February 28, 2011 Insights from the Trenches

Corruption Is Bad … But What is It, and What Should Be Done?

All would agree that providing a suitcase full of cash to government officials to secure a government contract is bribery., but that is where the consensus seems to stop.

By Mike Koehler

Everyone it seems is talking about it.  The G-20 nations all agree that it “threatens the integrity of markets, undermines fair competition, distorts resource allocation, destroys public trust and undermines the rule of law.”[1]  According to President Obama “preventing and tackling [it] must be a key part … of efforts to shape an international economic architecture that is rules-based and transparent.”[2] 

It is front-page news.  It is a high-enforcement priority and a “new era of enforcement” has been declared.[3]

It is corruption and bribery.  But what is it?

All would agree that providing a suitcase full of cash to government officials to secure a government contract is bribery. Yet, perhaps at the risk of oversimplification, that is where the consensus seems to stop.

Are expediting or facilitating payments to incentivize a low-ranking foreign government official to do something he ought to do anyway – is this corruption?  In passing the FCPA, Congress said no; in passing the Bribery Act, the U.K. Parliament said yes.

Is it corruption when a corrupt tax official threatens to assess penalties and shut down a company’s offices unless a cash payment is made and the company acquiesces so that it can continue to do business in the country?  In the eyes of the Department of Justice and the Securities and Exchange Commission the answer is yes.[4]  When a company conducts legitimate business with a state-owned enterprise, yet the company has difficulty collecting outstanding receivables, is it corruption when a company employee acquiesces to a cash demand of a mid-level employee at the enterprise who is holding up release of the funds?  In the eyes of the SEC the answer is yes.[5]  Why if the recipient of lavish entrainment is person x might we call it effective sales and marketing, yet if the recipient of lavish entertainment is person x do we call it corruption?[6]  If corruption is bad, why is it not a bribery offense when a company provides “substantial benefits,” such as “security services, real estate, automobiles and personal items” to a Saudi public official in a position of influence over lucrative fighter jet contracts secured by the company?[7]

As Theodore Sorensen stated in the midst of Congressional deliberations regarding what would become the FCPA, “corporate bribery is not the simple, safe issue it seems at first blush.”[8]  Noting “countless situations in which a fair-minded investigator or judge will be hard-put to determine whether a particular payment or practice is a legitimate and permissible business activity or a means of improper influence,” Sorensen stated that “reasonable men and even angels will differ on the answers … [and] such distinctions should make us less sweeping in our judgments and less confident of our solutions.”[9]

Consider the following scenarios.

A government official (and his wife) tour a vineyard and castle and spend an afternoon at a ski resort.  The company, realizing that it cannot foot the bill directly, funds a group that then picks up the tab.  Another company acknowledges that it participates in charitable events of government officials to get access to the officials to push the company’s agenda.  Over a six week period, another company sends at least $45,000 in donations to four charitable programs founded by government officials just as the companies were seeking approval of favorable legislation.  A prudent FCPA practitioner would immediately see the “red flags;” counsel the companies at issue to conduct a lengthy and expensive internal investigation as to the conduct at issue and related conduct; and – mindful of the enforcement agencies guidance and cognizant of the carrots and sticks they posses – likely suggest voluntarily disclosure of the investigative findings.

But wait.

The government officials in the above real-life scenarios were not “foreign officials” – they were U.S. government officials![10]  Scrap those internal investigation plans, forget about the voluntary disclosure, and slim chance there will be an enforcement action.   Nobody said our system was perfect, but that is just how the system works some will say.  But why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official?  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

A “new era of enforcement” has been declared, but in this new era is quantity of bribery enforcement actions more important than quality?  Although the OECD recently commended the U.S. for its “substantial enforcement” of the FCPA, the OECD also questioned many of the policies and enforcement theories which yield the high level of enforcement.[11] For instance, the OECD noted that the FCPA's language "does not specifically convey" that cases concerning "an operating license or permit to operate a business, or a reduction in tax or import duty" are in violation of the statute.  Yet, many FCPA enforcement actions are principally based on this theory.  Further, the OECD noted that "due to an absence of explicit language in the definition of foreign official" it is an open question whether employees of so-called state-owned or state controlled enterprises are "foreign officials" under the FCPA.  Yet, numerous FCPA enforcement actions (approximately 60% in 2010) were based in whole or in part on this theory.

