Archive for the ‘FCPA Scholarship’ Category

The FCPA Turns 36

Friday, December 20th, 2013

Happy 36th birthday to our favorite statute, the Foreign Corrupt Practices Act.

Thirty-six years ago today, President Jimmy Carter signed S. 305.  President Carter’s signing statement stated in full as follows.

“I am pleased to sign into law S. 305, the Foreign Corrupt Practices Act of 1977 and the Domestic and Foreign Investment Improved Disclosure Act of 1977. During my campaign for the Presidency, I repeatedly stressed the need for tough legislation to prohibit corporate bribery. S. 305 provides that necessary sanction. I share Congress’s belief that bribery is ethically repugnant and competitively unnecessary. Corrupt practices between corporations and public officials overseas undermine the integrity and stability of governments and harm our relations with other countries. Recent revelations of widespread overseas bribery have eroded public confidence in our basic institutions. This law makes corrupt payments to foreign officials illegal under United States law. It requires publicly held corporations to keep accurate books and records and establish accounting controls to prevent the use of ‘off-the-books’ devices, which have been used to disguise corporate bribes in the past. The law also requires more extensive disclosure of ownership of stocks registered with the [SEC]. These efforts, however, can only be fully successful in combating bribery and extortion if other countries and business itself take comparable action. Therefore, I hope progress will continue in the United Nations toward the negotiation of a treaty on illicit payments. I am also encouraged by the International Chamber of Commerce’s new Code of Ethical Business Practices.”

S. 305, of course, did not fall out of the sky onto President Carter’s desk thirty-six years ago today.  Rather, S. 305 was the result of more than two years of Congressional investigation, deliberation, and consideration.

If the FCPA is your cup of tea, you owe it to yourself to read the most extensive piece ever written about the FCPA’s history – “The Story of the Foreign Corrupt Practices Act.”

The article weaves together information and events scattered in the FCPA’s voluminous legislative record to tell the FCPA’s story through original voices of actual participants who shaped the law.

Among other things, you will learn: (i) how the foreign corporate payments problem was discovered, specific events that prompted congressional concern, and the policy ramifications of those events which motivated Congress to act; (ii) how seeking new legislative remedies to the foreign corporate payments problem was far from a consensus view of the U.S. government and the divergent views as to a solution; (iii) the many difficult and complex issues Congress encountered in seeking a new legislative remedy; (iv) the two main competing legislative responses to the problem—a disclosure approach as to a broad category of payments and a criminalization approach as to a narrow category of payments, and why Congress opted for the later; and (v) how Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons, but how and why Congress  intended and accepted in passing the FCPA to capture only a narrow category of such payments.

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).

An Examination Of Foreign Corrupt Practices Act Issues

Monday, July 29th, 2013

I am pleased to share my new article “An Examination of Foreign Corrupt Practices Act Issues” recently published as the lead article in an FCPA specific volume of the Richmond Journal of Global Law & Business.  The article highlights DOJ and SEC enforcement statistics from 2012, identifies the top FCPA issues from 2012, and examines substantively insignificant events that become top stories in 2012 simply because they occurred.

The article can be downloaded here.

“An Examination of Foreign Corrupt Practices Act Issues” is the latest in my series of FCPA annual reviews.

For 2011, see here.

For 2010, see here.

For 2009, see here.

Put them all together and you will have an extensive collection of FCPA statistics, trends, and analysis over time.

A SEC Blast From The Past

Tuesday, July 2nd, 2013

This recent post highlighted 1979 comments from the DOJ’s Assistant Attorney General regarding the DOJ’s FCPA enforcement priorities.  Today’s post is an SEC blast from the past.

The year was also 1979 and Wallace Timmeny (SEC Deputy Director, Division of Enforcement) authored an article titled “SEC Enforcement of the Foreign Corrupt Practices Act” in the Loyola of Los Angeles International and Comparative Law Review.  The purpose of the article was to “discuss legal issues arising from the enforcement” of the FCPA in actions brought by the SEC.  The article is an informative read as to the SEC’s early FCPA enforcement actions.

The article is also an interesting reading concerning the author’s description of “vicarious liability under the FCPA” and it states, in pertinent part, as follows.

“The liability of issuers for the acts or failures of foreign or domestic subsidiaries is not clearly specified in section 30A and section 13(b). Section 30A covers the conduct of registered and reporting companies and the conduct of any officer, director, employee, or agent of any such company or any stockholder of such company acting on behalf of the company. Thus, by its terms, section 30A does not refer to subsidiaries whose securities are not registered or which are not required to file reports pursuant to section 15(d). The legislative history of section 30A indicates that the section was not intended to cover the activities of foreign subsidiaries where there was no jurisdictional nexus with the United States and where the issuer of a reporting company had no knowledge of the payment.”

The article concludes as follows.

