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Can We Make The Expenditure In The First Place? Practical Advice For Navigating Gift, Travel And Entertainment Issues

Wednesday, May 22nd, 2013

Today’s post is from Brian Chilton (DLA Piper LLP (US)).

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I first had the pleasure of meeting Professor Koehler in 2002, a time when, to paraphrase TRACE’s Alexandra Wrage, the legal world was still learning to spell F-C-P-A. Mike was a hard-working young associate already keenly (and presciently) interested in the statute’s nuances, and he was helping me wade through the bowels of a company’s documents detailing travel, meals, gifts and entertainment involving foreign officials after the company was “invited” to do so by the DOJ/SEC.

As the readers of Mike’s blog know all too well, FCPA awareness and enforcement has exploded since 2002, but one thing remains the same: gifts, meals, entertainment and travel remain the part of the statute that companies still find the most vexing in terms of day-to-day compliance. Rarely a day goes by that I don’t receive a call or email from a client with a question in this area.

The number and results of enforcement actions focusing exclusively on this area might lead a casual observer to conclude a gift/travel/entertainment mistake is unlikely to result in a serious penalty. But those practicing in the area know that a disproportionate number of enforcement matters ultimately resulting in a high penalty for bribes unrelated to gifts/meals/travel/entertainment had their genesis in marketing/promotion expenses that soon turned out to be the “tip of the iceberg” revealing more extensive and substantial corruption. Companies who focus on keeping a clean FCPA house in the gifts/meals/entertainment/travel part of the statute stand a better chance of keeping big problems from occurring elsewhere among the statute’s danger zones, both because it sends a strong “tone from the top” and because it keeps small problems from going undetected until they’ve morphed into big ones.

Advising companies to “keep a clean house” and accomplishing that are, of course, two entirely different matters. Companies, and particularly their business people on the front lines, understandably find the FCPA’s statutory language in this area quite frustrating, where the statutory language provides an affirmative defense to prosecution under the FCPA’s anti-bribery provisions if the thing of value otherwise given to the foreign official is (1) reasonable, (2) bona fide, and (3) directly related to the promotion, demonstration, or explanation of (4) the payer’s products or services. Congress purposefully left the key terms broad and undefined, providing a high degree of flexibility, but with a commensurate degree of uncertainty. Business people struggling with what’s lawful and what’s not feel like they’ve been given guidance that’s no more helpful than the famous admonition given by Justice Potter Stewart in the context of discerning nudity that loses the protection of the First Amendment: “I know it when I see it.”

The recent DOJ/SEC Guidance devotes all of one page (p.24) to the subject, helpfully pointing out, “Whether any particular payment is a bona fide expenditure necessarily requires a fact-specific analysis.” At the risk of vast understatement, the business community was hoping for more.

Nevertheless, the Guidance does offer “non-exhaustive list of safeguards, compiled from several DOJ Opinion releases that is better than nothing:

• Do not select the particular officials who will participate in the party’s proposed trip or program, or else select them based on pre-determined, merit based criteria;

• Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt;

• Do not advance funds or pay for reimbursements in cash;

• Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable;

• Ensure the expenditures are transparent, both within the company and to the foreign government;

• Do not condition payment of expenses on any action by the foreign official;

• Obtain written confirmation that payment of the expenses is not contrary to local law;

• Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred;

• Ensure that costs and expenses on behalf of the foreign officials will be accurately recorded in the company’s books and records.

Those are all good procedures to follow for planning meals/gifts/entertainment/travel after a decision to engage in such has been made, but what the Guidance largely ignores, and what businesses most want help with, is more fundamental than the “how.” It is, “Can we make the expenditure in the first place?” Here I offer some additional practical guidance built up through many years and many questions in this area.

Compliance for promotional and marketing expenses should conceptually focus on three fundamental questions. The most important is to determine whether the expenditure is “bona fide” or “corrupt.” This requires that the business purpose of the expenditure be carefully defined. In other words, ask, “What products or services does the Company wish to promote, demonstrate, or explain?” As the DOJ/SEC Guidance alludes to, the more the item leans in the direction of “fun,” and away from “business,” the more likely it is to be perceived by DOJ/SEC as not bona fide.

On the “bona fide” question, it turns out that Justice Stewart’s formulation is not so bad after all. Anyone who has been around the business world long enough should have sufficient instincts to “know it when they see it” in terms of an expenditure that appears to be intended to ingratiate the company with the foreign official versus one that is hospitably polite, but not so nice as to overwhelm the business purpose. Here I like to advise my clients to apply what I call “The Spouse Eye-Roll Test.” We all have those business occasions where decorum requires us to include our spouse in an event, and, when we finally get around to inviting them, they react with the expected eye roll and an exasperated “Do I really have to go again this year?” You know your gift/meal/entertainment/travel has veered into the “too nice” realm if you can imagine your spouse, upon being given/invited to what you’re planning for the official, instead breaking into a big smile and saying, “Wow! That sounds great!”

