This is the fifth and concluding installment in a series of five articles posted this week examining current trends in FCPA and anti-corruption enforcement. The posts are excerpts from a forthcoming article by Thomas Gorman and William McGrath.
There is a new era of FCPA enforcement. The point is well illustrated by the dramatic increase in the number of cases being brought by enforcement officials, the huge sums of money being paid by business organizations and collected by the government to resolve FCPA inquiries and the increasing number of trials.
The critical question, however, is not whether the new era has arrived but, rather, where does it go? Can the interpretation of the statutes continue to expand? Can the amounts paid to resolve FCPA inquires continue to spiral? Can there continue to be increasing numbers of trials against corporations and individuals and escalating demands for fines and prison terms continue?
No one would disagree with enforcement officials that corruption in the world business place needs to be eliminated. It makes markets uncompetitive, skews and stifles fair competition on the merits, serves as a kind of tax on legitimate business paid to the greedy and unscrupulous, and deprives consumers of goods which compete on the merits and are fairly priced. No doubt enforcement officials are correct when they argue that the statutes and their enforcement efforts offer business organizations a defense when faced with demands for bribes and an avenue to compete on the merits rather than with a suitcase full of cash.
Equally clear is the fact that FCPA enforcement will continue to be a priority of enforcement officials. The DOJ and the SEC are expanding their efforts in this area while increasing their ability to conduct industry-wide inquiries and coordinate with regulators around the globe. Enforcement will continue to be vigorous.
Those efforts will undoubtedly be bolstered by the new trend in earning cooperation credit as well as the recently enacted SEC whistleblower rules. The former is reflected in the settlements with Siemens, Panalapina and J & J, where companies expand their internal inquiries to develop evidence against others so they can barter with enforcement officials for additional cooperation credit. The new SEC whistleblower rules offer significant bounties for original source information along with protections for the corporate employee turned government informant. Whistleblowers will undoubtedly be vigilant for possible FCPA violations in view of the huge sums being paid to resolve the actions and can be an effective source of information for law enforcement. Indeed, the Daimler action began with a whistleblower. At the same time, these trends may spur additional self-reporting by business organizations simply as a defensive measure – better to self-report and earn cooperation credit than be discovered and reported on by others.
At the same time, the need for reforms is apparent. These expansive trends cannot simply continue unabated. Three key areas of focus should be: (1) The approach to jurisdiction; (2) the definition of a foreign official; and 3) compliance. Initially, it seems prudent for enforcement officials to carefully evaluate their approach to jurisdiction. Fine legal arguments can be made in favor of, as well as against, bringing cases like JGC, Panalpina and others. Yet tying a criminal prosecution to transfer of funds from one foreign bank to another because it passes through New York since it is denominated in U.S. dollars as in JGC seems to reach for actions far from the U.S. Likewise, pushing SEC jurisdiction to cover the acts of a foreign company in a foreign transaction in another country by alleging it aided and abetted a violation of the statutes as in Panalapina seems remote from miss the core of FCPA jurisdiction.
At its center the FCPA focuses on business from this country being conducted in an ethical manner. While the conduct in JGC, Panalapina, and other similar cases may be wrongful, where it is remote from U.S. business interests it may well be more prudent for enforcement officials to decline prosecution in favor of turning the matter over to law enforcement officials in the organization’s home country. This may be particularly true in view of the increasing efforts of foreign regulators in the anti-corruption area and the scarce budget resources of the DOJ and the SEC.
Second, the definition of a foreign official, which includes the concept of “instrumentality,” needs clarification. This is an issue which has been repeatedly raised by business groups and in litigated cases. As it now stands, not only is the definition broad but it is unworkable in many instances and in some a trap for the unwary. In many countries outside the United States business is conducted to a significant degree through state-owned enterprises. According to recent studies, this trend is continuing. In many respects, however, these state entities are largely indistinguishable from private business organizations.
The current facts and circumstances test used by the courts is wholly unworkable in every-day business. While it is straightforward to say that bribes should not be paid to anyone to obtain business, in areas such as business travel, gifts and entertainment the issue becomes most difficult. What is routine business such as travel and entertainment with a private company turns into a bribe when a state-owned enterprise is involved. Yet it may be difficult, if not impossible, at the time of the transaction to determine all the “facts and circumstances” a jury might consider years after the fact in assessing whether the employee works for a state owned enterprise. A correct guess may mean a successful business transaction. The wrong guess can mean years of investigation, prosecution and prison. This is not effective law enforcement. Rather, it is a high-stakes game of Russian roulette. Simple amendments to the definition of foreign official and instrumentality, perhaps coupled with a clarification of the travel and entertainment rules can resolve this difficulty.
Finally, a compliance defense should be added to the statute. The current trends of enforcement are not sustainable and, if continued, may well become counter productive. Examination of the current top ten settlements demonstrates the value and limits of cooperation. Several, but not each, of the top ten cases is based on an extensive pattern of wrongful conduct. Typically the criminal charges in each case reflects the underling pattern with in the jurisdictional limits of the FCPA.
