On May 18th, U.S. District Court Judge James Selna (C.D. Cal.) denied the Carson "foreign official" challenge and concluded that "the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact." (See here for the prior post).
In connection with his pre-trial ruling, Judge Selna ordered the parties to submit their proposed "instrumentality" jury instructions and legal support by June 30th.
Last Thursday, the Carson defendants and the DOJ filed such proposed jury instructions and legal support. See here and here. This post summarizes the dueling jury instructions.
Defendants
Before proposing jury instructions, defendants stated as follows.
"Defendants respectfully disagree with the Court’s May 18 Order denying their Motion to Dismiss (“the May 18 Order”) and continue to believe, as set forth in their Motion to Dismiss (the “Motion”) and the supporting Declaration of Professor Michael J. Koehler, that the FCPA does not criminalize payments made to employees of state-owned enterprises (“SOEs”). Defendants reserve all of their rights to challenge the May 18 Order, if necessary, on appeal. Were it not for the existence of the Court’s May 18 Order, Defendants would propose a jury instruction that states that “a state-owned enterprise is not a foreign government instrumentality within the meaning of the FCPA, and officers and employees of a state-owned enterprise therefore are not ‘foreign officials’ under the FCPA.” But given the existence of the Court’s May 18 Order, and without waiver of their right to challenge all aspects of that Order on appeal, Defendants herein propose a jury instruction that accepts the Court’s premise that “state-owned companies may be considered ‘instrumentalities’ under the FCPA, but whether such companies qualify as ‘instrumentalities’ is a question of fact.”
In preparing their proposed “instrumentality” jury instruction, defendants were "guided by three overarching principles."
"First, it will not be sufficient to merely provide the jury with a list of nonexclusive, unweighted factors – none of which is dispositive – and ask the jury to “figure it out,” as the government seems to suggest. That will provide the jury with no real standard for making an “instrumentality” determination and will be tantamount to giving the jury no instruction at all on the “instrumentality” issue."
"Second, in determining an appropriate jury instruction, the Court should not accept any invitation from the government to borrow wholesale from an “instrumentality” analysis used under another statute – such as the “organ” prong of the Foreign Sovereign Immunities Act (“FSIA”), a provision the government highlighted at the hearing on Defendants’ Motion. [...] The FSIA may provide some guidance (indeed, Defendants have had to consult FSIA case law, because the FCPA legislative history is devoid of any discussion of SOEs as “instrumentalities,” much less any discussion of which SOEs qualify and which do not qualify), but because it is a different statute than the FCPA – the FSIA is a civil statute aimed at determining, inter alia, when a foreign entity will be considered to be part of a foreign government for purposes of sovereign immunity – its applicability to interpreting the “instrumentality” provision of the FCPA, a criminal statute that by definition must be strictly construed, is necessarily limited."
"Third, in determining the correct “instrumentality” jury instruction, the goals and structure of the FCPA must be considered. The FCPA is aimed at combating foreign bribery, but it is not a general commercial anti-bribery statute. Rather, the FCPA is aimed at preventing the special harm caused by the bribery of foreign government officials. Accordingly, Congress criminalized payments only to a “foreign official,” a term expressly and narrowly defined in pertinent part as an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The Court should provide the jury with an “instrumentality” instruction that accurately reflects Congress’s desire to criminalize payments made to foreign government officials, not payments made to employees of a company that is not, in both form and substance, actually part of the foreign government."
The proposed jury instruction then states, in full, as follows.
"The FCPA does not criminalize all payments made to foreign nationals, but only corrupt payments made to a “foreign official.” Therefore, in order for a defendant to be found guilty of an FCPA violation, the government must, among other things, prove beyond a reasonable doubt that the intended recipient of the corrupt payment at issue was a “foreign official” at the time of the alleged payment.
The term “foreign official” means any officer or employee of a foreign government (or any department, agency, or instrumentality thereof), or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality.
A “state-owned” business enterprise may, under certain circumstances, qualify as an “instrumentality” of a foreign government. On the other hand, not all “state-owned” business enterprises qualify as “instrumentalities” of a foreign government. It is up to you to determine, weighing all of the evidence, whether a particular business enterprise is or is not an “instrumentality” of a foreign government, and whether the officers and employees of that enterprise therefore are – or are not –“foreign officials” under the statute.
To conclude that a business enterprise is an “instrumentality” of a foreign government, you must conclude beyond a reasonable doubt that the business enterprise is part of the foreign government itself. In order to conclude that a business enterprise is part of the foreign government itself, you must find that the government has established, beyond a reasonable doubt, each of the following four elements:
First, the foreign government itself directly owns at least a majority of the business enterprise’s shares.
Second, the foreign government itself controls the day-to-day operations of the business enterprise, including the appointment of key officers and directors (who themselves may be government officials); the hiring and firing of employees; the financing of the enterprise through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties; and the approval of contract specifications and the awarding of contracts.
