The facade of FCPA enforcement.

Author:Koehler, Mike
 
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TABLE OF CONTENTS I. INTRODUCTION II. THE FCPA A. Origin B. Anti-bribery Provisions 1. "Anything of Value". 2. "Foreign Official". 3. "Obtain or Retain Business". C. Books and Records and Internal Control Provisions III. FCPA ENFORCEMENT A. Relevance of "Carrots" and "Sticks". 1. Principles of Prosecution 2. Sentencing Guidelines 3. SEC Policy B. Prevalence of Resolution Vehicles Subject to Little or No Judicial Scrutiny 1. NPAs and DPAs 2. Pleas 3. SEC Settlements C. FCPA Resolution Vehicles Do Not Necessarily Reflect a Superior Legal Position 1. Lessons from SEC v. BofA 2. The Enforcement Agencies are Vulnerable in Contested Actions IV. THE FACADE OF FCPA ENFORCEMENT A. First Pillar: Bare-Bones, Uninformative Facts, and Legal Conclusions B. Second Pillar: What is the Legal Support? 1. The "Foreign Officials" All Around Us? 2. Just How Was that Business Obtained or Retained? 3. Strict Liability for Books and Records and Internal Controls Violations? 4. Disgorge What? C. Third Pillar: Same Facts, Different Results D. Fourth Pillar: Bribery, Yet No Bribery V. WHY THE FACADE OF FCPA ENFORCEMENT MATTERS A. The Absurdity of FCPA "Case Law' B. The Breeding of Overcompliance C. Modeling VI. CONCLUSION I. INTRODUCTION

The rise in Foreign Corrupt Practices Act ("FCPA") enforcement has been well-documented, as have the aggressive enforcement positions of the Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC")--the two government agencies responsible for enforcing the statute. (1)

Ordinarily, aggressive government enforcement of a statute based on untested and dubious legal theories invites judicial scrutiny in a transparent, adversarial proceeding. Such judicial scrutiny is particularly appropriate when enforcement theories result in multi-million dollar corporate fines and penalties, as is often the case in FCPA enforcement actions.

However, judicial scrutiny is virtually non-existent in the FCPA context given the frequency with which FCPA enforcement actions are resolved through DOJ non-prosecution agreements ("NPAs"), deferred prosecution agreements ("DPAs"), pleas, or SEC settlements. Each of these resolution vehicles is the result of private negotiations between the enforcement agencies and the alleged wrongdoer in the context of the enforcement agencies dangling substantial "carrots" for cooperating and agreeing to its version of the facts and interpretation of the law. At the same time, the alleged wrongdoer is cognizant of the enforcement agencies' substantial "sticks" should it disagree with the enforcement agencies.

Thus, in many instances, the FCPA means simply what the DOJ and SEC say it means. Accordingly, "FCPA law" has developed through privately-negotiated agreements, and not as in other areas of law, through transparent, adversarial proceedings in which a judge or jury, weighing the evidence and the parties' conflicting arguments, renders an impartial decision. It is this feature of the FCPA that distinguishes FCPA enforcement from nearly every other area of law. This feature is troubling enough in isolation. Even more troubling is that the enforcement agencies, in the absence of meaningful, substantive FCPA case law, urge those subject to the FCPA to view these privately-negotiated agreements as de facto case law and to conform conduct to the foggy legal signposts in these privately-negotiated agreements.

The end result is a facade of FCPA enforcement and, this article explores various pillars that contribute to the facade of FCPA enforcement. This article does not argue, or even suggest, that every FCPA enforcement action is unwarranted or that no company or individual has ever violated the FCPA. Rather, this article demonstrates that a significant majority of recent FCPA enforcement actions are a facade and argues that addressing the facade and subjecting FCPA enforcement actions to judicial scrutiny is in the public interest and of vital importance to those subject to the FCPA as well as the broader marketplace.

Section I of the article begins by providing a brief overview of the FCPA.

Section II of the article provides an overview of FCPA enforcement and demonstrates that FCPA enforcement actions are typically resolved through NPAs, DPAs, pleas, and SEC settlements. A common thread in all of these resolution vehicles is the absence or practical absence of judicial scrutiny. This section also explores the motivations of settling parties pursuant to these resolution vehicles and demonstrates that settlement does not necessarily reflect the triumph of one party's legal position, but rather it reflects a risk-based decision primarily grounded in issues other than facts or the law.

