The following commentary is by Main Justice CEO Mary Jacoby.
Forbes magazine published a cover story this week accusing Justice Department prosecutors of ginning up Foreign Corrupt Practices Act cases to enrich themselves.
A valid story questioning the high costs to corporations of FCPA investigations and compliance was marred by innuendo and unsupported allegations that Justice Department lawyers had ramped up anti-bribery enforcement merely to make big bucks when they leave government.
“What are these prosecutors accomplishing? Maybe they are fighting for truth and justice,” Forbes reporter Nathan Vardi wrote. “Maybe, that is, it makes sense for the U.S. to hold its corporations to a higher standard of integrity than the French or Chinese outfits they compete against when trying to win business abroad.”
So, Forbes is saying that U.S. competitiveness is enhanced by operating on the same low ethical plane as corrupt Chinese companies? Interesting argument.
Yes, it is true that U.S. businesses can lose contracts to foreign companies with no constraints on bribing public officials. That’s a really old debate — as old as the 1972-74 Watergate scandal whose revelations of corporate slush funds for bribing overseas officials helped lead to enactment of the FCPA in 1977.
The Forbes magazine spread depicts Former Justice Department FCPA Chief Mark Mendelsohn as part of a bribery "racket." (Forbes)
It’s also true that some former DOJ Criminal Fraud Section lawyers have gone on to lucrative FCPA-related jobs in the private sector. (Stop the presses, there’s a revolving door in Washington!) But the Forbes piece becomes unhinged in its portrayal of increased FCPA enforcement as nothing but an extortion racket intended to make millionaires of prosecutors.
Prosecutors are “creating a lucrative industry – FCPA defense work – in which they will someday be prime candidates for the cushy assignments,” Forbes wrote. “[T]here is nothing to stop prosecutors from ginning up cases that will feed the lawyers who used to have their jobs or from looking forward to a payday in the private sector that will be made possible by their busy successors at Justice.”
This analysis ignores the long history of U.S. anti-corruption efforts, the consensus among developed countries about the corrosive effect that public corruption has on living standards in poor countries, and the distorting effects on markets when contracts are awarded not on merit, but on the basis of who paid the biggest bribes to government officials.
We won’t get into this history – a terrific multimedia primer can be found here on PBS’s website, as a sidebar to journalist Lowell Bergman’s Frontline documentary on international bribery, “Black Money.”
To be sure, large companies with complex operations in many countries face a daunting task in keeping their noses clean. If an employee in a far-flung locale makes a grease payment to get a shipment through customs, or wines and dines officials to get business, it can bring the hammer of U.S. law enforcement down. It’s a genuinely tough position for a general counsel. Having a robust – and expensive – compliance program in place wins a company points if it ever does come under DOJ scrutiny.
Moreover, the wisdom of self-reporting violations in exchange for leniency from the government is increasingly being questioned, as relatively minor issues can spiral into situations where millions of dollars are paid to outside law firms and consultants to prove to the government the company has rooted out its problems.
Case in point: Avon. The cosmetics company voluntarily disclosed to DOJ bribes paid by employees in China. It expects to spend $28 million cleaning up after the disclosure, Forbes wrote. We expect to see much more debate about self-reporting in the future.
But the Justice Department portrayed by Forbes isn’t the one I know. Most prosecutors love their jobs. They’re making under $200,000 a year. Why do many stay well into their working primes, when they could make millions outside the government? Many are idealists who believe they’re making the world a better place. Their work is fun and mostly rewarding.
The Forbes story opens with an anecdote about former Criminal Fraud Section prosecutor Billy Jacobson. In 2007, when Jacobson was an assistant chief enforcing the FCPA, oil services firm Weatherford International informed the DOJ that its employees may have paid bribes in Europe. Weatherford hired Fulbright & Jaworski LLP to assist in the FCPA probe. Jacobson left DOJ to join Fulbright as a partner working on Weatherford’s compliance. Then, he left for Weatherford itself, making something short of $4 million a year, Forbes reported. Weatherford, in turn, paid Fulbright and other firms $106 million in connection with the bribery probe and other issues, Forbes reported.
Nailed, right? While it would be naïve to dismiss the lure of a staggering salary, there are other explanations for Jacobson’s departure from government. People who know Jacobson said he wanted to rise to deputy chief overseeing the FCPA. That wasn’t happening, because Mark Mendelsohn – the FCPA chief since 2004 – wouldn’t budge.
Mendelsohn finally left the Justice Department in April to join Paul, Weiss, Rifkind, Wharton & Garrison LLP as a partner earning as estimated $2.5 million a year.
Why did Mendelsohn leave? Word on the street is that he knew he didn’t have a chance of rising higher in the DOJ under the Obama administration. He started looking for a private-sector job in late 2008, but didn’t actually make the leap until this month. If Mendelsohn’s goal was to cash out, why did he delay a year? Many top law firms were vying for him. Is it possible he just loved his government job too much?
Other fraud section lawyers left this year because they were nudged out by Criminal Division Chief Lanny Breuer, who wanted to put his own team in place and bring new blood into the section. Yes, they went on to lucrative law firm jobs. But to say they pursued aggressive law enforcement over long DOJ careers simply to feather their nests strikes me as a pretty low blow.
Read the full Forbes story here.
Bethany Hengsbach is a partner in the government contracts and regulated industries practice group in the Los Angeles office of Sheppard Mullin Richter & Hampton LLP. She spoke with Main Justice’s editor Mary Jacoby by telephone from Shanghai, China on April 16.