Third, the business enterprise exists for the sole and exclusive purpose of performing a public function traditionally carried out by the government. A “public function” is a function that benefits only the foreign government (and its citizens), not private shareholders. A business enterprise that exists to maximize profits rather than pursue public objectives does not perform a public function and therefore is not a foreign government instrumentality.
Fourth, employees of the business enterprise are considered to be public employees or civil servants under the law of the foreign country.
If the government fails to prove each of these four elements beyond a reasonable doubt for the “state-owned” business enterprise at issue in a particular count, and therefore fails to prove that the intended recipient of the alleged corrupt payment was a “foreign official,” you must find the defendant “not guilty” on that count.
A business enterprise is not a foreign government instrumentality if it is a mere subsidiary of a state-owned company. To qualify as a foreign government instrumentality, the business enterprise must, as set forth above, be directly and majority owned by the foreign government itself. Therefore, an employee of a business enterprise that is merely a subsidiary of another entity that is majority owned by the foreign government is not an employee of a foreign government instrumentality and is not a “foreign official.”
A business enterprise that operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, is not a foreign government instrumentality, and its employees therefore are not “foreign officials.”
DOJ
The DOJ's proposed jury instruction states, in full, as follows.
"The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
An “instrumentality” of a foreign government is any entity through which a foreign government achieves an end or purpose, and can include state-owned entities. In determining whether an entity is an instrumentality of a foreign government, you should consider the following:
(1) the circumstances surrounding the entity’s creation;
(2) the foreign government’s characterization of the entity and the entity’s employees, and whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions;
(3) the foreign government’s control over the entity, including the foreign government’s power to appoint key directors or officers of the entity;
(4) the purpose of the entity’s activities, including whether the entity provides a service to the citizens of the jurisdiction;
(5) the entity’s obligations and privileges under the foreign country’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
(6) the extent of the foreign government’s ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans)
These factors are not exclusive, and no single factor is dispositive. In addition, in order to conclude that an entity is an instrumentality of a foreign government, you need not find that all of the factors listed above weigh in favor of such a determination."
Showing posts with label Foreign Official. Show all posts
Showing posts with label Foreign Official. Show all posts
Tuesday, July 5, 2011
Monday, June 27, 2011
Mission Creep At The SEC?
Today's post is from Bruce W. Bean (Professor and Director, LLM Program at Michigan State University College of Law - here).
*****
Last week FCPA Professor had a post (see here) describing the SEC’s internal search for the new Head of the Division of Enforcement’s FCPA Unit.
As previously reported (see here), Cheryl Scarboro, Head of the Commission’s FCPA Unit, will shortly join the Washington, D.C. office of Simpson Thacher.
The internal SEC marketing materials for this position state that this “Unit seeks to expand the Commission's global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes.”
“[E]xpand the Commission’s global reach?” We do not find this concept in the FCPA. Nor is it in the original Securities Exchange Act that established the SEC. Has the Commission really run out of legitimate domestic prosecution targets? Does the Commission actually believe that, having long ignored stock manipulation by Wall Street traders (who can afford to mount a vigorous defense), it should declare victory in the domestic equities markets, shout “Mission Accomplished” and move on to police the rest of the world?
The most revealing aspect of this internal job posting for the new Head of the FCPA Enforcement Unit is this sentence, which encapsulates the SEC’s jurisdictional philosophy. "The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA."
Certainly “unique legal, evidentiary and policy challenges” are presented each time we have the Commission stretch and distort the language of the FCPA as it “attempts to develop case law.” For example, there is no FCPA language supporting the determination that millions of Chinese employees at State-Owned Enterprises are “foreign officials.” Similarly, we search in vain for the statutory basis for FCPA liability for a foreign company whose foreign subsidiary committed an act which the prosecutor claims violates the FCPA.
This newly developed FCPA “case law,” of course, is largely created by the enforcement attorneys. (See here for a prior post on "prosecutorial common law"). It is seldom fully litigated before the Judicial Branch. After all, few defendants can afford to litigate against the Government, and those that could most often do not wish to risk “debarment” from doing further business with the Government until proven innocent.
FCPA enforcement has come to mean, “Let’s see just how far we can push the inherent ambiguities in the statute.” When that rare defendant does stand up and fight as in U.S. v. Giffen, we see a multi-year, multi-million dollar legal defense during which a Federal Court ultimately did not endorse the prosecutor’s attempt to “develop new case law."
Unquestionably, there is marvelous deterrent value when the SEC makes clear that it aggressively pursues FCPA violators. Prosecutors also find good value in high profile prosecutions, since this accelerates their passage through the SEC’s revolving door to much more lucrative private practice.
A closing note of warning. As outrageous as it may seem, the SEC’s jurisdictional and enforcement philosophy is comparatively good news. On Friday, July 1, the former Head of the Unit, Cheryl Scarboro, is likely to start at Simpson Thacher. That is also the date the U.K. Bribery Act comes into force. The Bribery Act actually does purport to give British prosecutors statutory authority to pursue bribery anywhere on the planet Earth. Stay tuned!
*****
Last week FCPA Professor had a post (see here) describing the SEC’s internal search for the new Head of the Division of Enforcement’s FCPA Unit.