The next step is to make sure that expenditures are directly related to the defined business purpose, rather than being only indirectly or tangentially related to the business purpose. In other words, ask, “Is the expenditure necessary to promote, demonstrate, or explain the product or service at the core of the defined business purpose?” The more the expenditure, both in terms of time and resources, is slanted in the direction of fun, so that the fun aspect begins to overwhelm the business aspect, the more likely it is that the expenditure is only indirectly promoting the Company’s goods and services. Similarly, expenditures related to “good will” or “team building” or “establishing the relationship” with foreign officials are almost always indirect rather than direct. Thus, the next time a marketing person says, “We need to give the gift/have the meal/pay for the trip to establish good will with this official,” your compliance radar should be going off BING BING BING BING BING.

The final question to ask is, “Is the amount of the expenditure reasonable?” The reasonableness of the expenditure is contextual fact specific, so that there are no broad general rules that can be defined in advance in order to ensure compliance. Nevertheless, appropriate areas to look in order to measure reasonableness include: (1) prevailing market rates for similar expenditures; (2) the amount of the expenditure versus the government official’s salary or receipt of similar benefits from his or her own government; (3) activity of the Company’s U.S.-regulated competitors when entertaining similar foreign government officials in a similar context; (4) custom both locally and within the particular industry; and (5) a company’s own reimbursement guidelines for its own people at a similar peer level to the official when traveling/eating on the company dime. Company reimbursement allowances tend to be highly frugal and business oriented so that using that as the expected baseline for expenditures involving government officials is a very good analytical starting point.

Finally, I do have one procedural “how” to add to the DOJ/SEC’s list that is probably the single best thing a company can do to avoid a violation in this area: BEGIN PLANNING EARLY. Given the statute’s breadth and flexibility in this area, if planning for a particular gift/meal/entertainment/travel expenditure begins early enough, and legal compliance is part of that early planning, an appropriate plan satisfying both the legal and business goals can almost always be constructed (the exception is those rare cases where the government official involved is truly and implacably corrupt).

Where most violations occur, despite a company’s otherwise good track record and intentions, is where the business person in Farawayistan plans the trip and calls the compliance counsel for approval only after the government official is already flying toward Company HQ while seated comfortably in First Class. When companies call me to review their plans, I usually have to tweak some minor aspect of the plan (“Well, maybe the side trip to Disney World is not such a great idea . . . .”), but so long as they consult me before invitations are issued and itineraries decided, I’ve never had to say, “No, you can’t do that.”

My thanks to the Professor for asking me to sit in for him while he and his family take a well-deserved vacation. I hope I’ve offered some additional practical advice in this area, though I know the readers are all looking forward to your return. Hook a few northern pike for us, Mike! (But make sure your fishing license is in order so that we don’t end up with an embarrassing incident involving things of value and government officials, especially if you stray too far north into those foreign, Canadian waters . . . . )

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Brian Chilton has been practicing in the area of anti-corruption, including as a former federal prosecutor, for over 20 years. His first novel in a three novel series, Issachar’s Heirs (White Feather Press, LLC), is due to be released around August 2013.

Can We Bring Quality FCPA Compliance and Investigative Services to the Underserved Middle Market?

Tuesday, May 21st, 2013

Today’s post is from David Simon (Foley & Lardner).

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Professor Koehler (my former colleague at Foley & Lardner) has been critical of “FCPA Inc.” and, in particular, the astronomical costs associated with certain FCPA investigations and compliance measures. My friends in the C-Suite of FCPA Inc. have responded defensively – reacting at least in part to a perception that these criticisms suggest a corner-cutting approach to important work that must be done properly.

As an FCPA lawyer with a foot in both camps, let me try to find some common ground.

I share Mike’s concerns. While I understand that each case is different and that it is often necessary for investigating counsel to respond to outside forces that drive up costs, some of the eye-popping numbers can’t help but make one question the FCPA investigation/compliance value proposition.

This dynamic is especially troubling because, I fear, it drives the perception among many smaller and mid-sized companies that anti-bribery compliance is simply out of reach financially. A recent survey of global corruption compliance in the middle market conducted by McGladrey confirms that this segment of the market is underserved. That is dangerous and bad for all the interested parties – including the DOJ and SEC. It simply isn’t good public policy for sound FCPA compliance advice and investigative resources to be available only to the Exxon Mobils of the world.

That said, the quality of the work should not be compromised by maintaining some focus on the value proposition. Corner-cutting is not appropriate (and is almost never in the company’s long-term interests). But aren’t there ways to manage costs and still produce quality work? The answer is clearly yes. And while the options for delivering more for less are myriad, let me propose three fairly modest concepts, which, if implemented, would help bring quality FCPA representation to many more companies that really need it:

1. Give Strong but Practical Compliance Advice

We can start by heeding the counsel of the SEC and DOJ in last year’s Resource Guide:

“DOJ and SEC have no formulaic requirements regarding compliance programs. Rather, they employ a common-sense and pragmatic approach to evaluating compliance programs.”
“[T]here is no one-size-fits all program. . . . Indeed, small-and medium-sized enterprises likely will have different compliance programs from large multi-national corporations, a fact DOJ and SEC take into account when evaluating companies’ compliance programs.”

In other words, take it seriously, but be practical. And take a risk-based approach to FCPA compliance.

In a world where FCPA compliance was the company’s number one focus (above and beyond making and selling stuff), a company would conduct “Full Monty” due diligence on all of its distributors (maybe even its customers). It would employ a rigorous system for reviewing all gifts, meals and entertainment expenses in excess of $25. (After all, $25 is a lot of money to a customs official in Borneo . . .) It would conduct annual compliance audits of the books and records of all of its third-party intermediaries.