Section III of the article highlights four pillars that contribute to the facade of FCPA enforcement. The first pillar highlights the frequency with which FCPA enforcement actions are resolved based on uninformative, bare-bones statements of facts or allegations or conclusory legal statements. The second pillar highlights the increasing trend of FCPA enforcement actions that are resolved based on untested and dubious legal theories, as well as enforcement theories seemingly in direct conflict with FCPA's statutory provisions. The third pillar highlights the opaque nature of FCPA enforcement and how similar enforcement actions, based on the government's own allegations, are resolved with materially different charges and penalties. The fourth and most alarming pillar highlights how seemingly clear-cut instances of corporate bribery, per the government's own allegations, are resolved without FCPA anti-bribery charges. These enforcement actions suggest, contrary to rule of law principles, that certain companies in certain industries are essentially immune from FCPA anti-bribery charges.

Section IV of the article demonstrates why the facade of FCPA enforcement matters and why judicial scrutiny of FCPA enforcement actions is in the public interest and of vital importance to those subject to the FCPA as well as the broader marketplace.

A goal of this article is to encourage more FCPA defendants, notwithstanding the "carrots" and "sticks" present, to challenge the enforcement agencies in an FCPA enforcement action and further expose the facade of FCPA enforcement. Exposing and addressing the facade of FCPA enforcement is a global issue given the reach of the FCPA and because other nations are increasingly modeling enforcement of their own anti-bribery laws on U.S. enforcement methods and theories.

  1. THE FCPA

    An understanding of the FCPA is critical to understanding the various pillars that contribute to the facade of FCPA enforcement and why judicial scrutiny of FCPA enforcement actions is warranted and in the public interest. This section provides a general overview of the FCPA, yet it provides only essential information relevant to this article.

    1. Origin

      The FCPA is commonly described as an outgrowth of the Watergate scandal. (2) While such a reference is relevant to the FCPA's origins, describing the FCPA as a singular outgrowth of Watergate misses the historical fact that Congress was actively investigating allegations of overseas bribery and corruption separate and apart from the Watergate scandal. (3)

      Allegations of U.S. companies making or offering bribe payments to foreign government officials to secure foreign government contracts became the focus of congressional hearings in the mid-1970s. During the summer and fall of 1975, the U.S. House of Representatives held hearings on "The Activities of American Multinational Corporations Abroad." (4) The Chairman of the hearings noted that "[d]uring the last few weeks, charges that American corporations have maintained secret funds for the payment of gratuities to foreign government and political officials have been made and substantiated...." (5)

      A primary focus of these hearings was the Lockheed Corporation scandal of the early 1970s, which was a key event "alert[ing] Congress to the need for legislation prohibiting overseas payments." (6) In fact, during the same general time frame as the above U.S. House hearings, the U.S. Senate also held hearings on "Lockheed Bribery." (7)

      Broadly speaking, the conduct of Lockheed and other U.S. companies concerned Congress because at the time, "[s]uch payments to foreign officials [were] not a violation of American law ..." notwithstanding the fact that other U.S. laws, such as the tax and securities disclosure laws, were perhaps indirectly implicated by such conduct.

      Two and a half years of Congressional hearings, a Presidential change, and various iterations of what would become the FCPA ensued, culminating in President Carter signing the "Foreign Corrupt Practices and Investment Disclosure Bill" into law on December 20, 1977. (8) President Carter's signing statement states, in part:

      I share Congress' belief that bribery is ethically repugnant and competitively unnecessary. Corrupt practices between corporations and public officials overseas undermine the integrity and stability of governments and harm our relations with other countries. Recent revelations of widespread overseas bribery have eroded public confidence in our basic institutions. (9) As routinely described, FCPA enforcement was largely (yet not entirely) non-existent from 1977 until circa 2002. (10) The FCPA was amended in 1988 and 1998 and the below summary provides a general overview of the post-1998 FCPA statute (i.e. the statute "on the books" when the FCPA was resurrected from near legal extinction and the version of the statute relevant to the current facade of FCPA enforcement).

    2. Anti-bribery Provisions

      The FCPA is part of the Securities Exchange Act of 1934 (11) and it has two main provisions: the anti-bribery provisions and the books and records and internal control provisions. The anti-bribery provisions generally prohibit:

      U.S. companies (whether public or private) and its personnel; U.S. citizens; foreign companies...

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