As previously reported (see here), Cheryl Scarboro, Head of the Commission’s FCPA Unit, will shortly join the Washington, D.C. office of Simpson Thacher.
The internal SEC marketing materials for this position state that this “Unit seeks to expand the Commission's global reach in this area by executing targeted sweeps and sector-wide investigations, identifying systemic practices that give rise to potential FCPA violations and aggressively enforcing anti-bribery statutes.”
“[E]xpand the Commission’s global reach?” We do not find this concept in the FCPA. Nor is it in the original Securities Exchange Act that established the SEC. Has the Commission really run out of legitimate domestic prosecution targets? Does the Commission actually believe that, having long ignored stock manipulation by Wall Street traders (who can afford to mount a vigorous defense), it should declare victory in the domestic equities markets, shout “Mission Accomplished” and move on to police the rest of the world?
The most revealing aspect of this internal job posting for the new Head of the FCPA Enforcement Unit is this sentence, which encapsulates the SEC’s jurisdictional philosophy. "The Unit selects cases that present unique legal, evidentiary and policy challenges and attempts to develop case law and legal precedent that will have the greatest deterrent impact on conduct that violates the FCPA."
Certainly “unique legal, evidentiary and policy challenges” are presented each time we have the Commission stretch and distort the language of the FCPA as it “attempts to develop case law.” For example, there is no FCPA language supporting the determination that millions of Chinese employees at State-Owned Enterprises are “foreign officials.” Similarly, we search in vain for the statutory basis for FCPA liability for a foreign company whose foreign subsidiary committed an act which the prosecutor claims violates the FCPA.
This newly developed FCPA “case law,” of course, is largely created by the enforcement attorneys. (See here for a prior post on "prosecutorial common law"). It is seldom fully litigated before the Judicial Branch. After all, few defendants can afford to litigate against the Government, and those that could most often do not wish to risk “debarment” from doing further business with the Government until proven innocent.
FCPA enforcement has come to mean, “Let’s see just how far we can push the inherent ambiguities in the statute.” When that rare defendant does stand up and fight as in U.S. v. Giffen, we see a multi-year, multi-million dollar legal defense during which a Federal Court ultimately did not endorse the prosecutor’s attempt to “develop new case law."
Unquestionably, there is marvelous deterrent value when the SEC makes clear that it aggressively pursues FCPA violators. Prosecutors also find good value in high profile prosecutions, since this accelerates their passage through the SEC’s revolving door to much more lucrative private practice.
A closing note of warning. As outrageous as it may seem, the SEC’s jurisdictional and enforcement philosophy is comparatively good news. On Friday, July 1, the former Head of the Unit, Cheryl Scarboro, is likely to start at Simpson Thacher. That is also the date the U.K. Bribery Act comes into force. The Bribery Act actually does purport to give British prosecutors statutory authority to pursue bribery anywhere on the planet Earth. Stay tuned!
Wednesday, June 22, 2011
Summer Reading For Representative Conyers
During last week's FCPA hearing in the House, Representative John Conyers (D-MI) had a contentious Q&A exchange with Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers). See here for the previous post regarding the hearing.
Conyers asked - "give me some examples of overcriminalization of the FCPA." He repeatedly interrupted Regon and asked "just give me some examples" "give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization." Conyers stated, "only 140 cases have been brought in 10 years -that averages 14 cases a year - is that overcriminalization to you?" Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occurred.
There should be plenty of concern regarding prosecutions that have already occurred, but given the glare of the cameras, the stress of testifying, and the disruption of being interrupted, it would have been difficult for any witness to retrieve from their memory bank specific FCPA enforcement actions.
This post provides a summer reading list of FCPA enforcement actions, commentary and analysis, and legal scholarship for Representative Conyers so that he can best seek answers to the question he posed to Regon.
For starters, what does overcriminalization mean?
To be sure, it can mean different things to different people in different circumstances. In "The Overcriminalization Phenomenon(here) Eric Luna provides this definition - "the overcriminalization phenomenon consists of: (1) untenable offenses; (2) superfluous statutes; (3) doctrines that
overextend culpability; (4) crimes without jurisdictional authority; (5) grossly disproportionate punishments; and (6) excessive or pretextual enforcement of petty violations. In this piece, Jeffrey Parker (while observing that "definitions of “overcriminalization” are a bit fuzzy and debatable") identifies the following as among the factors that may contribute to overcriminalization: "the vague, arcane, or trivial nature of such prohibitions, as undermining citizens ability to conform, and debasing the moral moment of the criminal sanction" and "the lack of adequate mens rea standards in criminal prohibitions."
Not all overcriminalization factors are relevant to this "new era of FCPA enforcement" (see here), but in the minds of many, several factors are.
Enforcement Actions
In the 2011 Comverse Technologies enforcement action (see here), the company paid $2.8 million in combined fines and penalties (and no doubt millions more in connection with the investigative and resolution process) to resolve a matter in which the DOJ did not allege that the company even knew about the improper payments at issue. The action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ's enforcement theory.