Bethany Hengsbach
Among the topics discussed: Enforcement of the U.S. Foreign Corrupt Practices Act against companies doing business in China; the Daimler AG case; the decision by Avon Products Inc. to suspend several Chinese employees after disclosing to U.S. authorities an internal bribery investigation; internal Chinese anti-bribery laws; and the conflict for Western companies doing business in a culture where officials often expect to receive entertainment and gifts.
NEW YORK — The two public faces of Foreign Corrupt Practices Act enforcement hammered home the well-worn messaging about their agencies’ commitment to the law at a conference Tuesday morning.
Mark Mendelsohn, a Deputy Chief in the Justice Department Criminal Division’s Fraud Section, and Cheryl Scarboro, an Associate Director in the Securities and Exchange Commission’s Enforcement Division, touched on a number of issues regarding the FCPA, but the overall message was nothing new: FCPA enforcement is now a priority and it will continue to be.
Deputy Chief Mark Mendelsohn (Christopher M. Matthews / Main Justice)
“There will be a coordinated and a more proactive approach to going out and finding violations,” Scarboro said.
“The department places a significant and high priority on its FCPA program,” Mendelsohn added. “You can see that commitment in the prosecutions we’re bringing and the resources we’ve dedicated to enforcement.”
The two FCPA chiefs appeared at the National Forum on the Foreign Corrupt Practices Act. The ubiquitous conferences offer the government a chance to spread the FCPA gospel to the corporate compliance officers, private practice lawyers and members of the media who attend such events.
After some opening remarks from Lucinda Low, a partner at Steptoe & Johnson LLP, Scarboro spoke about the SEC’s FCPA program.
In August, Robert Khuzami, the head of the SEC’s Division of Enforcement, announced the creation of specialized teams dedicated to specific enforcement areas. Scarboro was selected as the FCPA team’s head.
Cheryl Scarboro (SEC)
Scarboro said her FCPA team was up and running and the team’s assistant directors had already been hired. She said the team’s staff size would number between 25 and 30, and they will be in place in the next two weeks.
According to Scarboro, having lawyers dedicated solely to FCPA enforcement will be a marked improvement.
“This is a new thing for us, because in the past, staff attorneys investigated all kinds of things as they came through the door,” she said. “The dedicated staff involved in these cases will have a chance to learn the nuts and bolts.”
Scarboro said that members of the FCPA team would be located all over the country. Fort Worth, Texas; Boston; Los Angeles and San Francisco will receive substantial resources, though the FCPA team’s largest presence will be in Washington, D.C, Scarboro said.
Scarboro also indicated that the SEC would follow DOJ’s lead in targeting specific industries for enforcement, but she declined to specify which industries.
The Justice Department has already publicly said that it will scrutinize the pharmaceutical and telecommunications industries. After February’s announcement of the sting case — in which 22 executives in the defense and law enforcement industries were indicted for FCPA and other charges — many speculated the department had set its sights on another industry. Mendelsohn confirmed those suspicions this morning.
“We’re obviously taking a hard look at the defense and law enforcement products industry, and I think you can expect more [targeted enforcement] going forward,” Mendelsohn said.
As for the sting case itself, Mendelsohn said it would not be surprising if some of the cases went to trial in the next year.
Mendelsohn also discussed a number of trends in the department’s FCPA enforcement. He said the DOJ was targeting certain types of individuals for FCPA-related prosecution, among them — mid to high-level executives, third party contractors, and in some cases, the actual foreign officials who accepted the bribes.
In response to a question about the DOJ’s recent settlement with BAE Systems, Mendelsohn said that it does consider collateral consequences when structuring settlement agreements.
Earlier this month, BAE pleaded guilty to failing to maintain an adequate anti-corruption compliance program. But the company did not plead to any FCPA charges, despite widespread allegations of bribes paid by the company. At the time of the settlement, many speculated that the FCPA charges were left out because BAE could face debarment in Europe. Mendelsohn also seemed to confirm that Tuesday.
“There is a growing recognition that the [European Union] debarment requirement presents particular challenges for companies trying to settle cases,” Mendelsohn said.
Mendelsohn and Scarboro also faced questions about what companies can gain from having extensive compliance programs when they self-disclose FCPA violations to the government.
Mendelsohn said he could provide only anecdotal stories on the value of compliance programs, not statistical data.
“Our principal mission here is prosecuting cases, not announcing ones that we don’t prosecute,” he said.
Scarboro said she could not provide details on when the SEC does not pursue companies that self-disclose, but that compliance programs were the first thing they looked at.
Mendelsohn also said the Justice Department strives for consistency in its plea agreements.
“There are good arguments, and then there are just arguments,” he said. “If you want to hearken back to a 1982 prosecution and suggest that what we’re doing now ought to relate very directly to the way that case was resolved, circumstances change.”
Charles James, the Justice Department’s antitrust chief under both Bush administrations, questioned the “secondary theories of liability” being used by the DOJ in the prosecution of foreign corruption in an interview with Corporate Counsel released Friday.
James discussed the theories in relation to an “oil for food” investigation that he settled in 2007 while working for Chevron. On Thursday, Chevron announced that James was retiring as an executive vice president at the company.
In November 2007, Chevron agreed to pay $30 million to settle allegations that it had violated the Foreign Corrupt Practices Act during its participation in the United Nations’ oil-for-food program. In its complaint against Chevron, the Securities and Exchange Commission alleged that bribes had been made by the intermediaries who helped Chevron purchase 78 million barrels of crude oil from Iraq between April 2001 and May 2002. Chevron neither confirmed nor denied the charges in its settlement
In the interview with Corporate Counsel, James said that he was not sure if due diligence is enough to keep a company from being held liable for crimes committed by intermediaries in the company’s employ, and that he questioned secondary theories of liability — holding the company liable for actions taken by its employees or contractors — as a policy resolution.
