FCPA Compliance and Ethics Blog

August 9, 2012

NFL Training Camps Open: Is The FCPA Political Football Season Upon Us?

I have often wondered who Mike Volkov refers to when he derisively uses the term “FCPA Paparazzi”. I would have to assume he uses it for folks who comment upon the Foreign Corrupt Practices Act (FCPA) in a public manner but do not know what they are talking about. However, I could not figure who on earth Mike might be talking about, at least until now. On Monday, the FCPA Professor, who assuredly does know what he is talking about, had a guest blog by Rajat Soni, where he asked the question “Politically Speaking-Is the FCPA Doomed in the Next Five to Seven Years?” Perhaps Soni was simply inspired by the US Presidential race to make claims which have no basis in fact. Whatever the reason, I found his piece to be so far from reality as to be worse than laughable.

While I do agree with his proposition that the current Congress cannot and will not pass anything, let alone a piece of anti-corruption legislation, to say that the first thing that Mitt Romney would do as President is to suspend enforcement of the FCPA is simply ludicrous. As we all know, because he has said so over and over again, his first act will be repeal RomneyCare, oops ObamaCare. How about those pesky Brothers Koch, the bane of all progressive thinking peoples across the globe? Has anyone, and I mean anyone, heard them say US companies need to bribe more? Even with the injection of unlimited money into the Presidential race wrought by Citizens United, there has been nothing said in any state or federal election race, that I am aware of, about the need for US companies to pay more bribes as a sure fire way of getting us out of the economic doldrums. Maybe Soni has confused the First Amendment right of Free Speech with the First Amendment right of the Freedom of the Press, which the Wall Street Journal (WSJ) opined to in an editorial last year as a defense to News Corp’s alleged bribery of UK officials.

How about this whopper: Barry Goldwater as a “lover of corporations”? He must be rolling in his libertarian grave with that one. This is the person who in the 1980s said gays had the right to be left alone to live their own lifestyles. Does that sound like anything you have heard a GOP’er say in the current political debate? I doubt Brother Goldwater could even win a primary in the Tea Party dominated Arizona these days.

Indeed, if you even want some on the record evidence in the other direction, recall the question posed by House Judiciary Committee Chair, Representative James Sensenbrenner (R-Wis), in the June 2011 hearing on FCPA enforcement to the Department of Justice (DOJ) representative, Greg Andres. Representative Sensenbrenner’s first question was whether the DOJ would support amending the FCPA to make all commercial bribery illegal; not simply that involving foreign governmental officials. I suppose that Soni has not heard about the New York Times (NYT) article of April 21, 2012 about Wal-Mart and allegations of bribery of Mexican government officials. If not, perhaps he might want to read Dick Cassin’s blog post entitled “How Wal-Mart Torched FCPA Reform”.

How about the professionalism and independence of the DOJ to enforce laws? While I wanted to write something about Henry Peterson, the career DOJ attorney who said No to President Nixon’s direct order to stop his Watergate investigation, Soni does not seem to think “Watergate Era” precedents have any relevance today. So instead I will simply quote from the comment by Howard Sklar to the blog piece, which reads:

“First, President Romney will just shut down the vigorous FCPA enforcement regime in the DOJ and SEC”? No, he won’t. In fact, I’ll bet all the money in my pockets against all the money in your pockets that that won’t happen.

“Let’s count the ways: first, the President doesn’t “order” the SEC to do anything. It’s a quasi-independent agency, and there would be tremendous political ramifications if the President called up the Chairman (and at least the two other Republican Commissioners, since it takes a majority vote to do anything) and ordered him or her to do anything.

Second, President Romney would have the same problem with the DOJ. It’s not like Reagan, where Romney can just say, “drop the case.” Any attempt to undermine FCPA enforcement would be a political redball. It would be painted as soft on bribery. It’s the same reason the legislature can’t eviscerate the statute.

Where the President could influence enforcement is in the appointment of the AAG of the Criminal Division and the SEC Commissioners. Even then, Presidents are pretty wary of screwing around in that arena. Even then, remember, most DOJ prosecutors are career people. They don’t care about and don’t consider politics.

