As detailed in this prior post, in September the Open Society Foundation released “Busting Bribery:  Sustaining the Global Momentum of the Foreign Corrupt Practices Act” (here).  The white paper was in response to the October 2010 white paper “Restoring Balance:  Proposed Amendments to the Foreign Corrupt Practices Act” (here) released by the Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce.  Authored by David Kennedy (Professor of Law, Harvard Law School) and Dan Danielsen (Professor of Law, Northeastern University School of Law), Busting Bribery stated that  “the Chamber proposes to change the [FCPA] in ways that would substantially undermine the possibility for successful enforcement of America’s anti-bribery commitments” and that the “Chamber’s proposed amendments would also set back decades of progress in the global struggle against corruption.”

As to a potential FCPA compliance defense, a defense that not only the Chamber supports, Kennedy and Danielsen (the “Authors”) stated as follows in the Executive Summary.   “Often seen as the least concerning of the Chamber’s proposals, the creation of an affirmative defense of ‘compliance’ to FCPA corporate criminal liability is actually potentially very dangerous.  Compliance is already taken into account at  every stage in the investigation and resolution of FCPA violations.  In 1988, Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place. A defense of ‘adequate’ or ‘good faith’ compliance makes no sense when, as under the current FCPA, corporate criminal liability requires proof beyond a reasonable doubt that the company acted with actual knowledge and corrupt intent to influence a foreign government to gain an improper business advantage. Creating a compliance defense to knowing and intentional violations of the FCPA would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from their knowing and intentional wrongdoing.” (emphasis in original).

In the substantive section of report, the Authors stated, among other things, as follows.  “… [A]n affirmative defense of ‘adequate’ or ‘good faith’ compliance is fundamentally inconsistent with the FCPA’s very high standards for corporate criminal liability which require prosecutors to prove that a company’s prohibited acts be both ‘knowing’ and ‘corruptly’ undertaken with intent.”  The Authors then state that  “these standards of liability were summarized in the Congressional Report on the 1988 amendments to the Act” and quote a portion of the Congressional Conference Report on the 1988 amendments as follows.  “Thus, the ‘knowing’ standard adopted covers both prohibited actions that taken with ‘actual knowledge‘ of intended results as well as other actions that, while failing short of what the law terms ‘positive knowledge,’ nevertheless evidence a conscious disregard or deliberate ignorance of known circumstances that should reasonably alert one to the high probability of violations of the Act.” (emphasis in original).

The Authors then continue as follows.  “From these articulated and clearly-defined standards of corporate culpability under the FCPA, it becomes immediately apparent that an affirmative defense of ‘good faith’ or ‘adequate’ compliance is simply inappropriate.  On the one hand, effective, ‘good faith’ compliance is logically incompatible with the requirement under the Act that violations be undertaken with ‘actual knowledge’ or a ‘conscious disregard or deliberate ignorance of known circumstances’ and the requisite ‘corrupt’ intent to induce a foreign official to misuse his official position to wrongfully obtain business or direct business to another.  Any compliance program that knowingly permitted, facilitated, or consciously or deliberately turned a blind eye to corrupt, intentional violations of the FCPA must be either per se inadequate or not undertaken in good faith.  On the other hand, the existence of a merely formal compliance program is irrelevant to the question of whether knowing, intentional and corrupt behavior took place.  Creating a ‘compliance defense’ to knowing and intentional violations of the Act would amount to eliminating criminal liability under the Act all together by permitting a ‘fig leaf’ compliance program to insulate companies from having knowing and intentional wrong-doing.”

To use the Authors phrase of “immediately apparent,” what is immediately apparent upon reading Busting Bribery  is how the Authors are off-target when it comes to the FCPA’s 1988 amendments as well as respondeat superior principles of corporate criminal liability.

In asserting that “Congress amended the FCPA to eliminate liability based on a company’s failure to eliminate bribery which it had ‘reason to know’ was taking place,” the Authors appear to assume that such was the general standard for corporate criminal liability prior to the 1988 amendments.  It wasn’t.

The FCPA, as originally enacted, prohibited those subject to the law from, among other things, providing things of value to “any person, while knowing or having reason to know that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.”  (emphasis added).   The FCPA, as originally enacted, thus contained a third-party payment prohibition triggered by a broad “while knowing or having to reason to know” standard.

This standard was very quickly criticized by many because companies were “unsure about the degree of their responsibility for questionable payments made by their foreign agents in cases when the companies believe they have instituted reasonable safeguards.”  (See  GAO Report, “Impact of Foreign Corrupt Practices Act on U.S. Business” at pg. iv).    U.S. Trade Representative William Brock candidly stated during a 1981 Senate FCPA hearing that “frankly, nobody knows what it means.”  (See “Business Accounting and Foreign Trade Simplification Act,” Joint Hearings Before the Subcommittee on Securities and the Subcommittee on International Finance and Monetary Policy of the Committee on Banking, Housing, and Urban Affairs, United States Senate, 97th Congress, First Session at pg. 63).