Below is excerpt of the interview, click here to see the rest of it
Q: Let’s first talk about corruption. You settled an “oil for food” investigation in 2007 for $30 million. Do you think regulators sometimes interpret the FCPA too aggressively?
A: I’m certainly not going to say that prosecution of foreign corruption is inappropriate. We settled that case and put it behind us. But I continue to think we had a strong and worthwhile legal position. One of challenges in that space is that there are virtually no FCPA cases that get litigated. This was a case in which it was alleged that Chevron should have known the people it engaged in arms-length transactions with were giving money to the Saddam Hussein regime. Nobody ever said Chevron gave anyone a dime.
Q: That certainly puts the onus on companies to do due diligence on their intermediaries. Have you improved compliance during your time overseeing the function?
A: Yes, we have increased our due diligence in this and other areas. But I’m not altogether sure, if your conduct is going to be judged by what a person actually did, that you’re really protected by due diligence. That’s one of the risks in enforcement based on secondary theories of liability. I question that as a policy resolution but in individual cases you have to do what you have to do.
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The year is 1977. The place is Washington, D.C. The forum is the United States Congress. The 94th Congress, which ended its term on January 3, 1977, and the 95th Congress had received information and held hearings that revealed evidence of payments to foreign governmental officials and political parties by United States businesses. These were embarrassing revelations of payments of corporate funds to foreign government officials in excess of $300 million to secure some type of favorable action by that government or to prompt government functionaries to discharge their administrative or clerical duties. The industrial sectors cited by the legislative history included drugs and health care, oil and gas production and services, food products, aerospace, airlines and air services, and chemicals.1
These revelations were discussed by the Congress on a number of levels. On the level of international relations, while détente with the Soviet Union had commenced, the Cold War was still a fact of life. There was an active struggle for worldwide influence between the Soviet Union and the United States. The proxy war in Angola between troops from Communist Cuba, supported by the Soviets, and apartheid South Africa, supported by the Americans, was in its second year.
The fall of Saigon in 1975 and its concomitant negative effect on US prestige was still felt in Washington. It was by no means certain or even predicted that the Soviet Empire would implode in a dozen or so years. In that context, Congress stated that corporate bribery had foreign policy implications. It was embarrassing not only to the United States but also allied governments. The House Report cited scandals in Japan, the Netherlands and Italy, all as a result of corporate bribery. These scandals lent “credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations.”2
There were also ethical and business levels to the issue. Congress flatly stated the obvious: “The payment of bribes to influence the acts or decisions of foreign officials, foreign political parties or candidates for foreign political office is unethical. It is counter to the moral expectations and values of the American public.”3 These sentiments resonated in Washington in 1977. President Jimmy Carter’s credentials as an economic leader or the Commander in Chief of the Armed Forces may have been questioned, but his role as a proponent of moral and ethical behavior was an important part of his presidency. President Gerald Ford signed the Helsinki Accords on human rights, but Jimmy Carter elevated the principles contained in the Accords in importance during his term.4
Finally, on the pure business level, Congress concluded that the corrupt activity that had been presented was bad business. It skewed the economic transaction. Rather than quality, service, salesmanship, price, or other factors being rewarded, corruption was paramount. Exposure of such activity could also have negative consequences for the company involved. It could “damage a company’s image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas.”5
With this background, and in the wake of the domestic corruption uncovered in the Watergate scandal that resulted in felony convictions for Presidential advisors and the resignation of a sitting president, Congress chose to address the issue of foreign public corruption caused by US persons. Two methodologies were considered by Congress. One proposal would allow companies to continue to make payments to foreign governmental officials but require them to annually disclose such payments. Failure to disclose would be criminalized. The other proposal would criminalize the payments outright. Congress rejected the “name and shame” approach in favor of criminalizing both bribery and concealment.
The Act
The Foreign Corrupt Practices Act (FCPA) 15 U.S.C. §§ 78dd-1, et seq. was enacted in 1977. At the signing, President Carter emphasized his belief that corporate bribery was “ethically repugnant.”6 The statutory scheme of the FCPA, as amended, is divided into the antibribery and the accounting provisions. The antibribery provisions of the FCPA make it unlawful for a US person, certain foreign issuers of securities, as well as foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The accounting provisions require companies whose securities are listed in the United States to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.
Antibribery provisions
The Lay–Persons’ Guide to FCPA (The Guide), published by the United States Department of Justice, sets forth an easily understandable exposition of the antibribery provisions of the FCPA. The Guide lists five elements necessary to constitute a violation of the antibribery provisions. Those elements are: who, corrupt intent, payment, recipient and business purpose test.
Who
Who is covered by the antibribery provisions of the FCPA? The FCPA casts a wide net. It potentially applies to any individual, firm, officer, director, employee or agent of a firm, and any stockholder acting on behalf of a firm. Issuers are covered by the FCPA. An issuer is defined as any entity that has a class of securities registered pursuant to the Securities Exchange Act of 1934 or that is required to file reports under that Act.7.