Finally, most DOJ and SEC actions come from self-disclosure. Disclosure is recommended by counsel, whose financial interest is best served by disclosure, not by suggesting a risky, don’t-disclose-because-Republicans-are-in-office attitude.”

I guess Soni thinks that the FCPA debate in this country has sunk to the level of the current Presidential election season. However, I would suggest that he read any of the FCPA commentaratti out there to see that there is reasoned debate going on between reasonable people with different points of view. And even though National Football League training camps opened last week, I see no evidence that the FCPA is or will become a political football.

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, 2012

July 3, 2012

Amendment to the Foreign Corrupt Practices Act – Another Perspective

Ed. Note-today we have a guest post from our colleague Stephen Clayton. The following is a synopsis of his article published by ACC and a copy of this was sent to the relevant House and Senate committees dealing with proposed amendments to the FCPA. 

Proposals for and against amending the Foreign Corrupt Practices Act, the US Federal law against government bribery in international business, have been percolating for the past 18 months. US Chamber of Commerce took a lead role, sponsoring a paper titled “Restoring Balance” in October 2010, advocating the position that substantial amendments to the FCPA are required to promote international business by US companies. Other groups have taken positions opposing any revisions that would weaken the FCPA or impede enforcement. The main arguments against the Chamber’s proposed amendments were set out in “Bursting Bribery” published in September 2011 by the Open Society Foundations. The possibility of amendments has prompted the Department of Justice to commit to issuing some form of written “Guidance” within the next few months. All parties profess to agree with the basic reason the FCPA exists:  bribery in international business is a serious crime that should be deterred and punished.

The Chamber is promoting 5 amendments which, taken as a whole, would make it significantly more difficult for the DOJ and SEC to enforce US criminal law against bribery in international business by US corporations.  The advocates on the other side are opposing the Chamber’s proposals, but not advocating significant amendments of their own. Status quo is to leave the FCPA as–is and enforcement to the fairly broad discretion of the Department of Justice and SEC.

In reviewing the positions of both sides, neither side has mentioned several potential amendments that would make the law more certain for US business people and promote the goal of reducing corruption in international business.  Indeed the proposals in “Restoring Balance” would require complex new definitions and rules which will make the FCPA even more confusing and difficult for US business people to understand.  Congress should consider common sense changes that reduce the potential for confusion by US business people and eliminate or modify poorly written provisions of the 35-year-old FCPA. This article discusses 6 amendments that would make the law easier for US business people to understand and help US companies create and run meaningful FCPA compliance programs.

1. Eliminate the Exception for Facilitating Payments.
The FCPA contains an exception for low-level bribes euphemistically called “facilitation payments.”  Facilitation payments are bribes. This exception creates the illusion minor bribery of employees of foreign governments by US companies and their agents can be “legal.” The exception for facilitation payments creates serious confusion for business people because it gives them the impression that some bribes are permitted under US law, but it can be difficult in practice to determine which bribes Congress considers tot be “legal.” The facilitating payments exception is offensive to normal ethical standards of corporate governance and should not exist.
2. Eliminate the affirmative defense for bribes that are “lawful under the written law or regulation of the country.”

No country has written law that permits conduct that is illegal under the FCPA. But business people and non-specialist lawyers see this language in the statute and think it must have some meaning.  They are forced to guess which types of bribes Congress considers to be “legal.” What difference does it make to good corporate governance if a country rigs its laws to allow bribery of members of its royal family or specific government employees?  This affirmative defense is meaningless and confusing and there is no reason for it to remain in the law.

3. Amend the FCPA to add Provisions Making Commercial Corruption a Federal Crime.

This is the most important change and would make the FCPA easier for US business people to understand. A major flaw of the FCPA is it makes it a crime to bribe only certain people, i.e. “foreign officials” including employees of “instrumentalities” of foreign governments.  Writing the FCPA this way gave rise to the idea among US business people and lawyers that bribes to other people can be paid legally and ethically.