The FCPA reform efforts that began in 1980 and culminated in FCPA amendments in 1988 had, as a core reform proposal, revising the “reason to know” standard relevant to third-party payments.  Jonathan Rose (Assistant Attorney General) stated, in connection with a 1983 House FCPA hearing, that the FCPA’s then standard of liability for third-party payments was akin to a “simple negligence standard” and “is plainly inappropriate and inconsistent with the general approach of modern criminal law to state-of-mind requirements.”  (See “The Foreign Trade Practices Act,” Hearings Before the Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs, House of Representatives, 98th Congress, First Session at pg. 118).

In 1987, the House Committee on Energy and Commerce stated, in reporting out an FCPA reform bill revising the third-party knowledge standards that the “reason to know standard under current law has been criticized as unclear” and that “some businesses interpret the standard as tantamount to “reason to suspect that an agent will pass on a bribe, or a negligence standard …”.  (See Trade and International Economic Policy Reform Act of 1987, House Report 100-49 (April 6, 1987) at pg. 75).  The House Report stated that “clearly such an interpretation was not intended by Congress …” and   when the FCPA was ultimately amended in 1988, the relevant Conference Report, under the heading “Standard of Liability for Acts of Third Parties (Agents)” stated that the conferees intended to retain the “knowing” requirement for payments to third-parties, to delete the House bill’s reference to “reckless disregard” and to include concepts of “conscious disregard” or “willful blindness.”  (See House Report No. 100-576 at 920 (1988) at pg. 919).

The third-party payment provisions were amended in 1988 (and remain the same today) to prohibit those subject to the law from providing things of value to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official.”  Knowledge was defined in the 1988 amendments, and still is today, as follows.  “(A) A person’s state of mind is ‘knowing’ with respect to conduct, a circumstance, or a result if – (i) such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii) such person has a firm belief that such circumstance exists or that such result is substantially certain to occur. (B) When knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such a circumstance does not exist.”

In other words, Busting Bribery constructs, as the primary foundation for opposing an FCPA compliance defense, a knowledge standard that was relevant only, and continues to be relevant only, to the FCPA’s third-party payment provisions.  The FCPA, when enacted, and to this day, allows corporate criminal liability under respondeat superior principles when an employee acts within the scope of his or her duties intending to benefit, at least in part, the organization.  Knowledge (however defined) of the employee’s conduct by the board, executive officers, or other high-ranking executives is not required and, at present, the organization’s pre-existing compliance policies and procedures are not relevant as a matter of law to the organization’s criminal liability.

For instance, the only time in the FCPA’s history that a corporate FCPA charge was presented to a jury was in the Lindsey Manufacturing case early this year.  The relevant jury instruction (instruction 16 – entity responsibility – entity defendant – agency) stated as follows.

“To sustain the charge of conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”) or violation of the FCPA against Lindsey Manufacturing Company, the government must prove the following propositions:

First, the offense charged was committed by one or more agents or employees of Lindsey Manufacturing Company; Second, in committing the offense, the agent or employee intended, at least in part, to benefit Lindsey Manufacturing Company; and Third, the acts by the agent or employee were committed within the authority or scope of his employment.

For an act to be within the authority of an agent or the scope of the employment of an employee, it must deal with a matter whose performance is generally entrusted to the agent or employee by Lindsey Manufacturing Company. It is not necessary that the particular act was itself authorized or directed by Lindsey Manufacturing Company. If an agent or an employee was acting within the authority or scope of his employment, Lindsey Manufacturing Company is not relieved of its responsibility because the act was illegal.”  (emphasis added).”

So yes, while it is true that the corrupt intent element must be met in order to convict a company of an FCPA offense, that corrupt intent element can be satisfied by singular and isolated acts of any employee, even if their conduct is in violation of pre-existing company policies and procedures.  However,  you would not glean this significant point from Busting Bribery because the term respondeat superior (or general concept) does not even appear in the lengthy white paper.

An FCPA compliance defense would not, as the Authors suggest, create a wholesale corporate defense to “knowing and intentional violations of the FCPA.”  If the board, executives, or other senior personnel were involved in the knowing and intentional conduct at issue, a company could not rely on the compliance defense.  If an employee, at any level, engaged in knowing and intentional conduct in violating of the FCPA, a company could not rely on the compliance defense unless it had in place pre-existing compliance policies and procedures reasonably designed and implemented to prevent and detect, insofar as practicable, the conduct at issue.

The notion that creating a potential compliance defense “would amount to eliminating [corporate] criminal liability under the Act all together” is simply false and off-target, as is Busting Bribery’s misleading reference to the FCPA’s 1988 third party payment revisions to support its position.

Despite its obvious shortcomings, others are championing Busting Bribery’s compliance defense rebuttal.  For instance, last week Citizens for Responsibility and Ethics in Washington (CREW) issued a release (here) touting the Authors’ work and praising Busting Bribery for “thoroughly debunk[ing] the Chamber’s arguments for amending the FCPA, finding them based on ‘myth.’”  See CREW’s letters to both the House (here) and Senate (here).

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How did Aaron Murphy (Latham & Watkins), an FCPA practitioner and author of “Foreign Corrupt Practices Act:  A Practical Resource for Managers and Executives” react to Busting Bribery?  In this twitter feed he asked – “why are professors with no apparent experience actually investigating corruption used as experts?”