This definition includes US publicly traded companies and foreign public companies that may be listed on US stock exchanges through the use of American Depositary Receipts. Domestic concerns are also covered by the FCPA. A domestic concern is not an issuer but any individual who is a citizen, national, or resident of the United States, as well as any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a state of the United States or a territory, possession, or commonwealth of the United States.8
In 1998, the FCPA was amended to broaden the jurisdiction over multinationals. US parent corporations (issuers or domestic concerns) may be held liable for the acts of their foreign subsidiaries if the US parent authorized, directed, or controlled the activity in question, as can US citizens or residents, themselves domestic concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.9
The 1998 amendments also expanded the jurisdiction over other foreign companies and nationals. If a foreign company or foreign national takes any action in furtherance of a corrupt payment within the territory of the United States, that person will be subject to the jurisdiction of the FCPA.10
The Department of Justice has taken an aggressive interpretation of this section to include not only the act itself but any circumstance that causes the act in the territory of the United States to be enough to confer jurisdiction.11 And the jurisdiction also extends to actions in the United States effected through the mails or other means of interstate commerce, as well as acts that occur in foreign countries without regard to means of interstate commerce.12
Corrupt intent
The act must be performed with a corrupt intent. If the payment is made for the purpose of:
1) influencing any act or decision of a foreign official in his official capacity;
2) inducing a foreign official to do or omit to do any act in violation of his lawful duty; or
3) inducing a foreign official to use his position to affect any decision of the government,
the element of corrupt intent is met.13
The Department of Justice has taken the position that the FCPA does not require that the corrupt act succeed in influencing the official receiving the payment. The offer or promise of a corrupt payment can constitute a violation.14
Payment
The FCPA prohibits paying or making an offer or promise to pay money or anything of value.15 Anything of value may be interpreted broadly to include travel, gratuities, physical gifts and even charitable contributions. The statue does not quantify the value of the payment. There isno statutory de minimus test for the payment.
Recipient
The FCPA prohibits the corrupt payments to a foreign official, foreign political party or official of such party or any candidate for political office, or a third party (such as an agent or joint venture partner) with knowledge that all or a portion of the payment will be given to one of the prohibited persons or parties. Unlike the UK Bribery Act, the FCPA was not intended to prohibit private foreign corruption. The FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.”16
There is no statutory exception to the definition of foreign official based on rank or position. The FCPA applies to any public official. Knowledge does not have to be direct. It may be inferred by all of the facts and circumstances. Willful blindness or reckless disregard is not a shield from the knowledge element.
Business purpose test
The FCPA prohibits payments made in order to assist the payor in obtaining or retaining business with, or directing business to, any person. Although the recipient of the payment may be a foreign official, the business does not have to be with a foreign government to satisfythe business purpose test. The Department of Justice warns that it will interpret “obtaining or retaining business” broadly.17
There is support for this position in the legislative history of the 1988 Amendments to the FCPA. [T]he reference to corrupt payments for ‘retaining business’ in present law is not limited to the renewal of contracts or other business, but also includes a prohibition against corrupt payments related to the execution or performance of contracts or the carrying out of existing business, such as a payment to a foreign official for the purpose of obtaining more favorable tax treatment. The term should not, however, be construed so broadly as to include lobbying or other normal representations to government officials.18
There are three circumstances in which acts otherwise prohibited by the FCPA will not constitute a punishable violation. A payment otherwise prohibited by the FCPA is permitted if it is a facilitating or expediting payment made to secure the performance of a routine government action by the recipient with regard to the award or continuation of business. This so called “grease payment” exception is limited to non-discretionary acts of the official. The FCPA further limits such a payment to one “which is ordinarily and commonly performed by a foreign official in: obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country; (ii) processing governmental papers, such as visas and work orders;(iii) providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across country; (iv) providing phone services, power and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration; or (v) actions of a similar nature.”19
The two other circumstances are affirmative defenses set forth in the statute. These affirmative defenses will shield the payor if the otherwise illegal payment was 1) lawful under the written laws and regulations of the recipient’s country or 2) a reasonable and bona fide expenditure,such as travel and lodging expenses incurred by or on behalf of the recipient and directly related to product promotion, demonstration or explanation or the execution or performance of a contract with a foreign government.20
In other words, there must be a valid business reason for the payment other than to influence the recipient in favoring or awarding business to the payor. The burden of proof for the affirmative defenses is with the person or entity that has been charged with a violation of the FCPA, i.e. that the payment met the requirements of the affirmative defense. A single violation of the antibribery provisions of the FCPA may place more than one person/entity in criminal and civil jeopardy. The business entity as well as its officers, directors,employees, agents, or shareholders acting on behalf of the entity may be penalized for a violation of the FCPA. Issuers and domestic concerns may be subject to a fine of up to $2,000,000. Natural persons who willfully violate the FCPA may be subject to a fine of up to$100,000 and imprisonment for up to 5 years. In addition, both the offending entity and natural persons acting on its behalf may be subject to civil penalties of up to $10,000 for each violation and be subject to other injunctive relief, such as a cease and desist order.21
For violations of the antibribery provisions, issuers are prohibited from indemnifying their natural persons who aresubject to criminal or civil fines.22
Accounting provisions
The accounting provisions of the FCPA are seemingly less expansive than the antibribery provisions but may be more troublesome. The accounting provisions require issuers to maintain certain records and adequate internal controls.23 The same definition of issuer is applicable to the accounting provisions as to the antibribery provisions, i.e. US publicly traded companies and foreign public companies that may be listed on US stock exchanges through the use of American Depository Receipts.
The maintenance of certain records required by the FCPA is commonly known as the “books and records” provisions. Each issuer is required to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”24 This provision makes it more difficult for a company to utilize slush funds or disguise payments to facilitate a violation of the antibribery provisions. There are no exceptions to this provision for materiality or for the facilitating payments exception or the affirmative defenses to the antibribery provisions of the FCPA.
Covered companies must decide how to record for their shareholders and the rest of the public payoffs to low level government functionaries, payments to foreign officials that would otherwise be illegal but lawful under the written laws and regulations of the recipient’s country, or even private nongovernmental bribery. These record keeping issues could be challenging. Issuers are also required to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization;(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to the differences.”25
This provision appears to be an attempt at statutory prophylaxis. It mandates that management know what is going on the company. Transactions must be approved by responsible authority.Assets can only be accessed with authorization. If proper controls are implemented, illegal payments become more difficult. But a knowing failure to implement such controls could result in liability.