It is a waste of time to argue whether Congress intended this result, though it has been the cause of a vast amount of discussion at conferences over who is a government official and what is an instrumentality. Congress should recognize the fundamental error and put an end to any confusion by simply amending the FCPA to criminalize all bribery of anyone in international business.

After all, when a bribe is paid by one US company (or a UK, German or Chinese company) to an employee of a foreign telecommunications company to win a bid and three other US companies which competed honestly and bid on that project lose to the briber, it does not really matter to the losing US companies whether the foreign telco was 49% or 51% owned by a government. The honest US companies still lost business due to bribery.  If the FCPA covered all bribery, no one will ever need to ask the bogus questions about whether a person is a “government official” or whether an entity is an “instrumentality.”

The FCPA should be stated in simple terms all business people can understand: It is a crime to bribe anyone. By making this change Congress would also recognize the current status of US business ethics. Nearly all US public corporations already have internal ethical codes of conduct that prohibit commercial bribery, and all corporate anti-corruption training orders employees to not bribe anyone.  So amending the FCPA to include commercial bribery involves no change of existing practice for US companies or their management or employees.
4. Add a UK style strict liability crime of failure to prevent bribery to the FCPA and a corresponding affirmative defense for proving an adequate compliance program.

The UK Bribery Act came into effect in July 2011 and contains a new crime that does not exist in the FCPA: Failure by a business organization to Prevent Bribery.  It is a strict liability crime: if bribery occurred in a company’s business, the company has violated this law. Due to the strict liability aspect of the crime, the UK government provided an affirmative defense – if the company can prove it had in place adequate processes to prevent bribery before the bribery occurred, it could avoid liability for this specific crime.  Congress should consider amending the FCPA to incorporate this UK innovation in legislation against corruption in international business.  Adopting the UK ‘s  “failure to prevent” legislation would make the prohibitions of the FCPA and US expectations about compliance programs much more clear to US business people.

Adding a “compliance defense” to the FCPA without simultaneously adding the new crime of failure to prevent bribery would not make sense.  A compliance defense would simply weaken the FCPA, undermine its basic tenants and create a new area of litigation around whether a company that had profited from bribery is nevertheless entitled to a defense based on it’s failed compliance program.  Courts will be called on to determine whether a compliance program was “robust” or ”state-of–the-art.”  That is not simple to understand or good for business.

It is already clear under the Federal Sentencing Guidelines that a company will get credit for a compliance program. That has been true for many years, but most companies have not put in place FCPA compliance programs that implement the DOJ’s clear guidance. Any US company that spends a modest amount of time researching the FCPA and examining its business practices can readily determine what elements it needs to have in place to have in an “adequate” FCPA compliance program.

5. Add provisions to the FCPA to make it clear that a Parent Company is Responsible for the Violations of its Subsidiaries.  

Managers of US companies know that they create, manage and are responsible for their company’s subsidiaries. Subsidiaries are created and exist to generate profits and provide business advantages to the parent company. Subsidiaries should not be a convenient and easily manipulated shield from criminal liability, and US law must be clear on that point.  Companies with average FCPA compliance programs apply their program to all of their domestic and international subsidiaries. Business people in those companies would be surprised if someone told them US law allowed their company to create a subsidiary that could engage in activities that might violate the FCPA and ignore the company’s ethical rules.  They would be surprised if the law shielded the parent company from liability even if a subsidiary engaged in criminal activity.  Relaxing the FCPA for subsidiaries adds to the list of gray areas in which unethical people can argue that Congress intends that certain types bribes are legal.  To the extent it is not already clear, the FCPA should be amended so US business people understand that the parent company is responsible for the bribery, corruption and false records of any of the company’s subsidiaries.
6. Widen the scope of the FCPA’s “reasonable and bona fide expenditures” affirmative defense.

It is important for US companies to be able to engage normal sales and marketing operations. The FCPA should clearly promote this. The current language of this affirmative defense for is poorly worded and unnecessarily restrictive. It limits bona fide business expenditures to those “directly related to the promotion, demonstration or explanation of products or services; or the execution or performance of a contract…” That limitation is not necessary and is confusing to business.

