Archive for the ‘FCPA Reform’ Category

FCPA Reform And The Olympics

Tuesday, February 11th, 2014

The DOJ may think that my “foreign official” declaration ”selectively reviews the [FCPA's] legislative history.”  However, the truth is the 152 page declaration is the most comprehensive document ever written on the FCPA’s legislative history relevant to “foreign official” issues.  So comprehensive in fact that it highlights Foreign Corrupt Practices Act reform efforts and the Olympics.

You may be asking in your best Gary Coleman voice “whatcha talkin bout.”

This is what I am talking about.

In April 1999, Representative Henry Waxman introduced H.R. 1370, Senator John McCain introduced S. 803, and Senator John Ashcroft introduced S. 797.  These bills sought to amend the FCPA by restricting American corporate sponsorship of the International Olympic Committee (“IOC”).

Specifically, H.R. 1370 sought to ”amend the FCPA to prevent persons doing business in interstate commerce from providing financial support to the International Olympic Committee until the International Olympic Committee adopts institutional reforms.”

Specifically, S. 803 sought “to make the International Olympic Committee subject to the FCPA” by amending the “foreign official” definition – specifically the “public international organization” prong to include the International Olympic Committee.

Specifically, S. 797 sought ”to apply the FCPA to the International Olympic Committee” by amending the term “‘foreign official’ [to] include[] any member of, employee of, or any person acting in an official capacity for or on behalf of, the International Olympic Committee.’”.

None of these bills made it out of committee.

You may be thinking, what about the “public international organization” prong of the FCPA’s “foreign official” definition which states that a “public international organization” is

an organization that is designated by Executive Order pursuant to section 1 of the International Organizations Immunities Act (22 U.S.C. § 288); or

any other international organization that is designated by the President by Executive order for the purposes of this section, effective as of the date of publication of such order in the Federal Register

The list of “public international organizations” is here.  For more, see here.

And now back to the Games.

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.

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.

Negotiating Bribery: Toward Increased Transparency, Consistency, and Fairness in Pre-Trial Bargaining Under The Foreign Corrupt Practices Act

Tuesday, November 5th, 2013

A guest post today from Peter Reilly (Associate Professor, Texas A&M University School of Law).  Professor Reilly, a negotiations expert, discusses his article “Negotiating Bribery: Toward Increased Transparency, Consistency, and Fairness in Pre-Trial Bargaining Under the Foreign Corrupt Practices Act,” forthcoming in the Hastings Business Law Journal.


I would like to thank Mike Koehler for the opportunity to contribute to this ongoing conversation about the FCPA.

In the context of FCPA matters, the use of DPAs and NPAs is not guaranteed; rather, they are awarded to defendants through elaborate negotiations with the Department of Justice. These negotiations present an opportunity for accused parties to agree to clean up their respective acts, usually by (1) adopting or enhancing internal anti-corruption programs; (2) carrying out self-policing audits and investigations; and (3) voluntarily disclosing compliance issues and information to federal authorities.  In addition to agreeing to implement various rules, policies, and procedures to prevent bribery from taking place, the accused parties oftentimes agree to pay hefty monetary fines.  In exchange, the Justice Department agrees to hold off (perhaps forever) on prosecution.  Ultimately, if all aspects of the negotiated agreement are successfully carried out, the initially-accused party can move forward without fear of further legal consequences on the matter.

But here is the problem:  This ultimate negotiation between prosecutor and accused can sometimes be unfair to the point where any “bargaining” taking place is merely illusory.  This is because in many instances, the government has too much power, too much leverage, and too much discretion in presenting, negotiating, and implementing DPAs and NPAs.  Given its enormous leverage in the negotiation, DOJ can oftentimes negotiate quite favorable prosecution agreements, whose terms can include large financial penalties, significant internal business reforms, and cooperation in pursuing the company’s individually culpable directors, executives, managers, and/or employees.  This cooperation can include the company admitting liability, identifying wrongdoers within the organization, and sometimes even waiving work-product protection and attorney-client privilege pursuant to internal documents and internal investigations.