Both of the accounting provisions are applicable to 50% or greater foreign subsidiaries and joint ventures. For foreign subsidiaries and joint ventures in which the issuer has a lesser interest, the issuer must make a “good faith” effort to ensure compliance with the accounting provisions.26 A willful violation of the accounting provisions of the FCPA can result in criminal fine of up to $25,000,000 for an entity. An individual may face a penalty of a $5,000,000 fine and imprisonment for up to 20 years.27
On the civil side, a violation of the accounting provisions can result in a civil penalty of up to $50,000 for entities or up to $100,000 for individuals as well as accountings, cease and desist orders and disgorgements. Like violations of the antibribery provisions, issuers are prohibited from indemnifying their natural persons who are subject to criminal or civil fines for violations of the accounting provisions.
Why it matters
In this period of globalization, many entities other than recognized multinationals are taking the first steps in doing business overseas. For them, a thorough understanding of not only the FCPA, but also patterns of SEC and DOJ activity, is necessary to navigate the shoals of enforcement.
The FCPA does not only apply to publicly traded companies. Virtually any US entity doing business overseas, from the privately held small manufacturer to the one man software shop, will be subject to the Act. Foreign companies that are traded in the United States are also subject to the act. If those entities sell directly to foreign governments, they are in the sweet spot of the Act.
But it is important to understand that sales need not only be to governments; private sales may also be within enforcement jurisdiction if there is an interface with government for even peripheral reasons. Use of intermediaries, subsidiaries or other business formats may not shield the entity from liability. A misinterpretation of the facilitating payments exemption or the affirmative defenses by operators or finance personnel in the field may give rise to prosecution.
The FCPA requires the enactment of certain internal controls and makes a willful failure to do so a violation. This may also expose publicly traded companies to a Sarbanes-Oxley compliance issue. In short, the FCPA may not be as straightforward as it seems. It casts a wide net and has been enforced with more vigor in the past few years. That trend is likely to continue.
As recently as November 12, 2009, Assistant Attorney General Lanny Breuer commented: “As some of you may know, the Criminal Division has primary enforcement responsibility for the FCPA, and in recent years, FCPA enforcement has been one of our top priorities. Since 2005, we have brought 57 cases – more than the number of prosecutions brought in the almost 30 years between the enactment of the FCPA in 1977 and 2005. As a result, the Fraud Section of the Criminal Division has developed a group of experienced, hard-working and talented prosecutors who specialize in FCPA investigations and prosecutions. In addition, in 2007, the FBI created a squad of dedicated FCPA agents in its Washington Field Office. That group of dedicated FCPA agents has grown exponentially, both in size and in expertise, over the last two years – and we hope and expect that growth will continue. Working together with the FBI, and often with our civil counterparts at the SEC,the Department currently is pursuing more than 120 FCPA investigations.” 28
The FCPA matters and is relevant for entities and persons who do or propose to do business outside the United States. There are a number of actions that affected entities can take in order to reduce the likelihood of a violation. Among them are adoption of an ethical business culture and adoption and implementation of a comprehensive anticorruption policy. Doing the right thing may be best way to comply with the FCPA.
References
1 H. Rept. 95-640, 95th Cong., 1st Sess., at 1 and 2 (1977)
2 H. Rept. 95-640, at 2
3 H. Rept. 95-640, at 2.
4 President Jimmy Carter, Address at Commencement Exercises at the University of Notre Dame May 22,1977
5 H. Rept. 95-640, at 2
6 Foreign Corrupt Practices and Investment Disclosure Bill Statement on Signing S. 305 Into Law
December 20, 1977
7 15 U.S.C. § 78dd-1(a)
8 15 U.S.C. § 78dd-2(h)
9 15 U.S.C. § 78dd-1(g)
10 15 U.S.C. § 78dd-3
11 United States Attorneys’ Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign CorruptPractices” (November 2000)
12 15 U.S.C. §§ 78dd-1(a), (g)
13 15 U.S.C. §§ 78dd-1(a) (1), 78dd-2(a) (1), 78dd3-1(a) (1)
14 United States Attorneys’ Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000)
15 United States Attorneys’ Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000)
16 15 U.S.C. §§ 78dd-1(f ) (1), 78dd-2(h) (2), 78dd3-1(f ) (2)
17 The Lay–Persons’ Guide to FCPA, page 418 H. Conf. Rept. No. 100-576, 100th Cong., 2nd Sess., at 9
18 and 9
19 (1988)19 15 U.S.C. §§ 78dd-1 (f ) (3) (A), 78dd-2 (h) (4) (A), 78dd-3 (f ) (4) (A)
20 15 U.S.C. §§ 78dd-1 (c), 78dd-2 (c), 78dd-3 (c)
21 15 U.S.C. §§ 78dd-2 (g), 78dd-3 (e)
22 15 U.S.C. § 78ff
23 15 U.S.C. § 78m(b)
24 15 U.S.C. § 78m(b)(2)(A)
25 15 U.S.C. § 78m(b)(2)(B)
26 15 U.S.C. § 78m(b)(6)
27 15 U.S.C. § 78ff(a)
28 Lanny A. Breuer, Assistant Attorney General, Criminal Division, U.S. Department of Justice, Prepared Keynote Address to The Tenth Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum, November 12, 2009
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Editor’s note: The following guest commentary from Mike Koehler, an Assistant Professor of Business Law at Butler University and an active writer and speaker on Foreign Corrupt Practices Act topics, first appeared on the FCPA Professor Blog. It has been reprinted below with permission.
