Dangerous liaisons: criminalization of "relationship hires" under the Foreign Corrupt Practices Act.

• Author: Chatterjee, Shinjini

INTRODUCTION I. BACKGROUND ON THE FCPA A. Legislative History 1. Congress Intended the FCPA to Address Government Leaders 2. Congress Limited the Scope of the FCPA 3. Amendments to the Act B. Statutory Analysis. 1. Parties Subject to the FCPA. 2. The "Business Purpose" Test 3. "Corrupt" State of Mind. 4. "Anything of Value". C. Recent Trends in FCPA Enforcement. 1. Number of Enforcement Actions. 2. Aggressive Investigative Tactics 3. Severity of Penalties and Sanctions. 4. Deferred Prosecution and Non-Prosecution Agreements II. "RELATIONSHIP HIRE" INVESTIGATIONS: THE NEW FRONTIER OF FCPA ENFORCEMENT A. JPMorgan's "Sons and Daughters Program" Scandal B. The Government's Previous Relationship Hire Investigations III. EXPANDING THE CRIMINALIZATION OF RELATIONSHIP HIRES LEGAL AND POLICY RAMIFICATIONS A. The Government's Expansive Reading of the FCPA Contradicts Legislative Intent B. Policy Arguments Against the Government's Interpretation of the FCPA. 1. Chilling Effect on Business in Foreign Markets. 2. Risk of "Prosecutorial Common Law". 3. Foreign Policy Ramifications 4. The Waning Benefits of Cooperation CONCLUSION INTRODUCTION

On August 17, 2013, the New York Times published a front page story on JPMorgan Chase & Co. that cast the firm at the center of an international bribery scandal and sparked a media firestorm. (1) The article reported that the U.S. Securities and Exchange Commission (SEC) had opened a bribery investigation into the firm's hiring practices in China pursuant to the Foreign Corrupt Practices Act (FCPA), (2) a statute that regulates bribery and public corruption in foreign countries. (3) The story continued to garner national attention in the weeks following the article's release, especially after the Department of Justice (DOJ) joined the SEC's investigation. (4) At the center of the controversy was the unusual nature of the investigation itself: unlike most FCPA bribery investigations, which target financial payments to foreign officials in exchange for business advantages, (5) the central issue underpinning the JPMorgan investigation was the firm's apparent practice of hiring well-connected children of Chinese business and political leaders. (6) More specifically, the government's investigation targeted the firm's "Sons and Daughters" program in China, a hiring program that allegedly favored children of Chinese owners of state-controlled enterprises in China. (7) JPMorgan purportedly relied on this hiring process to gain a competitive advantage in China, where state-owned enterprises dominate the economy. (8)

Although most media reports on the JPMorgan investigation characterize it as an unusual approach for the government, (9) probes into corporate hiring practices are part of an increasingly apparent trend in FCPA enforcement. (10) About eight months after the JPMorgan investigation began, DOJ and the SEC sent letters to at least five other financial institutions, requesting information on their hiring practices in Asia. (11) Federal agencies have justified these types of "relationship hire" investigations as well within the scope of the FCPA. (12) The FCPA prohibits the exchange of "anything of value" with foreign officials for any "improper advantage"--language that appears to encompass offers of employment to relatives of foreign officials. (13) Critics of the FCPA's application to relationship hires have questioned the government's reading of the Act's language, characterizing it as an "aggressive" interpretation. (14)

Despite the publicity surrounding the JPMorgan scandal, very little scholarship has examined relationship hires as an issue that defines and tests the limits of future FCPA enforcement. This Comment begins this discussion by analyzing both the rationale for the government's application of the FCPA to relationship hires and the implications of this type of FCPA enforcement.