Moreover, while DOJ has complete discretion on whether or not to offer accused parties an NPA or a DPA, the consequences of not being offered one or the other can be devastating to a company.  Due to negative collateral consequences surrounding corporate prosecutions, accused companies tend to yield to whatever demands are made by DOJ during the negotiation.  This helps explain why, in the last twenty years, only a handful of companies have decided to go to trial in an FCPA case.[1] And while federal prosecutors enjoy wide, largely non-reviewable discretion regarding which corporate entities to target and what crimes to allege, the most effective way for any criminal justice system to test such prosecutorial discretion and to rein in overly-aggressive prosecutors—namely, the trial by jury[2]—is, for the most part, not being utilized to resolve FCPA cases.  Given that corporations cannot run the risk of going to trial, they essentially do not have a Best Alternative To a Negotiated Agreement (or “BATNA”)[3] in their negotiations with DOJ; in other words, they have little choice but to accept whatever terms are offered through the form of a DPA or NPA.

Professors Robert Mnookin and Lewis Kornhauser taught us in their seminal article, “Bargaining in the Shadow of the Law: The Case of Divorce,” that parties do not bargain “in a vacuum” and that two essential ingredients of power within the context of legal negotiations include:  (1) the option of going to trial should the negotiation fail to achieve agreement; and (2) knowledge of what the likely outcome would be, in accordance with legal precedent, should one ultimately choose to go to trial.  And yet, corporations facing FCPA charges lack both of these essential ingredients of power:  (1) as pointed out previously, going to trial would be so damaging to the company that it has little choice but to accept whatever terms are offered through the form of a DPA or NPA; and (2) because so few FCPA cases have gone to trial, it is very difficult for companies to accurately predict what the outcome at trial would likely be if they decide to pursue that avenue.  The end result is that the balance of power in the context of FCPA pre-trial negotiations is weighted significantly in favor of the government.

My article explores in depth the various factors that contribute to less-than-optimal transparency, consistency, and fairness in pre-trial bargaining under the Foreign Corrupt Practices Act, and it concludes with recommendations to strengthen the current system and make it more fair, including:

- DOJ should release to the public carefully redacted information regarding all FCPA declination decisions.

- FCPA Opinion Procedure Releases should have greater precedential value.

- The U.S. Congress should thoroughly investigate, in as non-partisan a manner as possible, the advantages and disadvantages of passing an FCPA compliance defense.

- Judicial supervision of the NPA and DPA negotiation processes should be mandated.

- Judicial review of NPAs and DPAs after they are drafted but before they are signed should be mandated.

- Judicial review regarding the issue of NPA and DPA breaches should be mandated.

Even if one disagrees with my recommendations or sees legislative, judicial, or political roadblocks to their adoption or implementation, my hope is that the article points out to readers that real and significant power imbalances exist when DOJ employs DPAs and NPAs to address FCPA enforcement matters.  This is not fair or just to the party sitting on the “accused” side of the negotiation table, and something should be done to address that unfairness

[1] See Mike Koehler, FCPA 101:  How Are FCPA Enforcement Actions Typically Resolved? (“Nearly every FCPA enforcement action against a company in this era of FCPA enforcement is resolved through a non-prosecution agreement (‘NPA’) or a deferred prosecution agreement (‘DPA’)”).

[2] See Taylor v. Louisiana, 419 U.S. 522, 530 (1975) (“The purpose of a jury is to guard against the exercise of arbitrary power—to make available the commonsense judgment of the community as a hedge against the overzealous or mistaken prosecutor and in preference to the professional or perhaps overconditioned or biased response of a judge” (citing Duncan v. Louisiana, 391 U.S. 145, 155-56 (1968))).

[3] Roger Fisher, William Ury & Bruce Patton, Getting to Yes:  Negotiating Agreement Without Giving In 100 (1991).

Yes As To A Certain Type Of Compliance Defense

Thursday, September 26th, 2013

Today’s post is from Marcia Narine (St. Thomas University School of Law).


First, I would like to thank Mike Koehler for the opportunity to add to the debate about an affirmative defense for a corporate compliance program. Although I am now an academic, I write from the perspective as a former compliance officer and deputy general counsel, and as a current consultant to a boutique law firm that advises multinationals, startups and suppliers grappling with the Foreign Corrupt Practices Act on a daily basis. I vote “yes” for the defense, but not for compliance programs that would currently be considered “effective” under the Federal Sentencing Guidelines.