Close examination of these cases demonstrates that the DOJ’s frequently repeated promise that there is credit for cooperation is correct. Where there is limited wrongful conduct cooperation offers the prospect of a non-prosecution agreement as in Pride, or perhaps even a declination. Where the conduct is extensive, the company will not be able to avoid guilty pleas even with extraordinary cooperation as in Siemens and Daimler. Where the pattern of wrongful conduct is more limited however it may be possible to obtain a non-prosecution agreement as in JGC, Panalapina and others. Those decisions may also be influenced by jurisdictional considerations as evidenced by the fact that KBR, a domestic concern and the subsidiary of a U.S. issuer, pleaded guilty to criminal charges for participating in the same conspiracy as foreign corporations JGC, Panalapina and Snamprogetti. At a minimum, however, examination of the top ten settlements demonstrates that cooperation can result in a reduction in the criminal fine. Indeed, each company in the top ten received at least some reduction, depending on the extent of the cooperation. The sole exception is BAE who chose not to cooperate and had the maximum statutory fine imposed.
Examination of these cases also demonstrates that the amount of the payments is increasing over time. This point is well illustrated by the fact that eight of the top ten occurred in the 2010 and 2011 and three cases were added to the list in 2011. Indeed, J & J secured the dubious honor of becoming number ten on the list despite the fact that the wrongful conduct seems far more limited than that of the other nine companies.
At the same time, examination of those cases suggests that the SEC has been taking a cookie-cutter approach to settlement, reaching for charges at the outer edges of the statutes and routinely imposing an almost formulaic kind of settlement. Perhaps the recent settlement with Tenaris S.A. (May 2011), where the Commission chose an FCPA case to employ its first non-prosecution agreement under a recently announced initiative, was intended to signal a change in approach.
What is often overlooked in examining the cost of settlement, however, is the cost of earning cooperation credit. Again the top ten settlements offers a good illustration. Only one of those companies self-reported. Once the inquiries began, however, each cooperated to some degree with the exception of BAE. At a minimum that cooperation would typically include conducting an internal investigation and furnishing the results to enforcement authorities and taking the appropriate remedial steps. While some companies conducted more extensive inquiries than others it is clear that each spent million of dollars on professional fees in addition to the huge amounts of executive time expended to work with enforcement officials. In many instances the cost of these efforts – particularly where a monitor was imposed – may well have exceeded the cost of settlement, acting as a kind of unstated penalty.
This creates a significant dilemma for any board of directors faced with a possible FCPA investigation and the issue of self-reporting. No doubt each company wants to be a good corporate citizen. Virtually every company has a code of ethics that it has implemented to guide its actions. Self-reporting and cooperating with government officials is clearly a “best practices” and ethical approach to resolving a difficulty. At the same time the choice is fraught with uncertainty and difficulty for directors trying to prudently implement their Caremark obligations. In re Caremark International Inc. Derivative Litigation, 698A.2d 959 (Del. Ch. 1996).
While assessing cases such as the top ten FCPA settlements and the experience of counsel can offer guidance on possible outcomes, there is little certainty in ascertaining the resolution of the action. Similarly, it is difficult at best to even speculate as to what costs might be incurred. To be sure, if there are extensive violations, the company may well be looking at guilty pleas, injunctions, huge criminal fines, disgorgement and very significant professional fees, all of which can drain the business if the organization self-reports. On the other hand, if the company simply cleans up the problem and moves on, it may save the cost of the fines and disgorgement but risks discovery.
As current enforcement trends continue with increasing fines and increasing costs, the balance could well tip against self-reporting or, delimit whatever cooperation is offered even by a company which chooses to self-report. This would defeat the purpose of vigorous enforcement.
A solution to this dilemma is to continue vigorous enforcement but add a compliance defense for the business organization in a fashion similar to that suggested by Judge Sporkin and in accord with that available under the U.K. Bribery Act. Judge Sporkin’s initiative focuses on an initial inquiry to ensure the company does not have a prior history of violations, installing best practices procedures and then obtaining periodic certifications that the procedures are being properly implemented. Where a company takes these steps there would appear to be no reason not to credit the procedures as a defense to possible FCPA liability.
The DOJ has traditionally opposed the notion of a procedures defense, arguing that they are considered in the charging process. That approach, which stems from the DOJ’s Principles of Corporate Prosecution and the federal sentencing guidelines, differs significantly from a procedures defense, however. Essentially it is a kind of mitigation approach which is similar to applying cooperation credit during the charging decision – it assumes the company is guilty and looks at mitigation.
In contrast, if properly established, a procedures defense could establish that the company is not guilty. Under those circumstances, no further decision as to the business organization would be required.
Perhaps more importantly, however, adding a procedures defense would encourage compliance with the Act as well as self-reporting if difficulties are encountered. If adequate procedures constituted a defense it would encourage business organizations to install state-of-the-art compliance procedures and enforce them. Indeed, in view of the potential liability under the FCPA and the spiraling cost of resolving possible charges, directors properly exercising their Caremark obligations would be virtually required to take the appropriate steps to make sure that the company not only had best practices procedures but also that they were properly enforced. If the defense also required that prior to installation the company obtain a certification of compliance, it would also encourage resolving any past difficulties.
Finally, the defense would also encourage self-reporting. If a violation occurred – even best procedures can be circumvented – the existence of a procedures defense would facilitate decision making for the company. The board would know the state of its procedures and have reasonable assurances as to its legal position in self reporting. Companies that have properly implemented and maintained the procedures would have a reasonable assurance that self-reporting will end the matter as to the organization. Accordingly, adding a compliance defense should, in the long run, encourage business organizations to be better corporate citizens which are, after all, the goal of law enforcement.