Koehler disagrees with news reports that last week’s BAE settlement was another example of the “get tough” approach on corporate bribery, and his own thoughts on the news. To read the original post, click here. To see our story on BAE’s settlement, click here.
BAE
By Mike Koehler
In a joint enforcement action that is sure to generate much discussion and controversy, the U.K. Serious Fraud Office (SFO) and the U.S. DOJ announced today resolution of an enforcement action against BAE Systems.
A BAE ship being launched.
The SFO announced (here) that it has “reached an agreement with BAE systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.”
BAE’s press release (here) notes that “[i]n connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”
The SFO and company release note that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”
In a strange turn of events, the SFO also announced (here) that it has withdrawn charges filed last week (see here) against a former agent charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments [...] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”
The SFO release notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.”
So what happened to the charges and allegations involving certain Eastern and Central European governments, including the Czech Republic, Hungary, and Austria?
Good question.
Much like the wave of magician’s wand, they have simply disappeared.
Closer to home, the DOJ announced that it:
“filed a criminal charge (here) in the U.S. District Court for the District of Columbia against BAE Systems plc charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”
The DOJ and BAE release note that the company “will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.”
According to the DOJ release (which is available through the DOJ Office of Public Affairs, but not yet publicly posted on DOJ’s website) “BAE Systems is charged with intentionally failing to put appropriate, anti-bribery preventative measures in place, contrary to the representations it made to the United States government, and then making hundreds of millions of dollars in payments to third parties, while knowing of a high probability that money would be passed on to foreign government decision makers to favor BAE in the award of defense contracts. BAE Systems allegedly failed to disclose these payments to the State Department, as it was required to do so under U.S. laws and regulations in order to get necessary export licenses.”
The bold language above would expose most companies to an FCPA enforcement action, but BAE is no ordinary company. It is a major defense contractor on both sides of the Atlantic (as noted in the criminal information “in 2008, BAE was the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales”).
You can bet that these charges were the subject of much negotiation so as to not upset current or future government contracts as well as foreign policy issues and concerns.
The BAE charges and thus similar to those against Siemens in December 2008. In that case, despite the company engaging in bribery “unprecedented in scale and geographic scope” and despite the company being one in which “bribery was nothing less than standard operating procedure” (both direct DOJ quotes), the company avoided FCPA antibribery charges. (See here for prior posts about Siemens).
These two cases seriously raise the issue of whether certain companies in certain industries are simply “above” the FCPA.
Can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?
Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today.
The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”
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Editor’s note: The following guest commentary originally appeared on Tfoxlaw’s Blog,written by Thomas R. Fox, and has been reprinted below with permission. Fox is a Houston-based lawyer who assists companies with FCPA compliance, risk management and international transactions. He was most recently the General Counsel at Drilling Controls and was previously a Division Counsel with Halliburton Energy Services.
To read the original post, click here.
Effective Compliance Training – Part 2
By Thomas R. Fox
TYPES OF TRAINING
What type of training is most effective in the ethics and compliance arena? The consensus seems to be that there are three general approaches to ethics and compliance training which have been used successfully. The first is the most traditional and it is in-person classroom training. This gives employees an opportunity to see, meet and speak directly with a Compliance Officer, not an insignificant dynamic in the corporate environment. Such personal training also sends a strong message of commitment to compliance and ethics when training is held away from a corporation’s home office. It gives employees the opportunity to interact with the Compliance Officer by asking questions which are relevant to markets and locations outside the United States. Lastly it can also lead to confidential discussions after such in-person training.
An important part of in-person training is the opportunity to interact with the audience through Q&A. There are a couple different approaches to Q&A. The first is to solicit questions from the audience. However many employees are reluctant, for a variety of different reasons, to raise their hands and ask questions in front of others. This can be overcome by soliciting written questions on cards or note pads. A second technique is to lead the audience through hypothetical examples in which the audience is broken down into small (up to 5 person) discuss groups to discuss a situation and propose a response.
The second approach is on-line training. Rick Chapman, Assistant General Counsel for Halliburton in its Compliance & Ethics Practice Group, has said that online training is a one of several training approaches used by Halliburton in ethics and compliance training. On-line training can be a helpful adjunct to live training because it can permeate a globally distributed organization and lends itself to automatic recordkeeping, tickling, and expiration management. He discussed this approach and its use by Halliburton to enable it to “effectively reach every employee at Halliburton worldwide” in Ethisphere Magazine, June 7, 2007. “Ethics and compliance courses are tailored to different categories of Halliburton employees and provided in multiple languages to ensure that all Halliburton employees will participate in ethics and compliance related learning activities at least once every two years by taking our general ethics and compliance training and/or issue-specific courses such as FCPA.”
A third option has been suggested in Wrageblog, written Alexandra Wrage the president of Trace International, It is a combination of live in-person training followed by a live Q&A session filmed. Such a program can then be shown at other company offices around the world. The presentation should be lead in-person by a Compliance Officer who can follow up the filmed presentation by conducting a Q&A teleconference with the Compliance staff in the company’s home office. Wrageblog believes that this approach can be a “very robust and inexpensive way to reach a large number of employees with a clear, tailored and forceful compliance message.”
All three ethics and compliance training approaches should be coordinated and both the attendance and result recorded for the combined approach, online training and traditional training for all types of employees in all countries. Results can be tabulated through short questionnaires immediately following the training and bench-marked through more comprehensive interviewing of selected training participants to determine overall effectiveness.