In general, US businesses should be able to defend themselves against charges of FCPA violations if they can prove the payments they made were reasonable and bona fide business expenses done for a substantial, legitimate corporate business purpose.

The 7th Point:  Successor Liability 

Congress should reject proposals to weaken successor liability. Restricting successor liability would permit companies to retain the profits derived from intentional, clearly illegal corrupt activity. If companies know they will be able to keep the profits from the bribery of the business entities they acquire, they have no incentive to take reasonable measures to detect bribery prior to an acquisition. Limiting successor liability would provide a perverse incentive for sellers of businesses to conceal conduct which might be illegal and for buyers to refrain from engaging in rigorous due diligence.  Due diligence by US companies in international acquisitions is already weak.  The burden, cost and legal liability for the corrupt activity should be on the company that engaged in the corruption in the first place and later sold its business – and the purchaser who enjoys the increased value and ongoing profits derived from the illegal conduct also needs to be subject to prosecution and required to disgorge the profits of bribery.

The FCPA has been in place for 35 years, though minimal enforcement of the law only started in the Bush II administration. The FCPA set the international standard for criminalizing bribery in international business. In the 21st century, bribery in international business is still common and widespread, and based on the high level of corruption, the current enforcement efforts of the DOJ and SEC are still at a low level that most US companies can ignore. Most US business people still do not consider bribery by a US company in Russia, China or Brazil to be a “real” crime. There is no reason to change US legislation to make it more difficult for the government to prosecute acts of bribery or falsification of corporate records by companies or individuals.

Some changes to the FCPA are warranted to remove obsolete provisions such as the exception for facilitation payments and the affirmative defense of legality. The scope of the FCPA should be widened to include all bribery in international business, so companies do not have to be concerned with whether a person is a “government official” or a company is an “instrumentality.”  US corporations already have internal rules prohibiting all bribery, government or commercial, in their operations and those of all their subsidiaries – the FCPA should follow the sensible lead of business in this regard.   To the extent it is not already clear, Congress should provide that parent companies are responsible for the unlawful activity of their subsidiaries.  These changes would make the FCPA easier for corporate management to understand, and benefit ethical and compliant US companies.


Stephen Clayton can be reached at stephen@stephenclaytonlaw.com.


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

March 2, 2012

The Big Dipper, Texas Independence Day and FCPA Effect on Competitiveness

We conclude our sports themed week by noting today is the 50th anniversary of Wilt Chamberlain’s 100 point game. Wilt (aka the “Bigger Dipper”) went 36-63 from the field and an astonishing 28-32 from the free throw line on that night. The out-of-this-world performance was the highlight of a season in which he went on to average 50.4 points and 25.7 rebounds per game. In any sport, by any measure, it is one of the greatest individual performances of all-time. Unfortunately the game, played between the (then) Philadelphia Warriors and the New York Knicks, was played in Hershey, PA, and there was not a television broadcast or even surviving radio broadcast; only a few black and white photos exist and masses of mystique. I would also note with pride that today is Texas Independence Day. 176 years ago, on March 2, 1836 Texas declared its independence from Mexico. On April 21, 1836, Texas won its independence from Mexico at the battle of San Jacinto but that, as they say, is a story for another time.

This past week I received the March issue of the Harvard Business Review (HBR). The issue is titled “Special Report-Reinventing America-Why the World Needs the U.S. to Bounce Back”. I read the entire issue cover-to-cover. As I went through the content, subtitled appropriately enough “Special Report-Restoring U.S. Competitiveness”, of all the things that I read about, from the smallest news piece filler to the longest article, I did not see one mention that the US needs to amend the Foreign Corrupt Practices Act (FCPA) to become more competitive in today’s world.

The lead article was by Michael Porter and Jan Rivkin, entitled “The Looming Challenge to U.S. Competitiveness”. The authors reviewed five general areas they believe speak to this issue; none of which comes close to accusing the FCPA of making the US non-competitive in the global market. A review of these might well point our lawmakers to enact some legislation to actually help competitiveness, instead of making political theater over the FCPA.

