditing foreign nationals charged with FCPA offenses, and the string of recent DOJ losses in individual enforcement actions when it is put to its burden of proof. For more on this last issue, see my recent article “What Percentage of DOJ FCPA Losses in Acceptable” (here).

The WSJ Law Blog also contributed to the FCPA feast with this post which asked whether corporate FCPA scrutiny and enforcement actions move markets. In answering the question, the post states as follows. “In general, we found a lot of shrugging on the part of investors. The average change in stock price from the day before to the day after the disclosure of an FCPA investigation was a decrease of 1%. [...] It was far easier to study market reaction to FCPA settlements. Companies’ stock prices increased, on average, by 1.1% after enforcement actions were announced.”

The WSJ Law Blog also noted here that “FCPA enforcement shows no signs of cooling.” I agree. As noted in the FCPA 101 feature of my website (here) there are several practical, as well as provocative, reasons for why FCPA enforcement has increased. Among the later is the industry itself.

At least more people are thinking and talking about it now after the Wall Street Journal’s FCPA-Palooza.

Friday Roundup

Friday, September 28th, 2012

In the classroom, survey says, a candid statement, on-point, an informative read, patience and a prediction. It’s all here in the Friday roundup.

In The Classroom

I was pleased to learn that my recent article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” (here) was required reading for the MBA students in Jeffrey Klink’s FCPA-related class at the University of Pittsburgh Joseph S. Katz Graduate School of Business. (See here for a recent profile of the class.) Klink (a former AUSA and current CEO of Klink & Co., a global risk management firm – here) shared the following.

“During our class we discussed your recent article regarding the Wal Mart case at length. Many students opined that it was likely that many of the payments were in fact facilitation payments and especially where permits would definitely be issued. The majority of students, however, believed that probably many payments were not clerical or ministerial, noting that according to the NY Times article, payments caused zoning maps to be changed, and environmental permits were obtained likely without proper process. Students believed that these kinds of payments were not grease or skid payments, but were in fact bribes designed to allow Wal Mart to open new stores without competition, thus gaining new business. All but one of the 41 students (a bright law student held out) present believed that Wal Mart had successfully obtained new business by paying bribes through the $24 million in payments to gestores. We also discussed the significance of an organization’s compliance culture. Wal Mart was viewed very negatively by the students, having been subject to successful discrimination suits regarding gender bias, its poor treatment of vendors, locking its own injured employees inside stores, and the facts of the Mexico bribery case, where, if the NY Times article is correct, it was clear that top officials buried facts, did not pursue an investigation, and promoted corrupt executives to high ranking positions. As geography under the FCPA can also be destiny, I also noted that Mexico is rated #100 by TI, and it doesn’t appear that Wal Mart had a risk plan in place to address its growth in places where corruption and bribery are extremely common and not unexpected. Many students believed that Wal Mart, like other large organizations, likely engaged in, and continues to engage in, cost – benefit thinking where executives conclude that the cost of bribery is not significant compared to the benefits that accrue to the organization through growth and profits.”

Staying on campus and referring to “THE” New York Times article (see here for the prior post) readers may enjoy this webcast of the recent Wal-Mart focused Milbank Tweed Forum at the NYU School of Law. Moderated by Professor Kevin Davis (the author of recent FCPA scholarship – here and here), the panel included David Barstow, the investigative reporter at the New York Times who broke the Wal-Mart story.

Survey Says

Speaking of the significance of the FCPA, a recent boardroom survey conducted by BDO USA (an accounting and consulting firm) reveals as follows. “One-third (33%) of directors cite corruption/bribery as the greatest fraud risk facing their company, compared to approximately one-fifth that identify either revenue recognition (20%) or earnings management (18%). Two-thirds (68%) of directors indicate their companies conduct business in foreign locations or with foreign customers or suppliers. Of those conducting international business, a majority (57%) say they deal with foreign officials and almost one-third (32%) of those believe compliance risks related to bribery of government officials has increased over the past two years, compared to just four percent reporting a decrease.”

The survey, conducted in late August and early September 2012, examined the opinions of 72 corporate directors of public company boards, with revenues ranging from $250 million to $750 million, regarding financial reporting and corporate governance issues. For more, see this BDO release.

Candid Statement

Hank Walther (a former Assistant Chief in the DOJ’s FCPA unit and currently at Jones Day – see here), stated in this recent interview in the Metropolitan Corporate Counsel as follows.

