The daily headlines heralding each new development in the global financial crisis serve as stark reminders of the extent to which our world and its diverse legal systems, economies and markets are interrelated intricately. The ripple effect that flows from a single development on one continent washes away jurisdictional boundaries and borders.
The US Foreign Corrupt Practices Act (FCPA), enacted just over 30 years ago, was a law that was truly ahead of its time, perhaps more than any other regulative scheme. It dispensed with complex jurisdictional questions by authorizing expressly the United States government to pursue and punish commercial bribery of foreign officials, even when the conduct occurred on the other side of the world.
As the global financial crisis develops and President Barack Obama nears the end of his first 100 days in office, it is prudent for us to pause and consider what the near future holds for FCPA compliance and enforcement. Specifically, how does this economic crisis and changing global financial landscape impact FCPA compliance and what approach will the new Obama administration take to enforcement of the FCPA? Though lacking a crystal ball, we can take note of several developments that offer insights into what to expect in FCPA enforcement and compliance in the next several years.
The Global Economic Slowdown Increases Pressure on Companies to Compromise Compliance
The demise of several large financial firms and the decline of the US auto industry, along with countless other less-reported corporate collapses, reveal the vulnerability of industry titans. No company or enterprise is immune from the adverse effects of this economic meltdown. Intense stress has been placed on virtually every competitive enterprise, not the least of which are companies whose bottom line depends on international sales, including transactions with foreign governments. Those pressures add to the urgency to close particular deals at all costs. Whereas a year or two ago, obtaining a major sales order from a foreign government may have been merely helpful in meeting a quota and qualifying a sales representative for a handsome bonus, that same sale today may be critical to the very survival of the company. The pressures emanating from this hard hit economy will doubtless result in more violations of the FCPA.
This does not mean that struggling sales managers will necessarily jettison all rules of business ethics and announce a bribery strategy to their sales force. As any practitioner or compliance professional familiar with the FCPA knows, the temptations to flirt with corruption are typically manifested in far more subtle ways. For example, a sales manager who did not hit his number last quarter may be more inclined to look the other way when there is reason to suspect that an undocumented “marketing expense” paid in cash was required to close the deal.
There are other somewhat attenuated ways in which these pressures may result in an increase in bribery. Corporate governance and vigilance is not cheap and a compliance officer’s staff may be reduced as part of a downsizing. Management may be more prone to second guess the necessity of a robust compliance and training program. The compliance department’s budget may be slashed to the point of eliminating any effective training and auditing of overseas sales staff.
While there is no way to know the extent of this probable increase in corruption—as covert conduct is inherently difficult to detect, much less quantify—it is safe to assume that the economic pressures will likely cause an increase in the incidents of corruption as businesses are tempted to push the boundaries in order to close deals and stay afloat.
New Definitions Arising from Government Takeovers
The current economic crisis impacts FCPA compliance in yet another way. In response to the economic meltdown, governments around the world have rushed in to rescue entities deemed “too big to fail.” The United States government’s acquisition of AIG Insurance was followed by similar actions by governments in Europe and elsewhere. These government bailouts and rescue packages take many forms, ranging from relatively modest financial assistance to ousting a management team and taking control of what were private enterprises previously. In many instances, the government acquires an equity interest in the corporation.
Government intervention in a private enterprise is significant in the context of the FCPA. Even though the law has not been amended, the FCPA may now apply to transactions to which it did not apply a year ago by virtue of a foreign government’s control of the enterprise. The application of the FCPA is limited to transactions involving an “agency or instrumentality” of a government, terms that are not defined. In Doing Business Under the FCPA, Don Zarin has suggested that a definition of a governmental “agency or instrumentality” may be borrowed from another unrelated statute which defines an “agency or instrumentality of a foreign state” as any entity that “is an organ of a foreign state or political subdivision thereof, or a majority of whose share or other ownership interest is owned by a foreign state or political subdivision thereof” (p. 4-22, Section 4:4.2 (Practicing Law Institute 2008) citing the Foreign Sovereign Immunities Act of 1976).
The foreign government’s ownership of a majority of the shares of the enterprise is not the only indicia of control. Noting recent comments by the Justice Department, Don Zarin concluded that “a combination of state ownership of the enterprise, and the governmental responsibility, privilege or influence of the employee may be considered by the Justice Department in determining when an individual is a foreign official under the FCPA” (id. p. 4-24, 4:4.2).
While these definitions were not clear before this rise in government rescues and takeovers, given the degree of government intervention in distressed companies around the world, it is safe to say that many entities that were privately held a year ago may now be considered an agency of instrumentality of a foreign government. That means that acts of bribery that would not have been actionable a year ago may now fall within the FCPA’s prohibitions as a result of recent government takeovers.
What to Expect from the Obama Administration
With the dramatic transformations of the world’s economic and regulatory systems serving as a backdrop, the new Obama administration is faced with significant challenges in combating global corruption. What might we expect from this new administration?
Precedents Set by the Prior Administration
The first thing to understand about the Obama administration’s perspective in FCPA compliance is that it inherits from the Bush administration a vigorous and strengthening enforcement regime. Over the past eight years, violations of the FCPA were pursued far beyond most observers’ expectations. Records for fines and settlements were set, only to be broken and even grander prosecutorial trophies obtained.
The magnum opus of the Bush Justice Department’s long list of successful prosecutions and settlements came in its final weeks just before Obama took the oath of office. On 15 December 2008, the Justice Department announced a US$1.6 billion settlement in the Siemens case, shattering all prior records, including the US$26 million fine against subsidiaries of Vetco International Ltd. announced in February 2007.