What is Competitiveness?

The authors focus on long-term productivity and state that “Only by improving their ability to transform inputs into valuable products and services can companies in a country prosper while supporting rising wages for citizens.” This is not job creation but more production, generating high-wage employment growth, attracting foreign investment capital and fueling sustainable growth.

Does the US have a Competitiveness Problem?

The authors argue that the US problems are not cyclical but are more structural. They present five areas of concern to demonstrate the US problem regarding being competitive:

  1. Productivity – The productivity growth experienced in the 1990s has not only dropped off but well before 2008 it dropped below other countries.
  2. Job creation – Here the authors point out that long term job “growth in private-sector employment has dipped to historically low levels.”
  3. Wages – While median wages grew 0.5% from 1987 to 2007, they have declined since that time.
  4. International trade and investment – Growth of US inbound foreign direct investment has slowed in recent years to less than those of other advanced countries.
  5. Outlook of managers – In a survey of 10,000 Harvard Business School alumni, the authors found that 71% “foresaw a decline in US competitiveness.”

Cracks in the Foundation

Here the authors speak to the macro components of competitiveness. The macro arena requires sound monetary and fiscal policies, strong human development and effective political institutions. The authors believe that there are problems with all three. The debt is at an all-time post WWII high; health care and primary education do not reflect the large sums of money spent on them; and a polarized and paralyzed political system, at least at the federal level.

How Did America Get Here?

The authors believe that there are five key reasons the US has lost is competitive mojo. They are intertwined and “stem from changes in the world economy as well as failures within America itself.”

  1. Increasing global options – Interestingly the authors opine that the US troubles started with the collapse of communism. These formerly “decrepit” markets began to attract new foreign investment capital away from the US. The increase in connectivity across the world has allowed the Top 20 US companies to base more than 58% of their total assets outside the US.
  2. Shortened time horizons in business and government – Stockholder value, the bane of many a corporate manager who has to focus his targets only on the next quarter. The same is true for politicians, except that it is even shorter-the next news cycle. “Nuf said.”
  3. Middle class pressure, inequality and unsustainable promises – Middle class jobs have been going, going, gone since the 90s and there has been nothing sustainable in the employment arena to replace them. Job training is continually promised but it has not had continued success. Paradoxically, the need for, and compensation of, highly skilled professionals has increased and compensation has raced far ahead of average workers causing vast wage inequality.
  4. Hobbled government – No one can conclude anything but that our (federal) government is broken, broken, broken. This is coupled with the time when there needs to be serious dialogue and reform in several areas; deficit reduction, tax code revision, funding of education and health care, and revitalizing of infrastructure. However, even the most basic things are now stuck in a polarized system on inaction in Washington.
  5. Vicious and virtuous cycles – Here the authors cite the current examples of US companies who take work overseas for many of the reasons listed above. This income generated overseas does not come back to the US Treasury in the form of tax revenues as the companies do not repatriate this money but their incomes and stock prices increase. All of this causes a public backlash and it makes passing legislation through an already polarized Congress all but impossible.

Call for Action, Not Despair

Nevertheless, much like Clint Eastwood, the authors are not ready to throw in the towel. In addition to remaining “fundamentally optimistic about America’s economic future” they also note that each state can play a role in a competitiveness comeback. After all, we are a country of 50 different laboratories for experimentation and regional and local leaders “can take step needed to boost competitiveness without relying on Washington.”

So, how about March 2, and the anniversaries of the Big Dipper’s century and Texas Independence Day? Wilt’s performance is one for the ages. But simply because it was done 50 years ago does not mean that it cannot be replicated at some point in the future. Borrowing from Clint Eastwood just a bit, if Detroit can make a comeback regarding competitiveness, then so can the rest of the country. And Texas Independence Day? It is one of those Justice Holmes monikered 50 laboratories of experimentation regarding competitiveness. If the federal government cannot get off its collective backside to increase US competitiveness, regional, state or local authorities could well take the lead.