In the 2010 Alliance One International enforcement action (see here), the company paid approximately $20 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter in which it did absolutely nothing wrong. Rather, the entire DOJ enforcement action was based on a successor liability theory. Again, the action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ's enforcement theory.
In the 2010 Noble Corporation enforcement action (see here), the company paid approximately $8 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter involving the import and export of goods into Nigeria. When Congress passed the FCPA, its intent as to so-called facilitating or grease payments was clear. Senate Report No. 95-114 (May 2, 1977) states, in pertinent part, as follows. “The statute does not […] cover so-called ‘grease’ payments such as payments for expediting shipments through customs ...". The relevant House Report (No. 95-640, September 28, 1977) similarly states as follows. “The language of the bill is deliberately cast in terms which differentiate between [corrupt payments] and facilitating payments, sometimes called ‘grease payments.’ […] For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are not necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments." The Noble enforcement action was resolved via a non-prosecution agreement meaning, again, there was no judicial scrutiny of the DOJ's enforcement theory.
And then of course there is the issue of "foreign official" and the fact that most FCPA enforcement actions in this new era are based on alleged improper payments to employees of alleged state-owned or state-controlled enterprises ("SOEs") on the theory that such business entities are "instrumentalities" of a foreign government and thus all employees, regardless of rank or position, are "foreign officials" under the FCPA. Yet, (1) During its multi-year investigation of foreign corporate payments, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities. (2) In certain of the bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOE entities. These bills were introduced in both the Senate and the House during both the 94th and 95th Congress. (3) Despite being aware of SOEs and despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, Congress chose not to include such definitions or concepts in what ultimately become the FCPA in 1977. See here for extensive reading on this issue.
Commentary and Analysis
In 2010, Forbes ran a feature article (here) titled "The Bribery Racket" - "How Federal Crackdown on Bribery Hurts Business And Enriches Insiders." Lucinda Low, a respected FCPA practitioner, notes in the article that "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" and that "you don't have the checks and balances you would normally have if you had more litigation." Commenting on the current era of FCPA enforcement, Joseph Covington (who headed the DOJ's FCPA efforts in the 1980's) said that the current era "is good business for law firms [...] 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."
Here, Michael Levy (a former Assistant United States Attorney in the District of Columbia and law clerk to U.S. Supreme Court Justice Lewis F. Powell Jr.) talks about what he calls prosecutorial common law. Levy states that "prosecutors don’t set out deliberately to interpret criminal statutes in ways that convict hundreds of people on the basis of a standard that not a single Supreme Court Justice finds supportable ...". Levy notes that "we have seen this before in connection with the interpretation of the honest services fraud and obstruction of justice statutes, and it is certainly happening today with the FCPA."
In this publication, an author group including Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar) noted that in several recent FCPA enforcement actions "the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear." In other cases, the author group states that in many cases critical elements of the statute were not pleaded or were pled in a way "that is not consistent with established precedent and the language of the statute."
In a September 10, 2010 interview with the Corporate Crime Reporter, Mark Mendelsohn (the former head of DOJ FCPA enforcement during this era of resurgence who departed the DOJ for private practice in 2010) stated that "some of the factors" the DOJ uses to resolve FCPA cases are transparent, but "there are other factors less easy to see from the outside." Mendelsohn also noted, in connection with non-prosecution and deferred prosecution agreements (the common way FCPA enforcement actions are resolved) that the "danger" "is that it is tempting for the Department, or the SEC [to use these vehicles] to seek to resolve cases through DPAs or NPAs that don't actually constitute violations of the law."
In this Q&A exchange, Martin Weinstein (a former DOJ FCPA attorney who prosecuted the Lockheed case in the mid-1990's and is now a prominent FCPA practitioner) stated as follows. "The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability."
Legal Scholarship
In "Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act" (here), Amy Westbrook (Washburn University School of Law) argues that the recent "transformation of the FCPA has been brought about by ad hoc enforcement actions, rather than legislation, judicial decision, or regulation" and that "in the absence of formal process or reasoned articulation, the actual scope of the law is unclear."
In "The Facade of FCPA Enforcement" (here), I argue that "the FCPA often means what the enforcement agencies say it means" and that "even though the resolution vehicles typically used to resolve an FCPA enforcement action are not subject to judicial scrutiny and [thus] the vehicles do not necessarily reflect the triumph of the enforcement agencies’ theories, in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law" which breed "inefficient overcompliance by risk averse business actors fearful of enterprise - threatening liability because of the enforcement agencies’ untested and dubious theories."
Conyers asked - "give me some examples of overcriminalization of the FCPA." He repeatedly interrupted Regon and asked "just give me some examples" "give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization." Conyers stated, "only 140 cases have been brought in 10 years -that averages 14 cases a year - is that overcriminalization to you?" Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occurred.
There should be plenty of concern regarding prosecutions that have already occurred, but given the glare of the cameras, the stress of testifying, and the disruption of being interrupted, it would have been difficult for any witness to retrieve from their memory bank specific FCPA enforcement actions.
