FCPA Compliance and Ethics Blog

June 22, 2011

Stephen Clayton Reviews Mukasey’s Proposed FCPA Amendments

Ed. Note-today we have a guest post from our colleague Stephen Clayton, who has prepared a lengthy review and commentary on the written testimony Michael Mukasey submitted in the Sensenbrenner hearings in House of Representatives on June 15th. The full article is available here.  A shorter summary is below.

The proposals for reform being made by Mr. Mukasey could severely curtail the ability of the government to prosecute violations of the FCPA and could have the effect of reducing the incentive for companies to introduce or continue robust FCPA compliance programs.  The proposed amendments may make the world a safer place for those who pay bribes in international business.

My article agrees that clarifications to the way FCPA enforcement is done by the DOJ and SEC are necessary. But it joins with others who recommend this be done by guidance, not amendment to the FCPA itself.

In covering each of Mr. Mukasey’s 6 numbered proposals  – and 2 other proposals Mukasey references in his written testimony, the article hits the following points:

1. Adding a  Compliance Defense

Basing a major change to a working US law on the examples of untried UK and Italian laws is ill advised.   The details of the compliance defense in the UK law are not in the law but contained in Guidance from the Ministry of Justice. The UK affirmative defense of “having in place adequate procedures to prevent persons associated with the company from bribing” only applies to the strict liability crime of “Failure of Commercial Organisations to Prevent Bribery” stated in Section 7 of the Bribery Act. The FCPA does not contain the strict liability crime of Failure of a Commercial Organization to Prevent Bribery.  The combination of the Federal Sentencing Guidelines and guidance from the DOJ on the elements of an adequate FCPA compliance program (see Attachment C to the 2010 Alcatel-Lucent DPA) is more clear than the status of what constitutes “adequate procedures” under the UK law.

2. Clarifying the meaning of “Foreign Official” and “Instrumentality

The confusion Mukasey fears in this area is not serious and reducing the scope of these definitions is not critical to companies which already have in place robust FCPA Compliance programs. They have dealt with these issues and moved on to determining how to deal with private corruption which generally accompanies government corruption.  The rule now and for the last 4-5 years has been, “Don’t Bribe Anyone.”  It is very important to know when your customers and business partners are “government.” and companies must make  a serious effort to know that.  That being said, improved guidance from the DOJ would be welcome.

3.  Improving Guidance from the DOJ

Mr. Mukasey correctly states that there is need for more guidance and direction from the DOJ and SEC.  The article provides  some specific examples including a leniency program and publication of information on decisions to not prosecute. The DOJ should take the efforts by the Chamber of Commerce to push amendments to the FCPA seriously and move to put in place guidance which negates the need for amendment.

4. Limiting Successor Liability

There is  a danger that creating a statutory  limitation of successor liability will allow companies to use or even create an acquisition to shield themselves from liability for corruption.  Mukasey’s statements that companies do very robust, exhaustive FCPA due diligence in merger and acquisition transactions is wishful thinking.  FCPA due diligence in most M & A transactions is far from adequate.   DOJ provided guidance in its Opinion on Halliburton’s request, and should provide further specific guidance in this area.  The FCPA should not be amended  to allow the profits and business gained by  international bribery to be passed to a successor with no liability.

5. Adding a Willfulness Requirement for Corporate Criminal liability

Mr. Mukasey’s is proposing a defense based on company senior management not knowing what its employees, subsidiaries and business partners are doing. To exempt  companies from responsibility because management does not make the necessary effort  to understand and control their employees and business would be bad for reducing corruption and bad for business.  Companies can actually set up business systems to know what their employees and subsidiaries are doing. A good FCPA compliance program will help with that business goal.

Mukasey introduces 2 additional reforms in this section:

– A Rebuttable Presumption that Gifts of De Minimis Value are not a Violation. This is a solution looking for a problem from a practical point of view. Companies with adequate FCPA compliance programs have dealt with it, but it should be the subject of DOJ guidance; and

– A Materiality Standard for Books and Records and Corporate Controls violations.   This proposal is an insidious attempt to gut enforcement of the Books and Records and Corporate controls parts of the FCPA.  Bribes made in international business are almost never material in monetary amount, they are material precisely because they are a violation of criminal law.

6. Limiting Parent Liability for Subsidiary Conduct Not Known to the Parent

Parent companies have complete power to manage and operate their subsidiaries, hire and direct their management and have full access to all to the subsidiary’s records and information.  Amending the law to allow a parent to use a subsidiary as a conduit to pay bribes and a shield from liability for corrupt activities based on the parent failing to understand what is going on in this part of its business would be a huge step backwards for reducing corruption.  It would reward poor management.

Mukasey bases his argument that amendments are necessary on faulty premises. His arguments are based the illusion that all companies have robust, state of the art FCPA compliance programs and are going to great expense to comply with a confusing and poorly written law.  Despite their sincere efforts to comply, they are being subjected to oppressive prosecution by the SEC and DOJ. They are being prosecuted for matters which are beyond their knowledge and control. Therefore substantial changes must be made to the law.  The trouble is that is not true.

Bribery in international business is common in many parts of the world and pervasive in some countries. Falsification of corporate books and records for various reasons is not unusual in international business.  There is an international trend towards criminalizing bribery in international business which has been led by the USA for 30 years. Weakening the FCPA through the amendments Mukasey advocates could end that US leadership and lead to more corruption. Companies can deal with bribery in their own business by instituting good business practices.  Companies with robust FCPA compliance programs are rarely subjected to prosecution. Despite the past 5 years of increased enforcement, most companies still have inadequate FCPA compliance programs which are not properly budgeted or staffed – or have no program at all. Many business people still do not take the law seriously.  The information is available for companies to determine how to assess their specific risks and set up a cost effective FCPA compliance program to prevent bribery and detect occurrences of corruption that slip through despite reasonable efforts.  Companies would be helped by further guidance from the DOJ and SEC.

Stephen Clayton ran the global anti-corruption compliance and investigation program for Sun Microsystems and has been an international business lawyer for over 30 years. He is now doing FCPA consulting in the San Francisco Bay Area and teaching a course in International Anti-corruption at Golden Gate University School of Accounting. He can be reached at stephen@stephenclaytonlaw.com.

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