But really, does that approach make sense for most of our clients? While there may be companies that have a risk profile that justifies these procedures, for many – indeed, the vast majority – such an approach is simply impractical. Let’s not make the perfect the enemy of the good.

To lawyers and compliance professionals: Be practical. Be willing to sign-off on compliance procedures that are effective but tailored to the actual risk posed. Don’t be afraid to divert from “best practices” when best practices are not risk justified. Take a stand. But be prepared to defend your decisions.

And to the enforcement agencies. Be true to your word. “[D]o not hold companies to a standard of perfection.” Accept common sense compliance judgments, even when things ultimately go wrong.

2. Appropriately Scope FCPA and Bribery Investigations

When a company discovers conduct that may violate the FCPA or company policies, an investigation is necessary. It never makes sense for a company to ignore such a discovery. You are simply not serious about compliance if you do not take steps to understand what happened, why, how, and to respond appropriately. The enforcement agencies are entirely justified in requiring this and in taking companies to account for failing to investigate and respond to indications of wrongdoing.

The problem for many companies is that they hear the words “FCPA investigation” and think millions of dollars – or tens of millions, or hundreds of millions – in costs and fees. Too often, this leads companies to make the bad decision to forgo an investigation altogether.

But just as there is no “one-size-fits-all” FCPA compliance program, there is no “one-size-fits-all” FCPA investigation. Proportionality and reasonableness are key.

The main driver of investigation cost is scope. FCPA investigations that spin out of control usually do so because the scope is never clearly defined at the outset or because of significant scope-creep during the investigation. Think about our country’s history with Independent Counsel investigations. Without a clear, narrowly defined mandate, investigations can go on interminably. Investigators investigate. There is always some new lead to pursue, another witness to interview, another document to request and review.

The investigation scope needs to be reasonable and appropriately calibrated to the issues under investigation. Scope must be clearly defined, and the investigator must keep the scope front of mind. Discipline is key.

This is not to say that the scope should never change once defined. Often, new significant facts are discovered and new issues identified. Many times, these developments warrant a modification to the scope. But those decisions should be approached thoughtfully and intentionally. Scope modification is not the same thing as scope-creep.

Appropriately scoped investigations cost less. Companies with limited legal and compliance resources can access quality investigative services and can fulfill the agencies’ directive that “companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response.”

To the SEC and DOJ: To make this work, you need to apply these same common-sense principles to your assessment of company investigations. Be reasonable. To outside auditors assessing the company’s response: Ditto.

3. Disaggregation of Services in FCPA and Bribery Investigations

One final modest idea to manage the cost of FCPA investigations: Consider disaggregating services.

It is not necessary to have high-priced lawyers conduct every aspect of every investigation. In the health care industry, they refer to “working at the top of your license.” In other words, to enhance the efficiency of the provision of care, each professional should be put to his or her highest and best use. Move the work down the chain of training and expertise where appropriate. Application of the same concept in FCPA investigations can have the same pro-efficiency effect.

As a preliminary matter, it isn’t necessary for a company to hire outside counsel to conduct every FCPA investigation. There are certainly some situations where the exclusive deployment of inside investigative resources is appropriate.

Even when outside counsel properly leads the investigation, the lead investigator should consider non-traditional deployment of resources so that everyone on the team is being put to his or her highest and best use. A couple of examples:

Consider enlisting internal company resources to accomplish some investigative tasks. Under the right circumstances, company IT personnel can help gather and process data for the investigation; internal audit or finance resources can help with the analysis of the books and records; and in-house counsel can perform certain investigative tasks. Independence and perceptions of independence must be taken into consideration in every case, of course. In some investigations, it won’t be appropriate to involve company personnel. But in some, it will be entirely reasonable and appropriate. And where it is, there will be substantial cost savings.

In addition, investigative counsel should consider outsourcing or alternative-sourcing aspects of the investigation. Document review is an obvious example. Consider using data review software to cull the relevant documents that warrant review. (It is noteworthy that DOJ recently approved the use of this approach in the AB InBev/Grupo Modelo merger review. If it works in antitrust, why not FCPA investigations?) This can save hundreds of hours of lawyer and staff time. It also often makes sense to outsource document review. There are a number of firms that conduct quality document review at a much lower cost than using attorneys (even contract attorneys.) I personally have used Novus Law, a document-related discovery firm, to handle all of the document review, management and analysis on a couple of document-heavy FCPA investigations. They do an outstanding job (no quality compromises) at a fraction of the cost.

These are just a few ideas for changing the way we provide compliance and investigative services to give better access to these critical services to more companies. How we do this is less important than that we do it.

U.K. Deferred Prosecution Agreements Expected In Early 2014 – A Work In Progress

Monday, May 20th, 2013

Today’s post is from Robert Amaee (Covington & Burling). Amaee is the United Kingdom Expert for FCPA Professor.

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The UK Crime and Courts Bill, which contained the implementing legislation for Deferred Prosecution Agreements (“DPAs”), received Royal Assent on 25 April 2013. The legislation will enable the UK Serious Fraud Office and the Crown Prosecution Service (the “Prosecutors”) to enter into DPAs with organisations — most likely from early 2014 — to deal with a specified list of economic crimes, including bribery, fraud and money laundering.