This post provides a summer reading list of FCPA enforcement actions, commentary and analysis, and legal scholarship for Representative Conyers so that he can best seek answers to the question he posed to Regon.
For starters, what does overcriminalization mean?
To be sure, it can mean different things to different people in different circumstances. In "The Overcriminalization Phenomenon(here) Eric Luna provides this definition - "the overcriminalization phenomenon consists of: (1) untenable offenses; (2) superfluous statutes; (3) doctrines that
overextend culpability; (4) crimes without jurisdictional authority; (5) grossly disproportionate punishments; and (6) excessive or pretextual enforcement of petty violations. In this piece, Jeffrey Parker (while observing that "definitions of “overcriminalization” are a bit fuzzy and debatable") identifies the following as among the factors that may contribute to overcriminalization: "the vague, arcane, or trivial nature of such prohibitions, as undermining citizens ability to conform, and debasing the moral moment of the criminal sanction" and "the lack of adequate mens rea standards in criminal prohibitions."
Not all overcriminalization factors are relevant to this "new era of FCPA enforcement" (see here), but in the minds of many, several factors are.
Enforcement Actions
In the 2011 Comverse Technologies enforcement action (see here), the company paid $2.8 million in combined fines and penalties (and no doubt millions more in connection with the investigative and resolution process) to resolve a matter in which the DOJ did not allege that the company even knew about the improper payments at issue. The action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ's enforcement theory.
In the 2010 Alliance One International enforcement action (see here), the company paid approximately $20 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter in which it did absolutely nothing wrong. Rather, the entire DOJ enforcement action was based on a successor liability theory. Again, the action was resolved via a non-prosecution agreement meaning there was no judicial scrutiny of the DOJ's enforcement theory.
In the 2010 Noble Corporation enforcement action (see here), the company paid approximately $8 million in combined fines and penalties (and millions more in connection with the investigative and resolution process) to resolve a matter involving the import and export of goods into Nigeria. When Congress passed the FCPA, its intent as to so-called facilitating or grease payments was clear. Senate Report No. 95-114 (May 2, 1977) states, in pertinent part, as follows. “The statute does not […] cover so-called ‘grease’ payments such as payments for expediting shipments through customs ...". The relevant House Report (No. 95-640, September 28, 1977) similarly states as follows. “The language of the bill is deliberately cast in terms which differentiate between [corrupt payments] and facilitating payments, sometimes called ‘grease payments.’ […] For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are not necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments." The Noble enforcement action was resolved via a non-prosecution agreement meaning, again, there was no judicial scrutiny of the DOJ's enforcement theory.
And then of course there is the issue of "foreign official" and the fact that most FCPA enforcement actions in this new era are based on alleged improper payments to employees of alleged state-owned or state-controlled enterprises ("SOEs") on the theory that such business entities are "instrumentalities" of a foreign government and thus all employees, regardless of rank or position, are "foreign officials" under the FCPA. Yet, (1) During its multi-year investigation of foreign corporate payments, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities. (2) In certain of the bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOE entities. These bills were introduced in both the Senate and the House during both the 94th and 95th Congress. (3) Despite being aware of SOEs and despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, Congress chose not to include such definitions or concepts in what ultimately become the FCPA in 1977. See here for extensive reading on this issue.
Commentary and Analysis
In 2010, Forbes ran a feature article (here) titled "The Bribery Racket" - "How Federal Crackdown on Bribery Hurts Business And Enriches Insiders." Lucinda Low, a respected FCPA practitioner, notes in the article that "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" and that "you don't have the checks and balances you would normally have if you had more litigation." Commenting on the current era of FCPA enforcement, Joseph Covington (who headed the DOJ's FCPA efforts in the 1980's) said that the current era "is good business for law firms [...] 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."
Here, Michael Levy (a former Assistant United States Attorney in the District of Columbia and law clerk to U.S. Supreme Court Justice Lewis F. Powell Jr.) talks about what he calls prosecutorial common law. Levy states that "prosecutors don’t set out deliberately to interpret criminal statutes in ways that convict hundreds of people on the basis of a standard that not a single Supreme Court Justice finds supportable ...". Levy notes that "we have seen this before in connection with the interpretation of the honest services fraud and obstruction of justice statutes, and it is certainly happening today with the FCPA."
In this publication, an author group including Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar) noted that in several recent FCPA enforcement actions "the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear." In other cases, the author group states that in many cases critical elements of the statute were not pleaded or were pled in a way "that is not consistent with established precedent and the language of the statute."
In a September 10, 2010 interview with the Corporate Crime Reporter, Mark Mendelsohn (the former head of DOJ FCPA enforcement during this era of resurgence who departed the DOJ for private practice in 2010) stated that "some of the factors" the DOJ uses to resolve FCPA cases are transparent, but "there are other factors less easy to see from the outside." Mendelsohn also noted, in connection with non-prosecution and deferred prosecution agreements (the common way FCPA enforcement actions are resolved) that the "danger" "is that it is tempting for the Department, or the SEC [to use these vehicles] to seek to resolve cases through DPAs or NPAs that don't actually constitute violations of the law."