“As a nation we understand the implications of corrupt practices. Improper or questionable payments undermine our foreign policy and, in fact, place control of foreign policy in the hands of private individuals or companies who do not respond to the electorate. Corrupt practices can topple friendly governments, increase hostility to the United States, and provide ammunition to those who would topple our own system. Shoddy accounting practices foster those problems and result in significant detriment to individual investors, and to the marketplace in general, by undermining investor confidence. The problems leading to the passage of the FCPA have been more than sufficiently illumined in legislative history and in enforcement actions brought by government agencies. Against this background, it is unlikely that the courts will interpret the FCPA narrowly.”

Like the recent post regarding the DOJ blast from the past, Timmeny’s article also recognizes that the primary motivation of Congress in passing the FCPA was foreign policy related.  (For more see my article “The Story of the Foreign Corrupt Practices Act“).  In this prior post, also regarding the 1979 speech by the DOJ official, I asked as follows.

“Most enforcement actions in this new era involve alleged payments to state-owned or state-controlled enterprises with many attributes of private commercial enterprises, employees of various foreign health care systems such as physicians, or actions based on payments to ministerial or clerical officials concerning mundane foreign licenses, permits or customs issues. Can it truly be said that these enforcement actions concern payments that could lead to the downfall of foreign governments or payments that have significant foreign policy and national security implications?”

Timmeny’s article also predicted that it was “unlikely that the courts will interpret the FCPA narrowly.”

It is believed that the  SEC has been put to its ultimate burden of proof in a core FCPA case only four times.

The SEC lost two cases.  In SEC v. Eric Mattson and James Harris the court granted the defendants’ motion to dismiss and rejected the SEC “obtain or retain business” enforcement theory.  In SEC v. Herbert Steffen, the court granted the defendants’ motion to dismiss and rejected the SEC’s jurisdictional theories.

Two cases remain pending.  In SEC v Elek Straub et al. defendants’ pre-trial motion to dismiss was denied.  In SEC v. Mark Jackson and James Ruehlen, the court granted defendants’ motion to dismiss the SEC’s claims that sought monetary  damages while denying the motion to dismiss as to claims seeking injunctive relief.  The dismissal was without prejudice and the SEC has filed amended complaints that have significantly narrowed the case.

Double-Dipping

Tuesday, June 4th, 2013

In this 2011 letter from Senator Mike Crapo to then SEC Chairman Mary Schapiro, Crapo asked, among other FCPA questions “under what circumstances, if any, is it appropriate for both the SEC and the DOJ to seek the recovery of penalties from the same entity for the same conduct.”

As noted in this prior post, Chairman Schapiro responded as follows.

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

Nice answer, but as I noted in the prior post, DOJ penalties are calculated by reference to the advisory U.S. Sentencing Guidelines where an important factor in determining the ultimate penalty amount is value of the benefit received by the company from the conduct at issue.

Among the FCPA reform proposals advanced by Philip Urofosky (former DOJ Assistant Chief of the Fraud Section) in this article is to “eliminate overlapping enforcement jurisdiction” – in other words  Urofosky writes, “the SEC should get out of the anti-bribery business.”

He writes as follows.

“The SEC’s enforcement of the anti-bribery provisions raises a fundamental matter of fairness.  Take two companies, one public and one private, and assume that both violate the FCPA and realize the same illicit gain from the violation.  The private company will be subject only to DOJ’s jurisdiction and will therefore be exposed to a criminal fine of up to twice its gain.  The public company, on the other hand, will be subject both to that criminal fine and to a civil fine and disgorgement of the illicit proceeds, thus potentially paying a third more in fines than the private company for the same conduct.”

Should the SEC be removed from enforcing the FCPA’s anti-bribery provisions, I’d call it ”granting the wish” because, as noted in my article “The Story of the Foreign Corrupt Practices Act,” the SEC never wanted any part in enforcing the FCPA’s anti-bribery provisions.  For additional support for this reform proposal, see Professor Barbara Black’s article (here) “The SEC and the Foreign Corrupt Practices Act:  Fighting Global Corruption Is Not Part of the SEC’s Mission.”

Despite the SEC’s response that it does not double-dip in FCPA enforcement actions involving a DOJ component, like in many instances of enforcement agency rhetoric, the reality suggest something different.

Consider the recent Total enforcement action (see here for the prior post).  At $398 million in total fine and penalty amounts, the action is the third largest in FCPA history.  The action involved a DOJ component ($245.2 million) and a SEC component ($153 million).

It is clear from the enforcement agency documents that approximately $150 million represented a double-dip.

The DOJ DPA sets forth the Sentencing Guidelines calculation and notes that the base fine was $147 million “which corresponds to the value of the benefit received in return for the unlawful payments.”  This base fine amount is the most significant factor determining the fine amount after the culpability score multiplier is added to it.

The SEC’s order states that Total’s improper payments “netted Total approximately $150 million in profits.”  Based on this figure, the SEC ordered Total to pay $153 million in disgorgement and prejudgment interest.

In other words, Total repaid the approximate $150 million benefit it received from the alleged improper payments twice – first to the DOJ and then to the SEC.

This is called double-dipping.

And it is not unique to the Total enforcement action.  Nearly every FCPA enforcement action that involves a DOJ and SEC component, in which the SEC seeks disgorgement, involves the same dynamic.