None of these solutions discussed in the Porter and Rivkin article, or indeed the entire March issue of the HBR require FCPA amendment, tinkering, reform or any other change to the law to make American companies more competitive. If the House or Senate Judiciary Committee is truly concerned with US competitiveness, they could do no better than doing some reading on the real issues, starting with the March issue of the Harvard Business Review.

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, 2012

January 12, 2012

When the FCPA Professor Writes, You Should Read It

As many compliance practitioners are aware, the FCPA Professor (in real life, Professor and Ironman Triathlete Mike Koehler) writes a daily blog on all things relating to the Foreign Corrupt Practice Act (FCPA) from the legal perspective. It is a great resource and one that you should put on your daily reading list. However, as a professor he also writes lengthier, law review articles, with his in-depth analysis and commentary. This month we are treated to an excellent law review article entitled “Big, Bold and Bizarre: The Foreign Corrupt Practices Act Enters a New Era”. Coming in at a hefty 50 pages, it is his analysis and commentary of “using 2010 FPCA enforcement actions, related developments and how big FCPA enforcement has become.” It is an excellent and most welcomed resource for the compliance practitioner who needs a solid review of where the FCPA enforcement year has been and what it may portend for the future.

The Professor divides his article into four parts. In Part I, he reviews the specifics of FCPA enforcement in 2010, what he terms the “big, bold and bizarre.” In Part II, he reviews the increased scrutiny of the FCPA, by courts who faced increased legal challenges due to increased individual prosecutions, Congressional scrutiny and business and legal commentary. In Part III, he reviews some legal developments related to the FCPA, such as Dodd-Frank and debarment legislation. In Part IV, he takes a look at the FCPA road ahead.

Big, Bold and Bizarre

A. Big. The Professor lists some of the raw numbers generated through FCPA enforcement actions. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) garnered almost $1.8 billion in fines, penalties and profit disgorgement through FCPA enforcement actions.
B. Bold. Here the Professor recounts that the DOJ “continued to push the envelope as to enforcement theories in two specific areas.” The first is regarding the definition of who is a ‘foreign official’ under the FCPA and the second revolves around the interpretation of “obtain or retain business” and facilitation payments under the FCPA.
C. Bizarre. Here the Professor looks at both general fact patterns and some specific enforcement actions. Generally, he notes that in the majority of DOJ enforcement actions, the eventual DOJ fine or penalty was at an “amount below the minimum range suggested by the [US] Sentencing Guidelines.” He also discussed some of the specific matters he believed had “bizarre patterns” such as Innospec, BAE, Digi International and the Giffen prosecution.

Increased Scrutiny

While noting that the increased scrutiny actually began in Q3, 2009 with the release of the Chamber of Commerce Whitepaper and Senate Judiciary Committee hearing, 2010 brought a more thorough debate in both Congress and the private sector. This included the House Judiciary Committee hearing in June as to whether the FCPA should be made less robust to facilitate job creation, judicial scrutiny in the form of some high profile individual prosecutions, where federal district courts had to directly confront challenges to the FCPA on what are ‘instrumentalities’ under the Act and who is a foreign governmental official. In the private sector, the Chamber of Commerce kept up its attack on the FCPA as anti-competitive and there was also bar and NGO commentary on the FCPA.

FCPA Related Developments

Obviously the passage of Dodd-Frank had a very large impact on the 2010 FCPA discussion. The Professor noted that “Many predict that Dodd-Frank’s whistleblower provisions will greatly increase the number of FCPA enforcement actions.” In addition to his Dodd-Frank discussion, he reports on the passage of the ‘Overseas Contractor Reform Act’ by the House, which would have debarred any company from doing business with the US government if it sustained a final judgment of a FCPA violation. However, the legislation was not passed by the Senate so it died in the last session.

The Road Ahead

The Professor concludes his article by noting that “the years ahead will likely see more of the same big, bold and bizarre developments as 2010.” One development he believes should continue is the increase in the scrutiny of the FCPA, both by Congress and continuing review and commentary by others, such as the Professor (and I). While noting that some have viewed discussion about FCPA reform as akin to “paving the way for business to go on a bribery binge”; the Professor clearly believes in the value of continued discussion and debate on how to achieve the goals of the FCPA is appropriate and necessary.