As impressive as these figures are, numbers alone do not convey the extent to which the Bush Justice Department aggressively pursued corruption. During the last eight years, several new frontiers were explored in FCPA enforcement including prosecution of cases involving transactions with only a minimal nexus to the US and increased collaboration with foreign governments. Thus, President Obama’s Justice Department assumed power at a time when the trajectory of FCPA investigations and prosecutions were on the rise. It will take a significant amount of work and tenacity for the Obama Justice Department to match the milestones of the prior administration. All indications point to this new administration being equal to the challenge.
Perceptions of the Key Players
To what extent is prosecution of international corruption a priority for the Obama administration? To answer this question, it is helpful to consider the perceptions, personal history and influences of the key players, beginning with the new President.
Appearing in his father’s homeland of Kenya in 2006, then Senator Obama spoke candidly of how that country and his own city had been impacted similarly by corruption and bribery. “My own city of Chicago, Illinois, has been the home of some of the most corrupt local politics in American history over the years,” Obama said, “from patronage machines to questionable elections.” Underscoring the level of corruption in Kenya, then Senator Obama later complained to authorities that Kenya customs officials attempted to shake down a Chicago TV crew traveling with Obama and covering the trip.
In the following months, candidate Obama’s campaign was overshadowed by the trial of Tony Rezko, the Chicago businessman and fundraiser who was eventually convicted on fraud and bribery charges. Unfortunately, revelations of the extent of the Chicago political machine’s corruption did not end with the November election. Press coverage of President-elect Obama’s transition to power coincided with the story of Illinois Governor Rod Blagojevich who was indicted, impeached from office and more recently convicted for attempting to sell Obama’s vacated Senate seat to the highest bidder.
In light of these events, the new President assumes office with ample reminders, both historic and firsthand, of the consequences and costs of political corruption wherever it appears; from the Kenyan customs official to the Governor of Illinois. President Obama will be undoubtedly even more motivated to devote significant resources to anti-corruption prosecutions during his presidency.
In this effort, the new President will rely primarily on two individuals charged with overseeing enforcement of the FCPA: Attorney General Eric Holder and SEC Chairman Mary Schapiro. Attorney General Holder is a veteran of Washington D.C. having spent most of his career in the Justice Department. His background as a seasoned prosecutor and more recently on the defense bar provides unique perspectives from both sides.
Most practitioners will remember then Deputy Attorney General Holder’s name in connection with the 1999 “Holder Memorandum” which stated that, in making a decision on whether to charge a company with wrongdoing, prosecutors should consider, among other factors, the corporation’s timely and voluntary disclosure of the wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of the corporate attorney-client and work product privileges.
The positions articulated in the Holder Memorandum came under criticism by the defense bar. It complained that targets of investigations were placed in a position of having to turn over confidential and privileged information gathered as part of an internal investigation or create the appearance of a lack of cooperation leading to an indictment. The Holder Memorandum was generally thought of as overreaching by the government and the positions it advocated have been modified in recent years.
It remains to be seen whether, during his tenure as a corporate litigator and white-collar practitioner defending large corporate clients, Mr. Holder’s prior stances have tempered. As a private practice lawyer, Mr. Holder gained a great deal of notoriety for his defense of Chiquita Brands International. In that matter, the company was fined US$25 million as part of a settlement with the Department of Justice (DOJ) for its ties to a Colombian paramilitary group in connection with local employee protection in Colombia’s volatile banana harvesting zone. Mr. Holder stated publicly that he believed this fine was excessive. Of course, that fine dwarfs some of the more recent fines levied in FCPA cases, including the US$1.6 billion settlement in the Siemens case, US$450 million of which was paid to the Department of Justice. In addition to the DOJ fine, the Securities and Exchange Commission (SEC) obtained a US$350 million disgorgement and German authorities obtained a settlement of separate charges for US$815 million.
While his experience as a member of the defense bar will undoubtedly impact Attorney General Holder’s perspective on FCPA prosecution and the reasonableness of these fines, there is little doubt that this career prosecutor will pursue vigorously anticorruption efforts.
Arguably the clearest indication of Attorney General Holder’s commitment to continue the worldwide campaign against corruption is his decision to retain Mark F. Mendelsohn, a Deputy Chief of the Fraud Section. Mr. Mendelsohn is the individual credited widely with the Bush administration’s highly successful FCPA enforcement record. He is reportedly staying on board with the new administration’s Justice Department, thereby expanding his legacy of FCPA enforcement into the Obama era.
Attorney General Holder and Deputy Chief Mendelsohn work closely with their counterparts at the SEC. That agency, also charged with FCPA enforcement, is led by Mary Schapiro, the new SEC Chairman. In the early weeks of her tenure, Chairman Schapiro and her Commissioners made it clear that the SEC, viewed by some as contributing to the current Wall Street crises that have spread to Main Street, will pursue a variety of priorities to restore the respect and fear for the agency that it once commanded. Chairman Schapriro has publicly stated that FCPA enforcement is among her Commission’s top priorities. The SEC’s efforts may be aided by the termination of a pilot program that had required Commission staff to obtain authorization from the SEC Commissioners before entering into settlement negotiations with corporate entities. As a result, one can expect to see a more efficient agency and an increase in the number of prosecutions and settlements.
The dynamics, priorities and perspectives of these principal players create conditions for unparalleled FCPA enforcement actions. While it may be that the financial pressures faced by the current economic downturn will result in increased incidents of bribery and corruption, it would be a mistake to conclude that the Obama administration is not ready, willing and able to pursue these violations with vigorous investigations and prosecutions.