Whatever approach is used, one of the critical factors is the length of time of the training session. While lawyers and ethics and compliance professionals can (sometimes) sit through 8 hours of such training, it is almost impossible to keep the attention of business and operations employees for such a length of time. The presentation must be kept to a manageable length and number of PowerPoint slides before eyes start to glaze over. My experience in all types of legal and compliance training has led me to believe that 3 hours is about the maximum length of in-person training which can hold the attention of business and operations employees for ethics and compliance training. For on-line training I would suggest a maximum length of one hour.
THE OPENING
As noted in Part I, a company’s ethics and compliance training may well comprise several different audiences and different cultures around the globe. Top notch training should be able to reach all of the learners at such training sessions. One way to do so is to grab the audience’s attention early by demonstrating the commitment of top management to ethics and compliance and make clear to each audience member how compliance laws such as the FCPA pertain directly to them. In his blog, the FCPA Professor has put forward a suggestion in his posting, “FCPA — The First Few Minutes” by proposing that an FCPA training session begin with an opening such as:
“Today, I will be talking about a U.S. law that applies to all of you – regardless of whether you are in the sales and marketing department, the executive office suite, the finance and audit department, or the logistics department. This law can cover a wide range of payments the company makes, or could make, either directly or indirectly, in doing business or seeking business in foreign markets. Your understanding of this law and how it may relate to your specific job function will best ensure that the company remains compliant with this law and is able to achieve its business objectives.”
Another technique to get the attention of the audience simply might be remind the them that hardly anyone looks good in a prison-orange jumpsuit and that you are here to present training to keep them out of such clothing.
THE END OF THE DAY
At the end of the day, an effective training program will incorporate all learning tools available to reach the widest target audience possible. An individual’s understanding of the rules is always important but it should be grounded in a company’s ethical corporate culture. Coupled together, these Approaches listed in Part I, together with types of training discussed in Part II, should embolden employees to make the right decision even if they cannot remember a specific rule governing a situation. More importantly, such effective training provides knowledge about what an employee can and cannot do when confronted those ‘grey areas’ that exist in the real world of international business.
This is the second of a two-part series on ethics and compliance training.
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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.
© Thomas R. Fox, 2010
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Another development in the DOJ’s prosecution of individuals under the Foreign Corrupt Practices Act took place Thursday, as two former managers of the oil, gas, and power contractor Willbros each were sentenced to slightly more than a year in prison for their roles in the company’s payment of more than $6 million in bribes to government officials from Nigeria.
Jason Edward Steph, 40, received 15 months in prison; Jim Bob Brown, 48, got 12 months and one day. Both had previously pleaded guilty to charges they helped coordinate bribes to Nigerian officials to help the Houston-based Willbros obtain, and retain, the Eastern Gas Gathering System (EGGS) Project, valued at approximately $387 million. Additionally, Brown admitted to his role in another plot to bribe Nigerian revenue officials in exchange for reduced federal and state tax obligations.
Also, Brown admitted to making at least $300,000 in corrupt payments to Ecuadorian government officials affiliated with PetroEcuador and PetroCommercial,in order to obtain and retain business, including the Proyecto Santo Domingo project.
“I allowed myself to be influenced by the corrupt nature of the international business community. It’s no excuse,” Brown told U.S. District Judge Simeon T. Lake III, as reported by The Houston Chronicle.
“I didn’t know how wrong it was, but I knew it was wrong,” added Steph.
Meanwhile, U.S. citizen Kenneth Tillery, the former president of Willbros International, remains a fugitive in Nigeria, and Nigeria remains a hotbed of corruption.
Posted in News | 1 Comment »
Editor’s note: The following guest commentary originally appeared on Tfoxlaw’s Blog,written by Thomas R. Fox, and has been reprinted below with permission. Fox is a Houston-based lawyer who assists companies with FCPA compliance, risk management and international transactions. He was most recently the General Counsel at Drilling Controls and was previously a Division Counsel with Halliburton Energy Services.
To read the original post, click here.
Effective Compliance Training – Part 1
By Thomas R. Fox
“Conducting effective training programs” is listed in the 2005 Federal Sentencing Guidelines as one of the factors the Department of Justice will take into account when a company, accused of an FCPA violation, is being evaluated for a sentence reduction. The Sentencing Guidelines mandate states “(4) (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.”
But what is an “effective training program”? Alexandra Wrage has written in her blog, Wrageblog, and Ethisphere Magazine that she believes there are two general approaches to ethics and compliance training. The first approach focuses on knowledge of the rules “as clear and sharp as barbed wire” so that the cowboys in the company will not run wild. This is the approach most U.S. in-house lawyers feel is required for their company’s operations teams, and is generally designed to help avoid criminal liability.
The second is to train on ethical values and is more prevalent in Europe where ethics and compliance are more designed to communicate a company’s underlying corporate values in its operations. This approach anticipates that most employees are decent and law-abiding and will not knowingly engage in bribery and corruption. Additionally, you can never create enough rules to govern every situation and train each employee on every rule so a company must hire trustworthy people and give them sufficient information to make the correct ethical and compliant decision. Ms. Wrage characterizes the two different approaches as “ethics” vs. “values”.
Both approaches have merit but both can catastrophically fail without the other components of an effective compliance program. Although it was not brought down by an FCPA violation, the Enron Code of Ethics was viewed (at least at one time) as one of the strongest in the energy industry. And not to focus on U.S. companies only, Siemens had one of the most robust Codes of Ethics for a European company before its multi-billion dollar (or euro-take your pick) fine and profit disgorgement. So the training on both of these company’s “Gold Standard” codes of ethics did not turn out to be too helpful.