The move by the UK government to introduce implementing legislation for DPAs reflected an acknowledgement expressed in the UK Ministry of Justice’s May 2012 consultation paper on DPAs that: (1) there was little incentive for companies to self-report due to uncertainty over where that process would lead and (2) the options available to the Prosecutors for tackling economic crime were unduly limited.

The Prosecutors will welcome the addition of DPAs to their armory and the likelihood of there being a greater number of global settlements in multi-jurisdictional cases involving economic crime. There are, however, a number of factors peculiar to the UK version of DPAs that organisation will need to examine before a decision is taken to self-report instances of suspected wrongdoing or to enter into DPA negotiations with the Prosecutor.

The Process

The newly-enacted legislation contemplates that – following the commencement of an investigation into suspected economic crime – the Prosecutor may decide to enter into DPA negotiations with an organisation. Once the Prosecutor and organisation have formulated an agreed statement of facts concerning the alleged offence, which may or may not include admissions, that statement will be presented in private to a Crown Court judge. Details of the alleged offending, a draft indictment, the agreed – or contemplated – conditions to be included in the DPA and a list of any issues that have not yet been resolved also will be provided to the judge at the preliminary hearing.

At the conclusion of the preliminary hearing, the judge will be asked by the Prosecutor to declare that resolving the matter by means of a DPA is in the interests of justice and that the proposed terms of the DPA are fair, reasonable and proportionate. The judge could decide that certain steps must be taken, or further lines of inquiry pursued, before he/she will consider issuing the declaration at the subsequent preliminary hearing or hearings.

Following the preliminary hearing(s), agreement of the terms of the proposed DPA between the Prosecutor and organisation and the resolution of any outstanding issues, the Prosecutor and organisation will return to the Crown Court for a final hearing in private. The purpose of that hearing is for the Prosecutor to seek the judge’s approval of the DPA and its terms. If the DPA is approved, the Prosecutor must publish details of the DPA and the declarations made and reasons provided by the judge at the preliminary and final hearings.

In the event of an alleged breach of the DPA by an organisation, the Prosecutor can make an application to the Crown Court. In such circumstances, if the judge finds – on the balance of probabilities – that the organisation has breached the DPA, he/she can either: (1) ask the Prosecutor and organisation to agree to a proposal for remedying the breach or (2) terminate the DPA. Once the DPA has expired – assuming that the organisation has complied with the terms of the DPA – the Prosecutor is unable to bring criminal proceedings against the organisation for the same offence(s) unless it can be shown that the organisation knew – or ought to have known – that it provided inaccurate, misleading or incomplete information to the Prosecutor.

It is expected that the Director of the SFO and the Director of Public Prosecutions shortly will issue a draft Code for Prosecutors that will contain further detail on the DPA process, including guidance on the principles to be applied by the Prosecutor when deciding whether a DPA is the appropriate means of resolving a particular case and the disclosure obligations of Prosecutors. In addition, the UK Sentencing Council is expected to produce guidance on corporate criminal fines, including for those offences eligible for resolution by means of a DPA.

A Work in Progress

While the UK approach toward DPAs builds upon the US system, there are a number of noteworthy factors unique to the UK system. One such factor is the significant role played by the judiciary. In contrast to the US, the UK DPA process mandates a notable degree of oversight and involvement by the judiciary from an early stage in negotiations through to the handling of any alleged breaches of a DPA.

The level of judicial involvement built into the UK system is intended to enshrine transparency in the DPA process and takes the ultimate outcome of a DPA negotiation out of the hands of the Prosecutor. An inevitable consequence of this judicial involvement is the introduction of additional uncertainty into the DPA process. It is not difficult to conceive of negotiations that have taken a number of months to reach the Crown Court being greatly protracted or even terminated by a judge who takes the view that what has been proposed is not fair, just or reasonable or that it is not in the interest of justice to pursue discussions. By that stage discussions may be at an advanced stage and the Prosecutor will have amassed case materials provided by the organisation in the course of the negotiations. While the Prosecutor, in most cases, will not be able to rely either on the fact that it conducted DPA negotiations with the organisation, or on any draft DPA in future criminal proceedings, he/she is entitled to rely on evidence obtained from investigations pursued as a result of anything said in any unsigned statement of facts or in the draft DPA. Any pre-existing material provided by the organisation during the DPA process also could become admissible in subsequent proceedings.

Another factor worthy of consideration is the nature of the admissions that may have to be made by an organisation to secure a DPA. In particular, it is unclear whether the Prosecutor is likely to need to insist — as a condition of agreeing to a DPA — on an admission of the involvement of a “controlling mind” of the organisation in the alleged wrongdoing or, in the appropriate case, the lack of adequacy of an organisation’s anti-bribery systems and controls.

In order to attribute criminal liability to an organisation for offences requiring mens rea, a UK prosecutor needs to prove that the offender was a directing mind and will of the organisation. This ‘identification principle’ requires that the acts and state of mind of those who represent the directing mind and will be imputed to the organisation. The UK courts have restricted the application of this principle to the actions of ‘controlling officers’ of the organisation, namely the Board of Directors, the Managing Director and senior officers who carry out functions of management and speak and act as the organisation. The Prosecutors have found this test to impose a high barrier to corporate prosecutions, meaning that many cases against organisations do not proceed as sufficient evidence cannot be amassed by the Prosecutor to implicate a controlling mind of that organisation.