In this Q&A exchange, Martin Weinstein (a former DOJ FCPA attorney who prosecuted the Lockheed case in the mid-1990's and is now a prominent FCPA practitioner) stated as follows. "The last decade of FCPA enforcement has seen extraordinary evolution, and I think you have to say that when Congress passed the law in 1977, they did not envision the wide reach of enforcement today and the types of things that the government gets involved in, such as transactions, joint ventures, and successor liability."
Legal Scholarship
In "Enthusiastic Enforcement, Informal Legislation: The Unruly Expansion of the Foreign Corrupt Practices Act" (here), Amy Westbrook (Washburn University School of Law) argues that the recent "transformation of the FCPA has been brought about by ad hoc enforcement actions, rather than legislation, judicial decision, or regulation" and that "in the absence of formal process or reasoned articulation, the actual scope of the law is unclear."
In "The Facade of FCPA Enforcement" (here), I argue that "the FCPA often means what the enforcement agencies say it means" and that "even though the resolution vehicles typically used to resolve an FCPA enforcement action are not subject to judicial scrutiny and [thus] the vehicles do not necessarily reflect the triumph of the enforcement agencies’ theories, in the absence of substantive FCPA case law, these privately negotiated resolution vehicles have come to represent de facto FCPA case law" which breed "inefficient overcompliance by risk averse business actors fearful of enterprise - threatening liability because of the enforcement agencies’ untested and dubious theories."
Tuesday, June 14, 2011
House Hearing - Overview and Observations
Representative James Sensenbrenner (R-WI) today chaired a hearing of the House Judiciary Committee, Subcommittee on Crime, Terrorism, and Homeland Security titled "Foreign Corrupt Practices Act." (See here for the video).
This post provides a chronological overview of the hearing as well as observations.
Compared to the Senate's FCPA hearing in November 2010 (see here for the prior post) today's hearing (approximately two hours) was much more contentious. For instance, during the hearing Chairman Sensenbrenner noted that FCPA enforcement has become a "considerable windfall for the federal government" and he concluded the hearing by telling Greg Andres (DOJ) that it "would behoove the DOJ to realize that the statute needs updating" and that those on the Committee will be drafting a reform bill.
The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980's in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business.
There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals most notably clarifying the FCPA's definition of "foreign official" / "instrumentality" and exploring an FCPA compliance defense. In fact, John Conyers (D-MI), who appeared most supportive of the current state of FCPA enforcement, stated he would support such reform proposals. The DOJ supports neither of these proposals.
Other issues explored in the hearing included prosecutorial discretion and DOJ declination decisions - including a request that the DOJ provide further information as to its declination decisions.
What happens next is a good question.
It seems like an FCPA reform bill will soon be introduced and hearings as to the specifics of such a bill may occur. Whether such a bill can get out of committee for full consideration by the House, and whether similar bills will be introduced in the Senate, is the open question. Politically, any FCPA reform efforts are likely, because of the topic at issue, to attract substantial opposition - including opposition that is less than informed as to the actual issues.
It bears noting that the last time Congress enacted significant FCPA amendments, the process took eight years and the statute was amended, not through a stand-alone bill, but through Title V, Subtitle A, Part I of the Omnibus Trade and Competiveness Act of 1988.
Opening Statement of Chairman Sensenbrenner
Sensenbrenner began by noting that when Congress passed the FCPA in 1977 the "world was a different place." In response to slush funds and secret payments to foreign governments that adversely affected U.S. foreign policy, Congress passed the FCPA and the law "sent a strong signal." (For an overview of the facts and circumstances motivating Congress to pass the FCPA - see here).
Sensenebrenner next observed that thirty-four years later, the world has turned upside down, China is a power, the nature of overseas business has changed, and many countries have some state-control over business.
Sensenbrenner noted that there has been a dramatic increase in FCPA prosecution and that last year approximately 1/2 of all DOJ criminal penalties were in FCPA cases (see here for the DOJ release) - a dynamic he called a "considerable windfall for the federal government."
In touching upon themes similar to when Congress held substantive FCPA hearings in the mid-1980's, Sensenbrenner placed the increase in FCPA enforcement in the context of the current economic downturn. Indeed a theme throughout the hearing was that the current state of FCPA enforcement may be harming U.S. business interests.
Sensenbrenner stated that "FCPA prosecutions should be effective and fair," but also "predictable" so that the "rules of the road are clear" so that "business can start moving again."
In closing his opening statement, Sensenbrenner stated that the Committee was well-suited to examine the impact of the FCPA and to ask hard questions - such as whether the FCPA was succeeding in its mission or hurting job creation.
Opening Statement of Ranking Member Scott
Robert Scott (D-VA) next made an opening statement. Scott summarized the reform proposals including providing greater clarity to the "foreign official" definition. As a potential compliance affirmative defense, Scott observed that companies are spending substantial sums - millions of dollars in some cases - on FCPA compliance - a result he indicated may often result in "overcompliance" because companies would rather be "safe than sorry." Scott stated that "punishing those companies and individuals who are operating in good faith runs counter to the basic tenets of fairness and justice." He also indicated that successor liability "runs counter" to a system of justice that should only punish the guilty party.