“Most government attorneys realize that a company can take every reasonable step to prevent wrongdoing but ultimately is powerless if somebody really wants to break the law.”

Makes you wonder why the DOJ is steadfast in its opposition to an FCPA compliance defense. But then again the current enforcement environment provides the DOJ maximum leverage. However, for the reasons I articulate in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here), the DOJ should be in favor of a compliance defense.

On-Point

This previous post, “Testing Innocence,” noted that the longest individual FCPA sentences (Joel Esquenazi and Carlos Rodriguez) were issued in enforcement actions where the defendants exercised their constitutional rights to a jury trial. The conduct Esquenazi and Rodriguez allegedly engaged in (and the jury found, although their appeals are pending) paled in comparison to some other FCPA individual prosecutions – such as the individual prosecutions in the Bonny Island Nigeria cases. What did Esquenazi and Rodriguez do that warranted such a long sentence? They tested their innocence.

The FCPA community once again saw the high cost of testing innocence this past spring and summer when the individual defendants in the so-called Carson enforcement action pleaded guilty on the eve of trial. (See here, here, here). The guilty pleas came after the trial court judge issued a pro-defendant jury instruction relating to knowledge of foreign official. (See here). On the brink of the DOJ being put to its ultimate burden of proof on “foreign official” and other elements as well, the DOJ offered plea agreements to substantially reduced charges and the defendants, likely mindful of the high costs of testing their innocence, did what most rationale, risk averse actors in their position would do – agreed to plead guilty.

The Wall Street Journal ran a feature story this week “Federal Guilty Pleas Soar As Bargains Trump Trial” (here) which documented the trend of a “growing number of federal defendants who [plead guilty] often to avoid the lengthy prison sentences that can come with losing at trial.” Among other things, the article noted that “federal [sentencing] guidelines not only toughened punishments but also formalized a system to reward defendants who plead guilty by reducing sentences if they accept responsibility or cooperate with prosecutors, among other things. As part of plea deals, federal prosecutors often drop additional charges that could add years, or decades, to a sentence. Going to trial brings none of those benefits for the accused.”

The WSJ article included research (here) co-authored by my Southern Illinois University School of Law colleague Lucian Dervan (here) which found that 55% of students who were innocent in a control group study pleaded “guilty.” The study showed “a strong compulsion to have the matter resolved even if it meant confessing to something that they really didn’t do.”

Informative Read

Breon Peace and Ryan Becker (Cleary Gottlieb Steen & Hamilton – here and here) recent authored this informative article in Bloomberg Law that touches upon just about everything you would want to know about the FCPA and statute of limitations. The article, written in the context of Wal-Mart’s potential FCPA scrutiny discusses black letter law and judicial decisions, but rightly notes in connection with Wal-Mart as follows.

“Given the facts as reported by the New York Times, Wal-Mart, and individuals involved in the bribery scheme, would have a plausible statute of limitations defense to any FCPA actions—even a potential conspiracy charge. As a practical matter, companies, especially publicly held companies like Wal-Mart, typically make a strategic decision to fully cooperate with a DOJ investigation. Despite the potential success of a statute of limitations defense, a company will often make the judgment that the negative press of a protracted investigation and the uncertainty of the outcome at trial make cooperation the more prudent business judgment. The company’s hope is that it will be given credit for the cooperation and it will achieve a better outcome than if it went to trial (i.e., avoid charges, a deferred prosecution agreement, or a reduced fine).”

Patience

Before Wal-Mart’s potential FCPA scrutiny dominated the headlines, there was News Corp. In July 2011, world-wide media attention focused on the company, not just the phone hacking aspects of the scandal, but the potential FCPA implications as well. See here for the prior post. In the prior Q&A style post, I addressed the issue of how long the FCPA gray cloud will likely hang over News Corp. and said that it would likely be between 2-4 years if the case followed the typical pattern. In February of this year, I noted (here) that the FCPA aspect of News Corp.’s scrutiny was following a typical path.

Eliot Spitzer (former New York Governor, former New York Attorney General and current TV personality) apparently is not aware of the typical path. In this recent Slate article titled “Why Hasn’t Eric Holder Charged News Corp. With Foreign Corrupt Practices?” Spitzer writes as follows.