So what should a company’s training focus on to be “effective” under the Sentencing Guidelines? It appears that effective ethics and compliance training should emphasize both approaches. Americans are long taught what the rules are in whatever life they choose. They expect to be told what the rules will be so that they know where the line is drawn that they should not step over. Probably the single comment I have heard the most when putting on ethics and compliance training in the U.S .is “Just tell me what I can and can’t do”. However, really effective training requires that employees be able to apply the rules to the incredibly wide and ever-changing situations which confront them in the real world. This is where communicating a company’s values are important. In other words, how would your conduct look if it was plastered on You Tube the next week?
This is the first of a two-part series on ethics and compliance training.
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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.
© Thomas R. Fox, 2010
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Editor’s note: The following guest commentary was written by Dru Stevenson, a Professor of Law at South Texas College of Law (here). Stevenson has written several entrapment publications (here). It originally appeared on the FCPA Professor Blog written by Mike Koehler, an Assistant Professor of Business Law at Butler University, and has been reprinted below with permission.
To read the original post, click here. To see our story on last week’s undercover FCPA sting, click here.
Africa Sting – Entrapment?
By Dru Stevenson
There are two versions of the entrapment defense, the “subjective test” (which is the majority rule, and focuses on the defendant’s predisposition) and the “objective test,” (favored by the Model Penal Code and about 15 states, and focused on the egregiousness of the government’s conduct). Given that this “Africa Sting” case is in federal court (brought under a federal statute, the FCPA), the court will have to apply the subjective test, because the United States Supreme Court adopted this rule in a series of five cases spread over several decades.
All federal courts use the subjective test; so this case will focus on the defendant’s “predisposition” rather than the actual government conduct in the case. The conduct of the FBI or their agents (including non-agency individuals recruited to act as informants or recruiters for the sting operation) will matter only to the extent that it sheds light on how much persuasion was necessary to convince the defendant(s) to violate the law, because this is one factor in showing “predisposition.” The same is true for the “inducement” or enticement (in this case, substantial kickbacks or bribes) involved – it will not really matter except to the extent that it suggests the defendant would never have committed the crime “but for” the undercover agent’s inducement.
Other factors that can show “predisposition” by the defendant are a history of committing similar acts, the alacrity/resistance with which the defendant responded to the undercover agent’s proposition, and the amount of time it took to entangle the defendant in the illegal activity. The subjective test is really a “but-for” test: “but for” the government’s inducement, the defense must show, the culprit would never have pursued such a course of action. It is important to keep this idea distinct from the notion of opportunity. The subjective test does not ask whether it was wrong for the government to provide an opportunity, or even if the undercover agents were deceptive or somewhat unethical in the approach that they used. It is a question of the defendant’s predisposition, which relates to both character and willingness, not opportunity. The subjective test looks at the defendant’s subjective preferences, choices, and history.
This is an uphill battle for defendants in sting operations, because the sting itself was planned out ahead of time to catch the defendant “in the act” with plenty of documentation about the time, place, and manner in which the crime occurred (stings are often on video!). It takes a lot of creativity and charisma to convince a jury that the defendant was actually not inclined to commit the act that he did in fact commit. The conventional wisdom among defense attorneys and legal scholars is that the entrapment defense usually does not work, and there is empirical evidence suggesting that fewer and fewer defendants use it each year.
There is also a significant hazard with raising the entrapment defense in federal court: the defendant’s criminal history becomes admissible evidence at the trial, where it otherwise might be excluded completely. Normally, the federal rules of evidence prohibit prosecutors from introducing the defendant’s prior convictions, because this could be so prejudicial for jurors (they might punish the defendant again for his previous crimes, regardless of his guilt under the present charges). With the entrapment defense, however, the defendant has put his own “predisposition” into issue in the case, arguing that he would never have committed the crime but for the government’s pressure. This opens the door for the prosecutor to submit the defendant’s “rap sheet” or “priors” to rebut his assertion that he lacked the predisposition to commit the crime.
The entrapment defense is, in fact, our country’s primary way of regulating sting operations. On a secondary level, the internal, administrative regulation of sting operations comes from the U.S. Attorney General’s Guidelines on Federal Bureau of Investigation Undercover Operations, which set rules for sting operations that the Federal Bureau of Investigation (the “FBI”) may conduct. The rules (see here) are the subject of modifications every few years, at the discretion of the Attorney General, and the last modification occurred in 2002, under John Ashcroft, mostly in response to the 9/11 terrorist attacks and the reactionary “War on Terror” that ensued thereafter. These Guidelines help illuminate the type of planning that went into this sting operation, but provide no remedies whatsoever for a defendant who is the victim of entrapment. The Guidelines, however, are a contributing factor to the difficulty of prevailing with an entrapment defense – the FBI knows the rules, is required to plan the sting operation carefully before proceeding or obtaining funding, and will generally plan the operation so that they steer clear of providing a potential entrapment defense to their targets.
A final note that may be relevant for these FCPA cases: there is no such thing as “private entrapment,” and even the notion of “vicarious entrapment” gets little traction in the federal courts. By private entrapment, I mean solicitation to commit a crime by someone who is not working for the government – that is, a false friend setting you up to get caught committing a crime, or even a fellow criminal who makes an “offer you cannot refuse.” If the defendant was induced to commit the crime by a private actor, not working for the FBI, no entrapment defense is available. “Vicarious entrapment” is similar: this is the situation where a defendant was recruited to commit a crime by another defendant, who might actually have a valid entrapment defense. In other words, suppose the FBI really crossed the line and recruited otherwise-innocent Defendant A, who was not predisposed to commit the crime but was overwhelmed by the undercover agent’s pressure or enticements; Defendant A might have a valid entrapment defense. If, however, Defendant A went and recruited his ever-willing colleague, Defendant B, into the conspiracy, Defendant B does NOT have a valid entrapment defense. Defendant A’s entrapment claim is non-transferable.
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