The article is well worth your time to read and see where we have been and where we might be going. If you needed one article to give you the information to provide to management on FCPA enforcement, trends and commentary from last year; this is it. While you may, or may not, disagree with the Professor’s conclusions, you cannot have a better resource from which to review the facts.

The FCPA Professor’s website has several nifty features, one of which is a Jobs Board
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, 2012

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.

December 6, 2010

Congressional Hearings for Amendment of the FCPA

Filed under: Amendments,FCPA,FCPA Professor — tfoxlaw @ 6:24 pm
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At what the FCPA Blog termed “an unprecedented investigation into the Department of Justice’s (DOJ) enforcement of the Foreign Corrupt Practices Act (FCPA)”, on November 30, 2010, at a hearing entitled the “Examining Enforcement of the Foreign Corrupt Practices Act” before the US Senate Judiciary Committee, Subcommittee on Crime and Drugs, three panelists, Butler University Professor Michael Koehler, author of the blog, the “FCPA Professor” and attorneys Andrew Weissmann of the firm of Jenner and Block and Michael Volkov, of the firm Mayer Brown, presented proposed changes to the FCPA. The witnesses all believe that the changes are required (1) to bring FCPA enforcement into line with Congressional intent; (2) to bring a more balanced approach in providing incentives to companies to comply with the law; and (3) to bring greater certainty and fairness to statutory interpretation and enforcement.

The hearing began with the Subcommittee Chairperson, Senator Arlen Specter, questioning the DOJ’s policy of obtaining large fines from corporations, rather than prosecuting individuals, to deter violation of the law. He specifically cited the example of the enforcement action against Siemens Corp., which resulted in a fine of $1.6 billion, yet had no individual prosecutions. He also pointed to the examples of BAE which paid a fine of $400 million and the Daimler Corporation which paid a fine of $185 million and subsequently there have been no individuals prosecuted from either of these corporations. Senator Specter posed the question to the DOJ representative at the Hearing, Greg Andres, as to whether the imposition of fines simply was viewed by companies as a cost of doing business.

Professor Koehler focused on two issues; (1) the lack of individual prosecutions and (2) what he believes is an over-expansive definition of foreign governmental official. In reviewing the DOJ’s claim of significant individual prosecutions, Professor Koehler testified:

Twenty-two individuals have been in one case, the so-called Africa [Gun] Sting case, in which FBI agents (posing as representatives of the President of Gabon with the assistance of an individual who had already pleaded guilty to unrelated FCPA violations) facilitated fictitious business transactions largely involving owners and employees of military and law enforcement products companies; and

Twenty-four individuals are or were in cases where the recipient of the alleged payments was not a bona fide foreign government official.

Additionally, the DOJ’s theory of prosecution was based on the claim that employees of alleged [state-owned enterprises] were “foreign officials” under the FCPA – an interpretation Professor Koehler believes is contrary to Congressional intent. Prosecuting individuals is a key to achieving deterrence in the FCPA context and should thus be a “cornerstone” of the DOJ’s FCPA enforcement program. He argued that the answer is not to manufacture cases, or to prosecute individuals based on legal interpretations contrary to the intent of Congress in enacting the FCPA while at the same time failing to prosecute individuals in connection with the most egregious cases of corporate bribery.

Attorney Michael Volkov advocated the adoption of a limited amnesty program for corporate self-compliance with the FCPA. Volkov’s proposal consists of the following elements:

1. A participating company agrees to conduct a full and complete review of the company’s FPCA compliance program for the five previous years.
2. This internal review is to be conducted jointly by a major accounting firm or specialized forensic accounting firm and a law firm.
3. The company agrees to disclose the results of the legal-accounting audit to the DOJ, Securities and Exchange Commission (SEC), its investors and the public.
4. If the company discovers any FPCA violations in the audit, the Company agrees to take all steps to eliminate the violation(s) and implement appropriate controls to prevent further violations.
5. The company would subject itself to an annual review for five years to ensure that FCPA compliance was maintained.
6. The company would retain a person similar to an independent FCPA compliance monitor who would annually certify to the DOJ and SEC that the company was in FCPA compliance.
7. In exchange for this, both the DOJ and SEC would agree not to initiate any enforcement actions against a company during this period except in the situation where a FCPA violation was found and it “rose to flagrant or egregious levels.”