“[W]here is the inept U.S. Department of Justice in all this? The DOJ has brought many irrelevant and tiny cases against companies for violating the Foreign Corrupt Practices Act, which makes it illegal to bribe either individuals or government officials, even in a company’s overseas operations. The DOJ loves to use the statute to show just how tough it is. Yet now they have the most important case sitting right there in front of them. It’s easy. Even a rookie could field this one. But what are they doing? It’s not clear. If they fail to make this case against News Corp., Eric Holder is a failure as attorney general.”

Patience. And while Sptizer is waiting, he may want to brush up on the FCPA - not sure what he means when he says that the FCPA “makes it illegal to bribe either individuals or government officials.”

Prediction

No, I am not going to predict that the DOJ’s FCPA guidance will be released next week. OK, maybe I will, see here from Compliance Week.

Rather my prediction concerns FCPA risk in India.

The Indian Commerce Ministry recently eased (see here) foreign investment restrictions giving multi-brand retailers greater access to the growing Indian market. Per the new policy, it will be the “prerogative of the states to allow a multi brand store” and “local and state-level regulations which govern shops and establishment are the prerogative of the respective state governments.”

I predict that India’s new FDI policy will be an FCPA compliance headache for relevant companies seeking to expand in India as the new policy facilitates points of contact between a company and state and local officials in regards to license, permit, and land issues. In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (see here), I highlight how companies subject to the FCPA are often funneled into an arbitrary world of low-paying civil servants who frequently supplement their meager salaries through payments condoned in the host country. I argue that such barriers create the conditions in which harassment bribes flourish and I predict India’s new FDI policy will do just that.

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A good weekend to all.

Assistant Attorney General Breuer’s Unconvincing Defense Of DPAs / NPAs

Monday, September 17th, 2012

Last week in this speech before the New York City Bar Association, Assistant Attorney General Lanny Breuer defended the DOJ’s frequent use of NPAs and DPAs. See here for video of the speech.

This post first contains excerpts of Breuer’s speech and then comments on it and the issues raised.

Breuer began his speech as follows. “Over the past three-and-a-half years, the Department of Justice has entered into dozens of DPAs, and non-prosecution agreements, or NPAs. I’ve heard people criticize them and I’ve heard people praise them. What I’m here to tell you, is that, along with the other tools we have, DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe. Though the U.S. Supreme Court blessed the concept of corporate criminal liability over 100 years ago – in New York Central Railroad Company v. United States – until roughly 20 years ago, we had only the blunt instrument of criminal indictment with which to attack corporate crime. Prosecutors faced a stark choice when they encountered a corporation that had engaged in misconduct – either indict, or walk away. In the 1990s, however, the government began doing something new: agreeing to defer prosecution against the corporation in exchange for an admission of wrongdoing, cooperation with the government’s investigation, including against individual employees, payment of monetary penalties, and concrete steps to improve the company’s behavior. And, over the last decade, DPAs have become a mainstay of white collar criminal law enforcement. The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts. Companies now know that avoiding the disaster scenario of an indictment does not mean an escape from accountability. They know that they will be answerable even for conduct that in years past would have resulted in a declination. Companies also realize that if they want to avoid pleading guilty, or to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance. Our prosecutors are sophisticated. They know the difference between a real compliance program and a make-believe one. They know the difference between actual cooperation with a government investigation and make-believe cooperation. And they know the difference between a rogue employee and a rotten corporation.”

Breuer further stated as follows. “One of the reasons why deferred prosecution agreements are such a powerful tool is that, in many ways, a DPA has the same punitive, deterrent, and rehabilitative effect as a guilty plea: when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing, agree to cooperate with the government’s investigation, pay a fine, agree to improve its compliance program, and agree to face prosecution if it fails to satisfy the terms of the agreement. All of these components of DPAs are critical for accountability. Perhaps most important, whether or not a corporation pleads guilty … or enters into a DPA with the government, the company must virtually always publicly acknowledge its wrongdoing. And it must do so in detail. This often has significant consequences for the corporation, and it prevents companies from explaining away their resolutions by continuing to deny that they did anything wrong.”

Breuer concluded as follows.