Part I of this Comment presents the legislative history of the FCPA, focusing specifically on who and what Congress intended to regulate when it passed the Act in 1977. Part I also provides a brief description of the FCPA's antibribery provision, which serves as the statutory basis for the government's investigations into corporate hiring practices in foreign countries. Part II introduces the relationship hire issue by focusing on the highly publicized probe into JPMorgan's hiring program in China. By comparing the unusual nature of this investigation with the government's previous relationship hire investigations, Part II shows that federal agencies are broadening the range of hiring practices subject to FCPA scrutiny. Part III explores the implications of this expansion, arguing that while sham or "no show" employment agreements resemble the type of bribery that the FCPA is supposed to regulate, the government's current approach produces troublesome legal and policy consequences. The government's expansive reading of the FCPA in recent relationship hire investigations runs contrary to congressional intent. The government's interpretation is also likely to raise a number of policy concerns. In particular, the government's new position threatens to undermine U.S. business relationships overseas, concentrate power in the hands of prosecutors at the expense of the judiciary, and provoke accusations of American imperialism in foreign nations. This Comment concludes by arguing that, while DOJ and the SEC should continue to use the FCPA as a tool to combat hiring practices that serve as bribes, both agencies should refrain from using the law to target foreign hiring practices that do not resemble sham employment programs.

1. BACKGROUND ON THE FCPA

   1. Legislative History

      1. Congress Intended the FCPA to Address Government Leaders

         The FCPA prohibits certain individuals and corporations from offering or authorizing the giving of "anything of value" to foreign officials to influence their official actions. (15) Although the Act bars bribery of foreign officials, it was domestic events that inspired its passage. After Watergate, several federal authorities, including the Office of the Watergate Special Prosecutor, the SEC, and Senator Frank Church's Subcommittee on Multinational Corporations, conducted large-scale investigations into the financial activities of U.S. corporations in foreign countries. (16) In May 1976, the SEC released its first survey on the status of foreign corporate payments, which reported problems including

         falsifications of corporate financial records, designed to disguise or conceal the source and application of corporate funds misused for illegal purposes, as well as the existence of secret "slush funds" disbursed outside the normal financial accountability system. These secret funds were used for a number of purposes, including in some instances, questionable or illegal foreign payments. These practices cast doubt on the integrity and reliability of the corporate books and records which are the very foundation of the disclosure system established by the federal securities laws. (17) Soon after the report was released, Congress conducted several hearings to evaluate the extent of U.S. corporate bribery in foreign countries. (18) The hearings focused on the donations of major American companies--including Lockheed, Northrop, and Gulf Corp.--to the political campaigns of foreign leaders. (19) These sessions show Congress's primary intention was to use the Act to "combat the foreign policy implications of American companies bribing foreign public officials." (20) For example, in the Gulf Oil hearing, Congress focused on the company's payments to the President of the Republic of Korea, (21) while in the Lockheed hearing, Congress highlighted the aerospace firm's contributions to Japanese Prime Minister Kakuei Tanaka and Italian political parties. (22) In characterizing these payments as a source of concern, Congress emphasized their ability to "embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States." (23) These statements underscore Congress's focus on political leaders operating in the public context.

         Although there were other social and political trends during this period that influenced the congressional support for the FCPA, (24) the legislative record makes clear that Congress's biggest priority was regulating relations between U.S. corporations and foreign government leaders. (25) The focus on foreign public officials was also apparent in the two legislative proposals that eventually formed the FCPA, which focused explicitly on transactions with foreign governments and officials. (26)

         By contrast, the legislative record does not show any evidence of congressional intent to regulate "acts of bribery in the private context." (27) Although media reports published during this period discussed the role of family members in corporate bribery schemes, Congress did not mention or identify family members in any of the bills or legislative proposals devoted to the drafting of FCPA. (28) This is unsurprising given that nepotism was a "widespread practice" within Congress in the 1970s, and it is possible that the members of Congress did not consider the issue of relationship hires as particularly salient. (29)

         The legislative history of the Act also shows that Congress did not intend to use the FCPA to regulate state-owned enterprises. The absence of any reference to these entities in the final legislative proposals for the Act was not due to a lack of oversight; Congress was well aware that state-owned enterprises existed in foreign markets and that many of the illegal payments discovered by the SEC in 1976 were made to these enterprises. (30) Although some of the initial bills designed to regulate foreign corporate payments did attempt to include leaders of state-owned enterprises in the definition of a foreign official, (31) Congress did not...