Attorney Andrew Weissmann testified about 2 of his 5 proposed amendments to the FCPA (the full five proposed amendments are set out in Whitepaper entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act). They were to create a compliance defense available to a company if it has an adequate compliance program, similar to the “adequate procedures” defense available under the UK Bribery Act.

Under this proposal, Weissmann believes that companies will increase their compliance with the FCPA because they will now have a greater incentive to do so. He envisions a defense similar to the “adequate procedures” defense, noted in the UK Bribery Act, where companies will be protected if a rogue employee engages in corruption and bribery despite a company’s diligence in pursuing a FCPA compliance program; and lastly “it will give corporations some measure of protection from aggressive or misinformed prosecutors, who can exploit the power imbalance inherent in the current FCPA statute—which permits indictment of a corporation even for the acts of a single, low-level rogue employee—to force corporations into deferred prosecution agreements.”

Weissmann stated that the institution of a compliance defense will bring enforcement of the FCPA in line with US Supreme Court precedent, which has recognized that it is appropriate and fair to limit the legal doctrine of respondeat superior liability where a company can demonstrate that it took specific steps to prevent the offending employee’s actions. Wiessmann argued that businesses may similarly be dissuaded from instituting a rigorous FCPA compliance program for fear that the return on such an investment will be only to expose the company to increased liability and will do little to actually protect the company. A FCPA compliance defense will help blunt this. He concluded by noting “It is unfair to hold a business criminally liable for behavior that was neither sanctioned by or known to the business. The imposition of criminal liability in such a situation does nothing to further the goals of the FCPA; it merely creates the illusion that the problem of bribery is being addressed, while the parties that actually engaged in bribery often continue on, undeterred and unpunished. The FCPA should instead encourage businesses to be vigilant and compliant.”

Other commentators have noted that the doctrine of respondeat superior puts a company at a great disadvantage in any FCPA enforcement proceeding. In a blog post entitled, “Quiz Time Answer”, the FCPA Professor explained:

Individual FCPA defendants tend to work for companies. Under respondeat superior theories of liability, the company is going to have a very difficult time “distancing” itself from its employees conduct.

The FCPA Blog went further, opining that the doctrine of respondeat superior “does more harm than good” and that corporations are “defenseless once employees are found to have committed [FCPA] violations” in an enforcement action because of the doctrine of respondeat superior. In a blog post entitled, “Naked Corporate Defendants”, the FCPA Blog said:

Sure, it produces a 100% corporate “conviction” rate in FCPA cases, which must go down well at the Justice Department. But, it probably doesn’t deter illegal behavior or encourage better compliance programs. And it puts overwhelming pressure on organizations to resolve threatened criminal cases. Because of the catastrophic effects of any potential conviction, companies have to settle with the government. So they rush into agreements that may require them to waive the attorney–client privilege, hand over employees’ private documents and data, cut off support for their legal defense, and fire those who don’t cooperate with government investigations.

At this point the debate is only beginning. The FCPA Blog commented, “DOJ stuck to its script. That didn’t include talking about what might be wrong with the FCPA and the way it’s enforced. But at some point, maybe soon, the DOJ will either be inside the tent, working with others to fix the FCPA in the best ways possible, or outside the tent and looking in.” We can only watch, wait and hope that the DOJ will seriously consider some of this commentary and others that may portend the need for an amendment to the FCPA.

For a copy of the prepared statement of Professor Koehler, click here.

For a copy of the prepared statement of Andrew Weissmann, click here.

For a copy of the prepared statement of Michael Volkov, click here.

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, 2010

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