Who decides what corruption is?

Under our system, Congress passes laws, enforcement agencies enforce laws, and courts oversee a process in which mitigating facts and potential defenses are weighed to determine if the enforcement agency has met its high burden of proof.  Yet FCPA enforcement has largely bypassed this process – a process that has served this country well in other areas of law.  Rather, the enforcement agencies largely determine the meaning of the FCPA.

Often times the enforcement agencies interpret the FCPA contrary to what Congress intended.  In passing the FCPA, Congress specifically acknowledged and accepted that the FCPA would not reach all of the foreign corporate payments uncovered during the mid-1970’s that motivated Congress to pass the law. [12]  Do the enforcement agencies acknowledge and accept this?  Or has the FCPA morphed, contrary to Congressional intent, into an all-purpose corporate ethics statute as perhaps best illustrated by the November 2010 Panalpina related enforcement actions largely centered on the movement of oil rigs in Nigerian waters and express courier fees.[13]   

If an all-purpose corporate ethics statute vs. a limited corruption statute is desirable, is that not a decision for Congress to pursue, not for the enforcement agencies to pursue via its charging decisions that are largely insulated from judicial scrutiny?

Top DOJ officials have declared a “new era of enforcement,” but what are the results?  For starters, over a 10 year period (a period in which not one word in the FCPA itself has changed) it has resulted in one enforcement action for $300,000 in 2000 to dozens of enforcement actions and an inflow of approximately $1.8 billion into the U.S. treasury in 2010.[14] As the DOJ’s former Assistant Chief for FCPA enforcement candidly stated, “the government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”[15]  Should the government be riding horses or enforcing a law consistent with Congressional intent in the context of an adversarial system with appropriate checks and balances and judicial scrutiny?

This “new era of enforcement” has witnessed the advent of non-prosecution and deferred prosecution agreements (NPAs and DPAs) that often leave even sophisticated lawyers searching for evidence of FCPA violations.[16]  Of note, the former Deputy Chief of the DOJ Fraud Section who oversaw (until recently) FCPA enforcement during its era of resurgence stated that a “danger … is that it is tempting for the Department, or the SEC since it too now has these options available, to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.”[17]  Indeed, a leading law firm recently noted that "by continually entering DPAs and NPAs, the DOJ can shield its expansive interpretation of important statutes from judicial review.”[18] 

The OECD, moreover, recently observed that the increase in NPAs and DPAs "are one of the reasons for the impressive FCPA enforcement record in the U.S."  Yet the OECD also observed that these agreements are subject to little or no judicial scrutiny.  The former Deputy Chief of the DOJ Fraud Section was also asked – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year” and he stated: “if the Department only had the option of bringing a criminal charge or declining to bring a case, you would certainly bring fewer cases.”[19] 

Would fewer FCPA enforcement actions necessarily be a bad thing?  Or has an “arms race” of sorts emerged to see which government can prosecute the most cases, secure the most financial penalties, and thus score the highest on various surveys and lists?  Is the outcome – whether perceived or actual – a “race to the top” or a “race to the bottom?” 

Transparency International, in its annual Progress Report on Enforcement of the OECD Convention, called for a study “on the use of negotiated settlements to resolve foreign bribery cases” given that agreements like NPAs and DPAs “could be questionable deals between prosecutors and politically influential companies.”  Transparency International also called for all settlements to be “submitted to judicial review independent from the Prosecutor’s Office.”[20]  Will the U.S., so eager to cite positive reviews of its FCPA enforcement program, be willing to accept criticism of its FCPA enforcement program?  Will the enforcement agencies consider the sensible step of abolishing NPAs and DPAs in the FCPA context?

What else has this “new era of enforcement” brought?  As noted by Forbes, it has delivered   “a thriving and lucrative anti-bribery complex” that is “good business for law firms […] good business for accounting firms, […] good business for consulting firms, the media - and Justice Department lawyers who create the marketplace and then get [themselves] a job."[21]  The “new era of enforcement” has ushered in profit center practices at leading law firms, “fear mongering” marketing tactics,[22] enforcement actions involving fictitious “foreign officials,”[23] “newcomers [some of whom ‘discover they can spell FCPA and it’s suddenly on their resume’] all clamoring for FCPA business,”[24] and rational pleas to “cool down the hysteria.”[25]

This “new era of enforcement” has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment.  This “new era of enforcement” has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable. 