I believe that the current system provides a disincentive for optimal investment in compliance. It is no surprise to me that only 30-40% of SEC cases and less than 50% of DOJ cases come from voluntary disclosures, as was reported by the FCPA Professor here last week. Why voluntarily disclose wrongdoing by a rogue employee when doing the right thing may still subject your firm to fines, penalties, shareholder derivative suits, possible debarment, and potential loss of licenses?

As I wrote here, the burden for corporations attempting to avoid deferred or nonprosecution agreements altogether should be high. I would require the prosecutor to rebut the affirmative defense posed by the firm, which would provide evidence that:

(1)      it has implemented a state of the art program approved and overseen by the board or a designated board committee, which receives comprehensive updates at least twice yearly on the program from the compliance officer;

(2)      elevated the compliance officer to report directly to the board or a designated committee and make the officer terminable only by the board (a suggestion rejected in the 2010 amendments to the Guidelines and which could eliminate potential conflicts when the general counsel does not want to disclose to the government but the compliance officer does);

(3)      clearly communicated the corporation’s intent to comply with the law and appropriate penalties for prohibited acts to employees, suppliers, agents, and partners;

(4)      has developed and provided position-specific training on legal and ethical obligations for employees and board members annually (at a minimum), which is revised as the law changes;

(5)      meets or exceeds industry standards and norms related to compliance and ethics;

(6)      provides the appropriate training and policies to agents, joint venture partners and others who can subject it to liability, requires them by contract to comply, receives annual compliance certifications, and audits their compliance with the same rigor as they audit their own processes;

(7)      has consistently applied anti-retaliation policies for whistleblowers, including terminating those who engage in retaliation;

(8)      is not a habitual recidivist, meaning that the company may have had rogue employees in the past but has endeavored to learn from the compliance failure rather than continuing the same conduct;

(9)      has voluntarily reported wrongdoing to authorities when appropriate;

(10)   is periodically audited and benchmarked by an independent third party that does not provide any other consulting or professional services to it or have any actual or perceived conflicts of interest (such as providing legal advice or external auditing for Sarbanes-Oxley or other purposes) and/or is pre-certified by the appropriate US government agency; and

(11)   has made modifications if necessary to the compliance program based upon the results of the audit.

The external compliance audit or pre-certification process should benchmark the company compared to peer companies and the general corporate population, reviewing, at a minimum, the following factors:

(1)     The corporate culture and tone at the top and throughout the organization. The higher up the level of the wrongdoer, the higher the burden for the company.

(2)     Incentive programs and compensation plans at all levels of the organization that encourage legal, ethical behavior. Companies that have financial incentives in place that either encourage unlawful or unethical behavior through goals that are impossible to reach or that fail to penalize bad conduct would fail this critical prong, which would disqualify them from using the defense.

(3)     Promotional practices and whether compliance and ethical behavior are considered prior to such decisions.

(4)     Adequacy, timeliness and comprehensiveness of training initiatives and the level of employee engagement and understanding of their compliance responsibilities (both position-specific and general).

(5)     The effectiveness of the anti-retaliation programs.

(6)     The effectiveness and usage rate of the anonymous reporting mechanisms.

(7)     The process by which complaints are investigated, including an audit of a random sampling of investigations for thoroughness.

(8)     The adequacy of the resources for the compliance function including continuing external education, appropriate salary and sufficient personnel commensurate with the size of the organization and the nature of the risks for that organization and that industry and

(9)     The level of board engagement and understanding of the compliance priorities of the company based upon the risks related to its business, geography, employee base and incentive structures.

My criteria –which make more sense after reading the longer article– incorporate research about behavioral economics, executive compensation, and best practices from around the world, and would likely disqualify Wal-Mart Mexico and a number of high profile companies that are alleged to have engaged in bribery.  It would also add a tool to the arsenal of beleaguered compliance officers who need ammunition every year around budget time. Most important, this defense would level the playing field between corporations and prosecutors, would provide the proper incentives for companies to prevent, detect and disclose criminal activity, and would allow both the private and public sector to allocate their resources more productively.