Archive for the ‘FCPA Scholarship’ Category

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.


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.

Friday Roundup

Friday, April 12th, 2013

The U.S. intervenes, I disagree, I agree, and say what.  It’s all here in the Friday roundup.

U.S. Intervenes in Wynn-Okada Dispute

Numerous prior posts (see here, here and here for instance) have highlighted the dispute between Wynn Resorts and its former board member Kazuo Okada.  Earlier this week, Bloomberg reported as follows.  “The U.S. asked to intervene in a lawsuit brought by Wynn Resorts Ltd., which accused Okada of making improper payments to Philippine gambling regulators. The Justice Department said in an April 8 filing in state court in Las Vegas that it doesn’t want the civil case to disrupt its criminal investigation into the same underlying allegations.”  According to Bloomberg:  “Okada’s lawyers have said they would probably oppose the request “in whole or in part,” according to the filing. Wynn Resorts won’t oppose its request, the Justice Department said.”  For additional coverage, see here from the Las Vegas Review-Journal.

I Disagree

Earlier this week a reader of the FCPA Blog (see here) posed the following question.  “One thing  that has not gotten much discussion is the possibility that the apparent slowdown in FCPA enforcement may be due to the spike in declinations.”

Putting aside the big-picture and highly relevant issue of what is a declination (see here as well as other embedded posts on this issue), when addressing the issue of FCPA enforcement statistics, it is important to keep in mind (as highlighted in this prior post) the following.

Just three unique historical events (Iraq Oil for Food, Bonny Island, Nigeria conduct, and Panalpina-related issues) served as the foundation for 35% of all corporate FCPA enforcement actions between 2007-2011 and resulted in 55% of settlement amounts in corporate enforcement actions between 2007-2011.  Adding just the 2008 Siemens enforcement action to the settlement amount calculation, results in just four unique historical events accounting for 77% of settlement amounts in corporate enforcement actions between 2007-2011.

Recognizing these events and how they impacted FCPA enforcement data is important to understanding why FCPA enforcement has declined in recent years.

Even though FCPA enforcement has declined in recent years, unique events giving rise to FCPA enforcement actions have remained relatively constant between 2007 and 2012.  In 2007, corporate FCPA enforcement actions were the result of 15 unique events.  In 2008, corporate FCPA enforcement actions were the result of 10 unique events.  In 2009, corporate FCPA enforcement actions were the result of 11 unique events.  In 2010, corporate FCPA enforcement actions were the result of 14 unique events.  In 2011, corporate FCPA enforcement actions were the result of 16 unique events.  In 2012, corporate FCPA enforcement actions were the result of 12 unique events.

I Agree

Dieter Juedes (who like me is a product of Sheboygan County, Wisconsin) recently published “Taming the FCPA Overreach Through an Adequate Procedures Defense” in the William & Mary Business Law Review.  Among other things, the article “proposes specific statutory language that Congress could use in adopting such a defense and it establishes precise factors to be promulgated by the DOJ and SEC for determining whether a firm’s procedure would be deemed “adequate.”

Given my prior article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I agree with the general thrust of Juedes’s article.

Say What?

I don’t quite understand the logic or rationale of this op-ed piece in the South China Morning Post by Robert Precht (director of Justice Labs Limited, a Hong Kong think tank).

Precht argues that ”the efforts of some Western countries to enforce their own anti-bribery laws in China are more likely to produce false accusations and hinder democratic reform than reduce corruption.”  He states as follows.  “One of the unintended harms of enforcing the US anti-bribery law in China is that it may actually stifle efforts to end corruption. US journalists, human rights workers and university researchers play an important role in shining light on the darker recesses of Chinese politics. Preventing Americans from making gifts to Chinese to obtain information useful to promote democratic reform will hinder the disclosure role the Americans play.”

According to Precht, “the solution is simple.”  He argues that “the US Congress should amend the law, providing that it will only be applied in countries that meet certain minimum requirements of democracy and will not be applied in authoritarian regimes such as China.”

A good weekend to all.