It may be that the soon to be issued Code for Prosecutors will address this topics but, at this stage, a question mark remains over whether a Prosecutor can be satisfied with agreeing to a statement of facts or admissions that fall short of implicating a controlling mind of the organisation. If an organisation seeking to resolve matters by way of a DPA is required to provide documentation or make admissions in relation to the role of a particular senior officer and his or her involvement in any wrongdoing during the early DPA negotiations with the Prosecutor, the organisation could be left at a disadvantage in the event that there is a derailment of the negotiations and a subsequent prosecution of the organisation.

It remains to be seen whether concerns about the level of uncertainty inherent in the UK DPA process or about any admissions that may have to be made will be justified and sufficient to deter organisations from reporting instances of possible wrongdoing and seeking to enter into discussions with the Prosecutor. Experience with DPAs in the US would tend to suggest that, irrespective of the legal arguments that could be deployed, the prospect of a settlement may well prove attractive enough for many organisations to prompt them to explore the UK DPA process in the hope of avoiding a drawn-out and uncertain court battle and the associated business disruption and reputational damage.

“Due Process” Limits on Criminal Enforcement of the FCPA Against Non-U.S. Nationals Based on Extraterritorial Conduct

Tuesday, May 14th, 2013

Today’s post is from Debevoise & Plimpton attorneys Sean Hecker, Steven Michaels, and Anna Domyancic.

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Earlier this year, two judges of the U.S. District Court for the Southern District of New York ruled on motions to dismiss SEC civil FCPA actions, invoking the International Shoe “minimum contacts” and “reasonableness” tests to determine whether the courts had personal jurisdiction over the foreign individual defendants in those cases. The decisions in the Straub and Steffen cases — one (Straub, arising out of the Magyar Telekom matter) rejecting the motion and the other (Steffen, arising out of the Siemens-Argentina matter) granting the motion and ordering dismissal — mark important boundaries regarding personal jurisdiction over foreign individual FCPA civil defendants.

But does the reasoning of the recent civil enforcement decisions carry over to the criminal enforcement context? Specifically, does “due process” mean the same thing in both criminal and civil FCPA actions brought against individual foreign defendants?

The answer is that, generally speaking, the civil and criminal “due process” minimum contacts tests overlap significantly, but not entirely. The argument that it violates due process to prosecute FCPA criminal charges based on the lack of connection of the underlying facts to the United States has rarely, if ever, been raised, let alone litigated to conclusion. But as the DOJ pursues more aggressive theories against foreign nationals who are not subject to the nationality principle of jurisdiction, and where the principal injured parties are foreign governments or marketplace competitors who may have no connection to the United States, the issue could gain traction. It is thus worth considering how precedent in the criminal law “minimum contacts” due process arena compares to International Shoe’s test, including how it might apply in the FCPA context.

I. Due Process “Nexus” Requirements in the U.S. Criminal Law Context

It is generally understood that, despite the limitations of the due process clause of the Fifth Amendment, U.S. federal criminal statutes may be applied to the extraterritorial conduct of foreign nationals when the law’s application would be neither “arbitrary [n]or fundamentally unfair.” United States v. Davis, 905 F.2d 245, 249 (9th Cir. 1990).

Most of the courts of appeals to have ruled on the issue have held that due process requires a “nexus” between the United States and the defendant. For non-U.S. citizens acting outside the United States, a “nexus” may exist when the aim of the defendant’s conduct is “to cause harm inside the United States or to U.S. citizens or interests,” including those outside the United States See United States v. Al Kassar, 660 F.3d 108, 118 (2d Cir. 2011). In Al Kassar, the defendants were foreign nationals, charged with conspiring to sell arms to a foreign terrorist organization knowing that the weapons would be used to kill U.S. citizens and destroy U.S. property, among other crimes. The court determined that the aim of the defendants’ conspiracy established a “nexus” with the United States even though the defendants acted entirely outside the territory of the United States.

Cases like Al-Kassar illustrate how courts look to the protective principle in international law to determine whether a U.S. nexus exists. The protective principle allows a nation to prosecute conduct occurring outside its territory if the conduct threatens the state’s security or similar interests. See United States v. Perlaza, 439 F.3d 1149, 1161-62 (9th Cir. 2006). Crimes like those in Al Kassar, as well as drug-smuggling, may support the exercise of jurisdiction under the protective principle, with some courts going so far as to hold no factual connection to the United States is required in drug cases if the acts at issue occur on “stateless” vessels on the high seas or those of nations that have consented to enforcement of U.S. law in their territories. See United States v. Cardales, 168 F.3d 548, 553 (1st Cir. 1999); United States v. Martinez-Hidalgo, 993 F.2d 1052, 1056 n.6 (3d Cir. 1993). Compare United States v. Perlaza, 439 F.3d 1149, 1169 (9th Cir. 2006) (requiring some U.S. connection); United States v. Angulo-Hernandez, 576 F.3d 59, 60 (1st Cir. 2009) (Torruella, J.) (dissenting from denial of en banc review) (noting conflicts among circuits as to the approach to narcotics cases).