In closing, Scott said that effective enforcement of the FCPA is "crucial" and he applauded aggressive enforcement of the law. At the same time, Scott noted the necessity of periodically reviewing laws to make sure "they remain fair and just."
Opening Statement of John Conyers
John Conyers (D-MI) also made an opening statement. After a few sentences about unemployment figures and the Obama administration, Conyers asked the following question: will somebody explain to me how 140 cases in 10 years is "overly aggressive prosecution."
Conyers did indicate in his opening statement that he does support certain FCPA reform proposals. As to clarification of "foreign official," Conyers said he can "support this one" because it can create a problem when those subject to the FCPA do not have a clear understanding of who a "foreign official" is. Conyers also said that he can support the addition of a compliance defenses so that companies can fight imposition of criminal liability if individual employees and agents circumvent compliance measures. Conyers did not support other FCPA reform proposals - such as limiting successor liability, limiting parent company liability for acts of foreign subsidiaries, and adding a wilful mens rea requirement for corporations.
Statement by Greg Andres
Greg Andres (Deputy Assistant Attorney General) next delivered an opening statement. His prepared statement can be found here.
Among other things, Andres noted that DOJ's FCPA prosecutions involve "systemic long-standing bribery schemes" not the payment of single bribe payments of nominal sums.
Andres specifically cited the Daimler AG and Siemens FCPA prosecutions to support this point. However, the irony is that neither of these FCPA enforcement actions involved FCPA anti-bribery charges against the parent company or any related individual prosecutions.
As to a potential FCPA compliance defense, Andres stated that the DOJ already considers a company's pre-existing compliance policies and procedures pursuant to the Federal Principles of Prosecution of Business Organizations (see here).
As to providing guidance, Andres noted that the DOJ's goal "is not simply to prosecute FCPA cases" and that senior DOJ officials often speak publicly on the FCPA and highlight relevant considerations and practices companies should adopt. Andres also discussed the DOJ's FCPA Opinion Procedure program (see here for more).
In closing, Andres stated that DOJ is proud of its enforcement record and that it looks forward to working with Congress.
Statement by Michael Mukasey
Former Attorney General and current Debevoise & Plimpton partner Michael Mukasey next delivered an opening statement on behalf of the U.S. Chamber of Commerce. See here for his prepared statement.
Mukasey began by noting that no one favors bribery and that while the FCPA indeed does have merit, "more than 30 years of experience" with the law demonstrates that it can be improved.
His testimony focused on two of the Chamber's FCPA reform proposals: clarifying the definition of "foreign official" and "instrumentality" and amending the FCPA to include a compliance defense.
As to the later, Mukasey observed that statutory guidance can be found in Title VII of the Civil Rights Act which provides for something akin to a compliance defense. Mukasey stated that "dozens, if not hundreds of cases are resolved under this compliance defense" and that the defense reduces discrimination by encouraging employers to have robust compliance systems.
As to "foreign official," Mukasey referenced the recent judicial opinions on this issue (see here and here for the prior posts), yet noted that the judges did very little to clarify the limits of the "foreign official" issue other than say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a "foreign official" varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it "impossible" for companies to determine in advance who is a "foreign official" thereby increasing uncertainty and barriers to U.S. business. According to Mukasey, "majority ownership is the most plausible threshold" for whether a state-owned or state-controlled enterprise constitutes a foreign government "instrumentality."
Statement by George Terwilliger
George Terwilliger (White & Case) next delivered an opening statement. See here for his prepared statement.
Terwilliger opened by stating that he favors "fair enforcement of sensible corruption statutes" and that "leveling the playing field" is essential. He noted that the DOJ and SEC are "realizing their enforcement goal of driving companies into far greater compliance," but also noted the less desirable effects of stepped-up enforcement. He spoke of the "hidden effect" of foregone business opportunities because of FCPA enforcement concerns and noted that the current state of enforcement may hurt job creation.
According to Terwilliger, the "hidden costs" of FCPA enforcement are the result of uncertainty and that companies sometimes forego deals, take a pass on certain projects and withdraw from other projects - not because such companies are necessarily risk averse - but because of the risk-reward ratio in this current FCPA enforcement environment.
Terwilliger proposed a further FCPA reform proposal related to successor liability and that is a statutory safe harbor provision during which an acquiring company could be shielded from FCPA liability for a defined time period post-closing. During this post-closing period, the acquiring company would undertake a thorough review of the target's business operations and have the opportunity to self-disclose any FCPA issues to the enforcement authorities.
Statement by Shana-Tara Regon
Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers) next testified. See here for her prepared statement.
She observed that given the general lack of judicial scrutiny over FCPA enforcement, the FCPA says whatever essentially the DOJ says it means and that the FCPA has, in many instances, become a strict liability statute "in ways that those who created the FCPA could never have envisoned."
