FCPA Compliance and Ethics Blog

December 10, 2014

The Nobel Prize and FCPA Enforcement Going Forward

Nobel Prize MedalOne hundred and 13 years ago on this date, the first Nobel Prizes were awarded in Stockholm, Sweden, in the fields of physics, chemistry, medicine, literature, and peace. The ceremony came on the fifth anniversary of the death of Alfred Nobel, the Swedish inventor of dynamite and other high explosives. In his will, Nobel directed that the bulk of his vast fortune be placed in a fund in which the interest would be “annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind.” Although Nobel offered no public reason for his creation of the prizes, it is widely believed that he did so out of moral regret over the increasingly lethal uses of his inventions in war. The Royal Swedish Academy of Sciences decides the prizes in physics, chemistry, and economic science; the Swedish Royal Caroline Medico-Surgical Institute determines the physiology or medicine award; the Swedish Academy chooses literature; and a committee elected by the Norwegian parliament awards the peace prize. The Nobel Prizes are still presented annually on December 10, the anniversary of Nobel’s death. Each Nobel Prize carries a cash prize of nearly $1,400,000 and recipients also received a gold medal, as is the tradition.

Just as important in the area of anti-corruption and anti-bribery is the Organization for Economic Development and Cooperation (OECD). Earlier this month the OECD issued a report entitled “Foreign Bribery Report-An Analysis of the Crime of Bribery of Foreign Public Officials”. To say the findings were eye opening, if not disheartening, would be to put it mildly. As reported by Shawn Donnan in the Financial Times (FT), in an article entitled “Big companies blamed for most of the world’s bribery cases”, he said that “Large companies and their senior managers are responsible for the vast majority of the world’s bribery cases and are giving up a third of their profits from related projects to corrupt officials”. Donnan summarized the reports key findings as follows:

  • Companies with more than 250 employees accounted for 60 per cent of the cases of corruption studied. In 31 per cent of the cases the companies brought the bribes to the attention of authorities themselves. In just 2 per cent of the cases were whistleblowers involved.
  • The cost of bribes averaged 10.9 per cent of the value of the related transaction and 34.5 per cent of the profits. The largest bribes paid in a single case were worth $1.4bn. The smallest were valued at just $13.17.
  • A majority of the bribery cases involved company executives. Managers were involved in 41 per cent of the cases. A further 12 per cent involved the president or chief executive officer of a company.
  • Corruption is not just a poor world phenomenon. Almost half the cases studied involved bribery of public officials from countries with “high” or “very high” levels of human development.
  • The number of bribery cases brought around the world has grown substantially since 1999 but has fallen in the past two years after reaching a peak of 68 annually in 2010. Moreover, the time needed to prosecute cases has risen substantially from an average of 2 years in 2003 to 7.3 years in 2013.
  • Executives at state-owned companies accounted were the target of almost three in 10 bribes while customs officials accounted for just 11 per cent. Almost 60 per cent of the bribes were paid in order to obtain government contracts.
  • More than two-thirds of all sanctions levied were the result of legal settlements rather than convictions. In almost half the cases studied the fines levied were worth less than 50 per cent of the profits made by defendants as a result of the bribe.
  • Oil and mining companies on average paid bribes worth 21 per cent of the value of projects whereas those involved in the education sector or in water supply paid just 2 per cent.

I thought about the implications of these key findings in the context of Foreign Corrupt Practices Act (FCPA) enforcement going forward. At the 2014 Securities Enforcement Forum, held in October of this year, Jesse Eisenger reporting in the New York Times (NYT) DealB%k column, in an article entitled “In Turnabout, Former Top Regulators Assail Wall Street Watchdogs”, noted that white-collar defense lawyer Brad S. Karp, the chairman of Paul, Weiss, discussed some of the defense tactics that he uses when the government comes knocking against banks. “First, he pushes to move the charges to a subsidiary. Second, he tries to lower the charge. Third, he said, he focuses “on the powerful individuals in an organization” meaning that lawyers need to put top management first as they prepare a defense.”

Now consider those tactics in the context of the OECD report. Where do you think that the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) might look if they wanted to beef up enforcement? I ask this question because of a second article, which got my attention this week. In the Wall Street Journal (WSJ), Joel Schectman wrote a piece based upon in interview with University of Virginia School of Law professor Brandon Garrett, entitled “Professor Says Corporate Penalties Aren’t Working”. Schectman wrote, “many critics have said the government is still fighting companies with kid gloves.” Garrett delivered some direct criticisms when he was quoted as follows:

Of course, companies, like children, can’t go to jail. You can fine them, but the fines might not affect the right person. There is much more focus on rehabilitation compared with other areas of the criminal justice system. 

What you can do with companies is supervise them strictly, not through the lenient means they are using. People would be really troubled if the most serious individual offenders were let out and told to just behave for a couple years without supervision. And that is what’s happening with companies. In cases that are not plea bargains, there is no probation, there is no court supervision of probation, and with these deferred and non-prosecution agreements, most of them are not even supervised by an independent monitor. Only a quarter get monitorships. 

Most companies don’t have to audit their compliance to validate whether it’s working or not. Obviously a prosecutor is not in any position to obtain a sense of whether a big multinational company is complying with anything. Even a monitor needs a big international team working for them onsite to look at documents and interview employees.

Garrett does not seem to favor the DOJ going to trial but does believe that by getting a criminal plea in front of a court, the DOJ could use the resources and power of a federal court to deal with recidivists. Moreover, he believes that rehabilitation should be more rigorous and stated, “And if prosecutors aren’t getting anything more than the company’s assurance that it will do a systemic fix, that should leave us uneasy. We are starting to see recidivist banks and it’s looking like this compliance stuff isn’t working. A monitor isn’t a cure-all either. There are concerns about how a monitor is appointed. Do some of them go over budget without doing good work? But having someone independent seems a much better way to supervise compliance than rely on the company’s own assurance.”

What does all this mean for FCPA enforcement going forward? On the one hand you have the OECD saying the myth of the rogue employee is simply that, a myth. Corporations are intentionally violating anti-corruption laws such as the FCPA or certainly are aware of the conduct. Couple that with Garrett’s concerns that companies are getting off too easily and you may have a storm of more severe and stringent FCPA enforcement coming out of the DOJ and SEC. It may mean more and greater fines and penalties. It may mean greater use of external monitors who have unlimited budgets. It may mean more court supervision and interpretation of what compliance programs a company may implement going forward. It may mean longer and more thorough investigations as the DOJ and SEC strive to ascertain as much as they can that companies are remediating not only during the pendency of their investigations and enforcement actions but continue to do so while they are under resolution agreements such as Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs).

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

1 Comment »

  1. I agree that the experience with the banks in particular makes it clear that fines (even high ones) are not enough to drive the business behaviours. Those fines do not make boards decide to simplify their business models and shed certain business activities. They do not hit the pocket (purse) of the people that either authorised the actions or, who poor supervision, detected the behaviours and prevented them from happening.
    Every time senior managers hear about a senior colleague being arrested or indicted, they show renewed interest in compliance activities that can protect them from a similar situation. At present it is shareholders that pay the price for non-compliance penalties and the bonuses of the perpetrators stay in tact. So let’s focus on who has done it (or failed to prevent it) and extract a toll from them and drive a clear message to other executives.

    Comment by fdnumann — December 11, 2014 @ 9:58 pm | Reply


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