In a decision in a non-FCPA foreign bribery context, the U.S. District Court for the District of Columbia in 2011 rejected a motion to dismiss criminal proceedings brought against an Australian national who, while employed as an advisor to the Afghan government, allegedly solicited $190,000 in bribes to be paid from U.S. funds supplied to a U.S. Agency for International Development (“USAID”) contractor. Charged with anti-kickback violations and federal program bribery under 41 U.S.C. § 53 and 18 U.S.C. § 666(a)(1)(B), the defendant moved to dismiss on due process grounds, based on the lack of any U.S. nexus. Rejecting the motion, the court invoked the protective principle as enabling the government to charge him for “conduct outside the nation’s territory [that] threatens the nation’s security or could potentially interfere with the operation of its governmental functions.” United States v. Campbell, 798 F. Supp. 2d 293, 306-08 (D.D.C. 2011) (internal citations omitted). The court held: “Not only might Mr. Campbell’s actions hold the United States up to opprobrium in Afghanistan, every instance of such connivance robs USAID money from its intended purpose, hinders the United States’ substantial efforts in Afghanistan, and also robs USAID of support for its efforts from the U.S. taxpayer.”

II. Comparison of Civil and Criminal Due Process Standards

The nexus requirement in criminal cases is in many respects similar to the “minimum contacts” test for personal jurisdiction in civil ones. The Straub court found that the SEC’s complaint alleged sufficient minimum contacts with the United States because the defendants’ alleged concealment of bribes, along with the company’s falsified SEC filings, were sufficient to demonstrate that the defendants’ intent was to cause injury to U.S. interests in the transparent operations of SEC-regulated companies. SEC v. Straub, 2013 WL 466600, at *7 (S.D.N.Y. Feb. 8, 2013). The Steffen court found that the defendant did not have “minimum contacts” with the United States when he did not authorize the bribes at issue or falsify any SEC filings. SEC v. Steffen, 2013 WL 603135, at *5 (S.D.N.Y. Feb. 19, 2013). Considering that the “nexus” element of due process may be met in the criminal context if the defendant intends to cause injury to the United States or its interests, it is possible that acts similar to those the Straub defendants undertook could be found sufficient to confer jurisdiction in a due process sense in criminal matters involving foreign nationals acting abroad. But the lack of clear precedent identifying which “U.S. interests” count for criminal law due process purposes in an anti-bribery context in which U.S. funds, property, or lives are not at issue raises possibly significant questions whether criminal jurisdiction might be more circumscribed.

At the same time, because the “reasonableness” due process test in civil matters focuses on several factors not strictly captured by the criminal law test, it is also possible that some defendants facing civil FCPA charges might have valid due process defenses where they might not if they were charged criminally for the same conduct. In Steffen, the court found that the reasonableness test was not met due to “Steffen’s lack of geographic ties to the United States, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter” after certain corporate settlements occurred, including in other jurisdictions. How and whether any of these points would matter if they were raised as part of a due process challenge in the pending criminal case where Mr. Steffen has been charged remains to be seen. Given that Mr. Steffen has not voluntarily appeared in the United States, is currently not subject to extradition proceedings, and cannot be tried under Federal Rule of Criminal Procedure 43 until he does appear, the issue may never be litigated in his case and may be rarely ripe in the FCPA context.

III. Conclusion

The recent due process rulings in the civil FCPA matters in Straub and Steffen rightly raise the question of the jurisdictional limits that apply as a matter of due process in the criminal FCPA arena. These constitutional issues, apart from the threshold matter of how and whether the FCPA was intended by Congress to apply in an extraterritorial context, an issue on which the Supreme Court’s recent decision in Kiobel v. Royal Dutch Petroleum Co., No. 10-1491 (U.S. Apr. 13, 2013) puts a spotlight, may become of increasing importance as the DOJ pursues aggressive jurisdictional theories against individual foreign nationals. A lack of clear precedent will undoubtedly put pressure on litigants to settle and on the courts to resolve cases on non-constitutional grounds, but may ultimately lead to judicial pronouncements on the constitutional limits of the FCPA.

A Different Perspective on Breuer’s New Position

Tuesday, April 2nd, 2013

The goal of FCPA Professor, as reflected in the Mission Statement, is to foster a forum for critical analysis and discussion of the FCPA (and related topics) among a broad audience, including those who disagree with me on certain issues.

This post last week highlighted former Assistant Attorney General Lanny Breuer’s new job and another recent post highlighted my recent article “Lanny Breuer and Foreign Corrupt Practices Act Enforcement.”

Today’s post is from Thomas Fox who runs the FCPA Compliance and Ethics Blog. After Fox’s perspective, I offer a few concluding remarks.

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A Different Perspective on Breuer’s New Position

Thomas Fox

Last week there was much a-buzz in the FCPA world and, indeed, the greater legal community about the move of former Assistant Attorney General, Department of Justice (DOJ) Criminal Division, Lanny Breuer to the law firm Covington & Burling LLP. Several commentators raised questions about Breuer’s move in light of his work as the former No. 2 at the DOJ. The first of these concerns fall into the category of the “revolving door” issue, the second is a more focused criticism.

