Thursday, May 6, 2010

The Bribery Racket

Those are the words on the cover of the current issue of Forbes Magazine.

The feature article (here) by Nathan Vardi is "How Federal Crackdown on Bribery Hurts Business And Enriches Insiders."

Given my soon to be published piece, "The Facade of FCPA Enforcement" and my other comments on FCPA Inc., the FCPA's revolving door, voluntary disclosure and the role of FCPA counsel, etc. (see here, here, here and here), Vardi's article resonates with me, and perhaps with you as well.

Below are a few snippets from Vardi's article:

"[FCPA is" nice work if you can get it--and to the tune of billions of dollars, lawyers, accountants and consultants, many with past ties to the Justice Department, are getting it. In the last few years, as the feds cranked up enforcement of the 33-year-old Foreign Corrupt Practices Act, a thriving and lucrative anti-bribery complex has emerged. Whether it's having any impact on reducing bribery is another matter. Instead, companies can find themselves getting extorted in foreign lands, only to get extorted again by Washington. It works generally like this: A company that suspects bribery overseas hires a battery of lawyers, accountants and investigators who may then report any findings to Justice in hopes of some undefined leniency. More likely, the company pays out huge fines and then hires more lawyers as government-mandated compliance monitors, a job that can stretch into years of legal billing."

"This is good business for law firms," says Joseph Covington, who headed the Justice Department's FCPA efforts in the 1980s and is now codirector of white-collar defense at Jenner & Block. "This is good business for accounting firms, it's good business for consulting firms, the media--and Justice Department lawyers who create the marketplace and then get yourself a job."

"[Mark] Mendelsohn declines to comment on his new job other than to note that it is routine for lawyers who leave the Justice Department to do white-collar defense work for corporations." (For more on Mendelsohn see here and here)

"What are these prosecutors accomplishing? Maybe they are fighting for truth and justice. Maybe, that is, it makes sense for the U.S. to hold its corporations to a higher standard of integrity than the French or Chinese outfits they compete against when trying to win business abroad. The prosecutors, though, are doing something else at the same time. They are creating a lucrative industry--FCPA defense work--in which they will someday be prime candidates for the cushy assignments. A former prosecutor, to be sure, does not work on the defense of the same case he had as a government lawyer. But there is nothing to stop prosecutors from ginning up cases that will feed the lawyers who used to have their jobs or from looking forward to a payday in the private sector that will be made possible by their busy successors at Justice."

"Many of the 150 pending cases will probably end with so-called deferred prosecution agreements. These involve the government threatening to bring an indictment against a company--which could effectively put the firm out of business--unless it agrees to adhere to certain practices. This hammer gives the feds immense power--for one thing, they don't have to prove their legal theories of bribery in court." (For more on non-prosecution and deferred prosecution agreements and the FCPA see here).

"The scope of things companies have to worry about is enlarging all the time as the government asserts violations in circumstances where it's unclear if they would prevail in court," says Lucinda Low, who has helped companies deal with the FCPA for years. "You don't have the checks and balances you would normally have if you had more litigation."

"The FCPA provides moneymaking opportunities even after a case is resolved. Following settlements the Justice Department often requires companies to hire a compliance monitor, whose job is to review a company's continuing anti-bribery efforts. It seems that an important qualification for these gigs is having previously worked at the Justice Department--as 7 of the 13 FCPA monitors have done. When it came time for Daimler to pick a government-mandated compliance monitor for three years, the company hired former fbi director Louis Freeh." (For more see here and here).

Vardi also discusses the recent NATCO matter (see here) - a case that resulted in a $65,000 SEC civil monetary penalty. Vardi states, "Natco reported the issue to the government and paid outside lawyers and accountants $11 million to investigate, causing Natco cash-flow problems." (For additional voluntary disclosure cases that have seemingly gotten out-of-hand see here).

There's alot in Vardi's article.

So, what do you think?

As always, comments (even if anonymous) are welcome.


  1. FCPA Professor- The tone of the Fortune article would make it appear that there were no prosecutions prior to 2003. While it is clear that have increased in the past 7 years there were multiple FCPA prosecutions prior to that time.

    As to the "revolving door" claims made against former DOJ/SEC employees who go to work for companies or law firms and assist companies in defending FCPA claims I believe there are a couple of responses. The first is the Chinese Wall that exists for some time when an employee leaves the government. Second this problem has existed since the inception of the first Federal Trade Commission back in the 19teens. Or as they asked in Ghost Busters-"Who ya gonna call?”; someone who knows about the Act and knows how to negotiate with the government or a neophyte. The prudent approach would be an ex-prosecutor who knows the ropes.

    There has been an ongoing debate as to the effectiveness of the FCPA; some using an economic analysis have claimed that the Act is counter-productive to third world countries. Others have pointed out that the Act is a supply-side solution to the problem of US companies engaging in bribery and corruption overseas. The Act was designed to be an important prong of US foreign policy; to promote ethical values and assist US companies in competing in a world market. I would argue that Act has largely achieved those goals. Or to put it another way, as a colleague of mine has noted, economists, "every now and then some tend to forget that a "valueless" foreign policy is no foreign policy at all."

    So what is the solution proposed by Fortune and others? To repeal the Act and say that US companies can engage in bribery and corruption overseas but not in America, as all US states have some form of anti-bribery legislation?

  2. Thanks for your comment Thomas.

    The "Chinese wall" concept you refer to, as applied to DOJ attorneys, is very limited. As set forth in the US Attorneys' Manual, restrictions that are triggered include: (i) a permanent ban of participating in a matter in which the attorney involved in the enforcement process “participated personally and substantially while a government employee;” (ii) a two-year ban on participating in a matter in which the DOJ prosecutor “knows or reasonably should know was pending under his or her official responsibility within a period of one-year before the termination of his or her employment;”and (iii) a one-year “cooling-off” period during which a “senior employee may not make any communication to or appearance before his or her former agency on any matter in which the former employee seeks official action.” The “cooling-off” period “ only applies to “United States Attorneys” and thus has very limited application. None of these restrictions would seem to address a situation where very few individuals enforce a niche law where the POTENTIAL to "create" markets may exist.