But is the status quo, in fact, desirable?

Is there anything wrong with returning to an era: when the enforcement agencies enforced a law within the framework Congress provided; when a company that engaged in corruption and bribery was charged with an actual criminal offense and when a company that did not was not charged and not forced into an alternative resolution vehicle; and when someone other than the enforcement agencies decided the ultimate issues?

Mike Koehler is an Assistant Professor of Business Law at Butler University.  Professor Koehler is the author of the FCPA Professor Blog and has recently testified at the Senate hearing “Examining Enforcement of the Foreign Corrupt Practices Act”.  His FCPA expertise and views are informed by a decade of legal practice experience at a leading international law firm.

[1] The G-20 Toronto Summit Declaration (June 26-27, 2010).

[2] White House Release, “The G-20 Summit in Toronto:  Global Leadership to Combat Corruption” (June 27, 2010).

[3] DOJ Release, “Assistant Attorney General Lanny A. Breuer Speaks at the 24th National Conference on the Foreign Corrupt Practices Act,” (Nov. 16, 2010).

[4] See U.S. v. Alliance One International AG (Aug. 6, 2010); SEC v. Alliance One International Inc. (Aug. 6, 2010).

[5] See SEC v. Joe Summers (Aug. 5, 2010).

[6] See SEC v. UTStarcom, Inc. (company manager in Thailand “spent nearly $10,000 on French wine as a gift to agents of the government customer, including rare bottles that cost more than $600 each”).

[7] See U.S. v. BAE Systems Plc (Feb. 4, 2010).

[8] Foreign Affairs, “Improper Payments Abroad:  Perspective and Proposals” (July 1976).

[9] Id.

[10] See “Rules for Congress Curb But Don’t End Junkets,” New York Times (Dec. 6, 2009); “Congressional Charities Pulling in Corporate Cash,” New York Times (Sept. 5, 2010).

[11] United States: Phase 3 -  Report on the Application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the 2009 Revised Recommendation on Combating Bribery in International Business Transactions.

[12] See e.g., Senate Report No. 95-114 as to S. 305 (May 2, 1977).

[13] DOJ Release, “Oil Services Companies and a Freight Forwarding Company Agree to Resolve Foreign Bribery Investigations and to Pay More Than $156 Million in Criminal Penalties,” (Nov. 4, 2010).

[14] This figure includes the $400 million fine paid by BAE in a non-FCPA, yet related case.

[15] See Joseph Rosenbloom, “Here Come the Payoff Police,” American Lawyer (May 17, 2010) (quoting William Jacobson)

[16] Shearman & Sterling LLP, “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act,” (Jan. 2011) (“some of the government’s cases appear to blur the lines or muddy the waters when it comes to the limits of the statute” and that in certain cases the “connection of the alleged conduct to ‘obtaining or retaining business,’ a critical element of the statute was not pleaded or, worse, was pled in a way that suggests that virtually any bribe that improves a company’s profitability is sufficient – a result that is not consistent with established precedent and the language of the statute.”).

[17] “Mark Mendelsohn on the Rise of FCPA Enforcement,” 24 Corporate Crime Reporter 35 (Sept. 10, 2010).

[18] Gibson Dunn, 2010 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements (Jan. 4, 2011).

[19] See note 15.

[20] Transparency International, Progress Report 2010 – Enforcement of the OECD Anti-Bribery Convention.

[21] Nathan Vardi, “The Bribery Racket  - How Federal Crackdown on Bribery Hurts Business and Enriches Insiders” (May 24, 2010) (quoting Joseph Covington – the head of the DOJ’s enforcement program in the mid-1980s).

[22] “DLA Piper’s Sharie Brown on the FCPA, UK Hype, and the Dark Empire”  25 Corporate Crime Reporter 5 (Jan. 31, 2011)

[23] DOJ Release, “Twenty-Two Executives and Employees of Military and Law Enforcement Products Companies Charged in Foreign Bribery Scheme,” (Jan. 19, 2010).

[24] Sue Reisinger, “TRACE Launches World’s First Accreditation Program for FCPA Compliance,” Corporate Counsel (Feb. 4, 2011) (quoting Alexandra Wrage – TRACE President).

[25] Michael Volkov, “The U.K. Anti-Bribery Act:  Let’s Cool Down the Hysteria,” FCPA Blog (Jan. 18, 2010).

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