The Revolving Door

Dennis Kelleher, a former partner at Skadden Arps in Washington, D.C., and current president of the public interest group Better Markets, Inc., was quoted in a Corporate Crime Reporter article titled “Lanny Breuer Back to Covington” that “nothing is more corrosive to the American people’s trust in government than the revolving door where too many officials turn their so-called public service into multi-million dollar riches unimaginable to most Americans.” Further, Kelleher said that “This blatant cashing-in is destroying faith in government and government officials.” Lastly, Keller said that “Lanny Breuer’s spinning through it is only the latest example: “partner at big DC law firm representing corporate clients before the Department, then becomes a senior official at the Department making decisions whether or not to prosecute those same or similar corporate clients, then leaves to go back to private practice representing those same or similar corporate clients with legal issues before, bingo, the Department of Justice”.

Multi-million dollar salaries are not only unimaginable to most Americans; they are also unimaginable to most lawyers. From my experience, the only lawyers who command such earnings are: (1) plaintiff’s lawyers who work on a contingency and receive a percentage of any settlement or judgment as their fee or (2) lawyers who are very, very good at what they do and clients are willing to pay a very high rate for their services because these lawyers are very, very good at what they do. I believe that Breuer falls into category 2.

Breuer had quite a career before he became the No. 2 at the DOJ. Indeed his bio on the Covington and Burling website has the following information.

Prior to his service at the Justice Department, Mr. Breuer co-chaired the firm’s White Collar Defense and Investigations Practice Group. Over nearly 20 years in private practice, Mr. Breuer maintained a wide-ranging practice that included white-collar criminal and complex civil litigation, internal corporate investigations, congressional investigations, and antitrust cartel proceedings.

Representative Matters

Represented the Special Litigation Committee of the Hewlett Packard Board of Directors.
Represented the former Minister of Atomic Energy for Russian Presidents Yeltsin and Putin in a case alleging theft of tens of millions of dollars.
Represented many major corporations before Congress, including a leading Internet company in a hearing concerning its foreign business activities, major pharmaceutical companies targeted in oversight investigations, the Los Alamos National Laboratory in a national security investigation, and a large Wall Street firm in the Enron hearings.
Represented leading telecommunications investors in a billion-dollar False Claims Act lawsuit.
Represented former National Security Advisor Samuel Berger in an investigation of documents at the National Archives.

In addition to the above, Breuer was Special Counsel to President Clinton (1997-1999), where he represented President Clinton and the White House staff in the presidential impeachment hearings and trial, independent counsel investigations, a Justice Department task force investigation, and numerous congressional oversight investigations. Breuer was also an Assistant District Attorney in Manhattan from 1985-1989. In other words, Breuer had quite a bit of experience in government and representing companies before the government before he went back to the DOJ in 2009.

What about the claim that Breuer went back to the DOJ, where he worked for four years so he could ‘cash in’ by going back to private practice? Public service is just that – public service. I am reasonably certain that Breuer did not go back into government service for the salary he received at the DOJ. I think his record demonstrates that he is one of the lawyers committed to serving our country in government. To say that anyone would put up with four years of taking all the shots that Breuer took during his tenure at the DOJ, both from Congress and from others, so he could cash in seems to me to be a little far-fetched. From my perspective, to criticize him for leaving and going back to his former firm does not hold merit.

With regards to one of the issues raised by Kelleher regarding whether a partner in a law firm who represents “corporate clients before the Department, then becomes a senior official at the Department making decisions whether or not to prosecute those same or similar corporate clients”, I do not believe that Breuer made any decisions “not to prosecute those same…corporate clients” while he was at the DOJ. Simply put, he would have been conflicted out. What about “similar corporate clients”? That seems to me to stretch the point way too far.

As to his new work in the private sector, what about another question posed by Kelleher, “Isn’t much of his new multi-million dollar pay package due to the high level connections, high-profile and intimate knowledge of the Department of Justice he gained while doing his ‘public service’ at the Department?”

Breuer himself appears to have answered that question directly in an interview with the Wall Street Journal (WSJ) Law Blog, which quoted him as saying, “Certainly, if I’m not ethically barred,” he told Law Blog. “I would certainly represent clients and anticipate representing clients in all different sectors, and I think that’s the majesty of our system.” But the Law Blog noted that, “Under federal ethics rules, Mr. Breuer has to abstain from matters that he was involved in while at the department, and he can’t approach Justice Department officials on behalf of clients during his “cooling off” period.” This means that he cannot work for Covington on any case he handled at the DOJ and must wait two years before facing off with the agency.

What about clients? If I am a corporation under a serious federal investigation, who do I want advice from? I want advice from someone who knows the ropes. Breuer obviously understands the law from a prosecutor’s perspective and that is of great value to a client. In fact, understanding how a prosecutor thinks and will react is one of the most important pieces of information that a client can have because it provides information on how to respond. Breuer was involved with far more than FCPA cases, and, while I do not know all of them, the one that sticks in my mind was when he had to postpone his talk at the 2012 ACI FCPA conference in Washington to attend the announcement of the US government settlement with BP over the Macondo oil spill. Not only did he have a lot on his plate at the DOJ, he has far-ranging experience in a large number of federal matters.

From FCPA Enforcement to FCPA Defense

The FCPA Professor, in a post titled “Former Assistant Attorney General Lanny Breuer Joins FCPA Inc.”, had a more focused criticism that he has consistently articulated, with the following statement. “Breuer’s departure from the DOJ to a private law firm is just the latest example of a high-profile FCPA enforcement attorney joining a law firm to provide FCPA defense services.” The Professor said:

“That Breuer (and other former DOJ FCPA enforcement attorneys who also moved to private practice) played a supervisory role as a DOJ enforcement attorney in helping create the current FCPA enforcement landscape and in setting the “priorities” and the “benchmarks” is precisely the reason why I have long argued that it is in the public interest (recognizing the niched nature of both the DOJ and SEC FCPA units) that all FCPA enforcement attorneys should be prohibited, when leaving the government, from providing FCPA defense or compliance services for a five-year time period.”