“To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling. In reaching every charging decision, we must take into account the effect of an indictment on innocent employees and shareholders, just as we must take into account the nature of the crimes committed and the pervasiveness of the misconduct. I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”

“When the only tool we had to use in cases of corporate misconduct was a criminal indictment, prosecutors sometimes had to use a sledgehammer to crack a nut. More often, they just walked away. In the world we live in now, though, prosecutors have much greater ability to hold companies accountable for misconduct than we used to – and the result has been a transformation in the culture of corporate compliance. In appropriate circumstances, large corporations, such as Siemens AG, must plead guilty for their crimes. In other cases, because the company has gone to extraordinary lengths to turn itself around, for example, or provided the government with extensive cooperation, a deferred prosecution agreement or non-prosecution agreement may be the best resolution. No matter what, individual executives and employees must answer for their conduct. And, perhaps most important of all, companies know that they are now much more likely to face punishment than they were when our choice was limited to indicting or walking away. Overall, this state of affairs is better for companies, better for the government, and better for the American people.”

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Let’s probe the two reasons why the “old” system, in which the DOJ either brought criminal charges or didn’t, seems to trouble Breuer.

First, he stated as follows. “Prosecutors faced a stark choice when they encountered a corporation that had engaged in misconduct – either indict, or walk away.” There is absolutely, positively nothing wrong with this choice. Bringing criminal charges against person (natural or legal) should not be easy. It should be difficult. Our founding fathers recognized this as a necessary bulwark against an all powerful government. There is no legal or policy reason warranting a change from such a fundamental and long-lasting principle.

Second, Breuer, without specifically mentioning the prosecution, carries forward the Arthur Anderson effect that has guided DOJ policy for over a decade ((i.e. the notion that indicting a company will result in a corporate death sentence). Breuer stated as follows. “I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake.” However, as highlighted in this recent guest post, Gabriel Markoff recently debunked the Arthur Anderson effect as factually false.

Breuer is clearly troubled, with good reason, by traditional notions of corporate criminal liability. However, rather than seek substantive solutions to this issue, either on a statute by statute basis (such as a compliance defense to the FCPA – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”) or more comprehensively, Breuer instead defends an alternate reality that is equally problematic.

Use of NPAs and DPAs to resolve alleged corporate criminal liability presents two distinct, yet equally problematic public policy issues.

The first is that such vehicles, because they do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges, allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence. On this issue, Breuer states in his speech that “when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing.” This is a false statement. While the standard NPA and DPA templates do contain a section concerning acceptance of responsibility, the acceptance is as to conduct and alleged facts, not actual legal charges.

The second is that such vehicles, because of the “carrots” and “sticks’ relevant to resolving a DOJ enforcement action (for more on this issue, see “The Facade of FCPA Enforcement – here), often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law. Breuer essentially admitted as such in his speech when he stated as follows. “[Companies] know that they will be answerable even for conduct that in years past would have resulted in a declination.”

Thus, use of NPAs or DPAs allow “under-prosecution” of egregious instance of corporate conduct while at the same time facilitate the “over-prosecution” of business conduct.

The alternate reality that Breuer defends is defined by the absence or practical absence of judicial scrutiny of many DOJ enforcement theories. Thus, by supporting use of DPAs and NPAs, Breuer is advocating an enforcement climate that insulates DOJ’s enforcement theories from judicial scrutiny in all but the rarest of circumstances. It is not hard to see why the DOJ favors such a system. Such a system makes its job easier and places the DOJ in the role of prosecutor, judge and jury all at the same time. Former Attorney General Alberto Gonzales rightly observed as follows. “In an ironic twist, the more that American companies elect to settle [through DPAs and NPAs] 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.” (See here for the prior post).

In short, Breuer’s defense of DPAs and NPAs was unconvincing. The Assistant Attorney General is clearly troubled by traditional notions of corporate criminal liability. However, rather than seek substantive solutions to this issue, Breuer instead defended an alternate reality that is equally problematic. This alternative reality benefits the DOJ, benefits the private bar, but harms other stakeholders and undermines the rule of the law and justice.

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In his speech, Breuer also supported the premise underlying an FCPA compliance defense when he stated as follows. “Companies also realize that if they want … to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance.” In my “Revisiting a Foreign Corrupt Practices Act” article (here), I demonstrate that despite the DOJ’s institutional opposition to an FCPA compliance defense, the DOJ already recognizes a de facto FCPA compliance defense albeit in opaque, inconsistent, and unpredictable ways. Breuer’s statement once again demonstrates the truth of this position. However, unpredictable de facto defenses have no place in a justice system based on the rule of law. Thus, an FCPA compliance defense accomplishes, among other things, the policy goal of removing factors the DOJ already considers in assessing corporate criminal liability from the opaque, inconsistent, and unpredictable world of DOJ decision making towards a more transparent, consistent and predictable model.