This is a more focused criticism. The Professor believes that DOJ lawyers who set FCPA “priorities” and “benchmarks” should be barred for a period of at least five years from providing FCPA compliance or defense services. While I believe that many of the arguments I made in the above Kelleher critique apply to this criticism, I also disagree with the Professor for a couple of other reasons.

First there were many, many voices in the DOJ and Securities and Exchange Commission (SEC) who set priorities and benchmarks for FCPA enforcement while they were in government service. I do not believe that there is anyone person who sets them, the best example of the benchmarks is the DOJ/SEC FCPA Guidance, which I understand was reviewed by several other government departments in addition to the DOJ and SEC.

Nevertheless to say that benchmarks are set, at least in the form of best practices, fails to acknowledge that best practices can evolve. The clearest example of this is the time frames set for post-acquisition integration of a FCPA compliance program by an acquiring company of an acquired entity. In April 2011, the Johnson & Johnson (J&J) Deferred Prosecution Agreement (DPA) had such time frames in its ‘Enhanced Compliance Obligations’. By 2012, these times frames had become minimum best practices. Another example is last year’s Opinion Release 12-01, which found that under certain circumstances, a royal family member is not a foreign government official for FCPA purposes. There are many such situations which make clear that best practices evolve. So even if Breuer had some hand in creating such benchmarks when he was at the DOJ, I do not think that should preclude him from representing clients going forward.

How about ‘priorities’? I have to assume this means priorities in FCPA enforcement. If so this would seem to suggest that Breuer either (1) ramped up FCPA enforcement so that he could get clients from this newly enforcement law or (2) directed enforcement at certain industries or sectors so that he could represent them. As to point 1, I think that, notwithstanding the DOJ’s Press Release on Breuer’s departure that “At the Justice Department, Mr. Breuer increased enforcement of the FCPA, overseeing more than 40 corporate resolutions and eight of the top 10 largest penalties in U.S. history”; these cases were long in the pipeline before Breuer arrived. While I do not know the reason that FCPA enforcement ramped up, it did so long before Breuer arrived at the DOJ. What about direction at certain industries? Here again the way enforcement operates would seem to belie this claim. Most of the FCPA enforcement directed at the energy industry was a result of Panalpina and its related cases. Pharmaceutical cases seem to follow J&J. The aerospace industry has all come after the BAE settlement. To borrow a line from the book and movie “All the President’s Men”, the point is that the DOJ (and SEC) seem to ‘follow the money’.

As you may have ascertained by now, I do not believe that there is a problem in Lanny Breuer going from the DOJ back to his old firm of Covington & Burling. Is $4 million per year salary a huge salary, of course it is. But he has the experience to merit it if clients will pay his hourly rate and for his new duties as Vice Chair of the law firm.

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Fox’s post of course demonstrates that Breuer has a plethora of legal skills and experience beyond the FCPA. Thus, my suggested prohibition would not have a material impact on his future career prospects.

Nor would my suggested prohibition affect many people. Here, it is important to recognize the highly centralized nature of FCPA enforcement – per the U.S. attorney manual.

9-47.110 Policy Concerning Criminal Investigations and Prosecutions of the Foreign Corrupt Practices Act states, in pertinent part, as follows.

“No investigation or prosecution of cases involving alleged violations of the antibribery provisions of the Foreign Corrupt Practices Act (FCPA) or of related violations of the FCPA’s record keeping provisions shall be instituted without the express authorization of the Criminal Division. Any information relating to a possible violation of the FCPA should be brought immediately to the attention of the Fraud Section of the Criminal Division. Even when such information is developed during the course of an apparently unrelated investigation, the Fraud Section should be notified immediately.”

Billy Jacobson (former assistant chief of DOJ FCPA enforcement) said it best in this article.

“[T]he FCPA has been recognized and treated as different by the U.S. government since its passage in 1977. [...] [The FCPA] is one of just a few, select statutes to be prosecuted centrally from one DOJ office. The over-whelming majority of federal criminal statutes may be brought by each of the country’s U.S. Attorney’s Offices, but FCPA actions may be brought only by the Fraud Section of the Criminal Division within Main Justice.”

In short, per DOJ policy, from a supervisory and discretionary standpoint, very few people control FCPA enforcement. These people largely “enforce” the FCPA behind closed doors in Washington, D.C. via non-prosecution and deferred prosecution agreements in the general absence of judicial scrutiny. This highly-centralized enforcement behind closed doors in the general absence of judical scrutiny further takes place without much caselaw of precedent setting the parameters (something which of course can not be said about many other laws the DOJ enforces such as antitrust, securities fraud, etc.)

It is these unique attributes (most of which are the DOJ’s own making) of FCPA enforcement that warrants special rules. A prohibition on DOJ (or SEC) FCPA enforcement attorneys with supervisory and discretionary authority from providing FCPA defense or compliance services for five years upon leaving government service is a special rule, but one that is in the public interest.