Regon stated that NACDL does not advocate bribery and similarly stated that advocating for reform is not akin to advocating for bribery. Her testimony was focused on two reform proposals - clarifying the definition of "foreign official" and strengthening the mens rea requirement for corporate offenses. She stated that the FCPA is "emblematic of the general problem of overcriminalization" and that FCPA enforcement has several "unintended consequences" including over-compliance.
During the hearing, Global Financial Integrity (see here for yesterday's post) tweeted as follos: " This group of witnesses is such a sham. All three non-DOJ witnesses spewing disingenuous pro-#bribery #AmChamb talking points #FCPAHearing." (See here).
Chairman Sensenbrenner reserved his questions for the end and next called on various Representatives present.
Q&A Session
Tom Marino (R-PA) asked Andres (DOJ) about the DOJ's top enforcement obstacle.
Andres stated that because FCPA violations focus on conduct abroad, the DOJ often needs to rely on MLAT requests which can take longer. He noted that the DOJ is in favor of extending the FCPA's statute of limitations given that it generally takes a long time to investigate FCPA cases. Andres further stated that while there is much discussion as to the increase in FCPA enforcement, this discussion often "fails to recognize the size and magnitude of the problem."
Robert Scott (D-VA) next asked Mukasey whether the compliance defense proposed was a total defense or an affirmative defense. Mukasey stated that the proposal was for an affirmative defense and that where there is a proved violation of the FCPA, the question should then become whether the company had a compliance mechanism in place reasonable designed to detect and prevent the conduct. Mukasey noted that this issue may be an "uphill climb" for a company, but that the FCPA ought to at least allow a company to pursue such a defense.
Scott next asked Mukasey about the mens rea reform proposal for corporate liability. Mukasey seemed to be advocating a corporate liability standard similar to the (soon to be old) U.K. standard and the current Canada law standard when he stated that a company should only be held liable if someone in a "policy making position" was involved in or condoned the improper activity.
Scott next asked Andres (DOJ) the general question of whether any de minimis cases have ever been brought by the DOJ. Andres stated "no," the DOJ has never prosecuted "cup of coffee, lunch, taxi-ride type of cases" and he further stated that because of the FCPA's corrupt intent element and the affirmative defense for reasonable and bona fide business expenditures, it is an open question as to whether such facts even violate the statute.
Even so, Andres stated that the DOJ is opposed to creating a de minimis exception to the FCPA because small, recurring payments can amount to significant bribery. He stated that the amount of the bribe is not the relevant consideration, rather the intent of the bribe is and that all bribery is inappropriate. Andres said that all the talk of taxi-ride payments and meals being in violation of the FCPA "is not reflected in our enforcement actions."
Taxi-cabs were a recurring issue throughout the hearing. Mukasey stated, in response to a question, that the taxi-cab example is real and that when "nervous counsel" found out that a company may have paid a "foreign official's" taxi-cab fare, the company disclosed the conduct to the DOJ and the DOJ requested that the company investigate its entire relationship with the "foreign official." Mukasey stated that this investigation cost the company approximately $200,000, no violation was found, and that the company could have used this money for something more beneficial than conducting in investigation as to these facts.
Louie Gohmert (R-TX) next stated that those subject to the FCPA "ought to have a clear enough line" so that people don't have to think "is it or isn't it a bribe" to make this payment. Gohmert said that Congress can define bribery so that companies "can have a clear line" so that a company does not have to spend $200,000 to figure out whehther paying for a cab is an FCPA violation. Gohmert then made an interesting observing that the FCPA allows a "young prosecutor" or an "FBI agent seeking to make a name for himself" the opportunity to pursue all sorts of enforcement actions and that enforcement then ends up being more aggressive than it should be.
Gohmert next asked Andres (DOJ) as follows: why should a company be prosecuted if a company has a compliance program set up according to the standards set forth in Chapter 8 of the U.S. Sentencing Guidelines (see here). Gohmert stated that if a company has done everything it can do, it seems like a strict liability standard if the company is prosecuted because of the act of an employee acting contrary to the company's policy. Andres stated that the DOJ "does not prosecute companies based on the acts of a single, rogue employee."
Rather, Andres stated that the DOJ looks at how pervasive was the conduct or whether the conduct involved a high-ranking employee. Andres specifically stated that the DOJ opposes consideration of an FCPA compliance defense. He stated that DOJ already seriously considers compliance programs in its charging decisions, along with other factors such as cooperation and voluntary disclosure.
Andres called a potential compliance defense "novel" and one that is not "well-defined." He said that such a defense could lead to "paper compliance." He also referenced the U.K. Bribery Act (which does contain such a compliance defense) yet stated that this defense is not yet in effect and thus there is no precedent to analyze to see whether such a defense is effective.
Given that the DOJ frequently takes FCPA enforcement position that are "novel," are not "well-defined," and are not supported by precedent, Andres response on this issue was less than convincing.
In closing, Andres stated that an FCPA compliance defense could "create a loophole" and allow for some bribery to occur. He called such a potential defense "novel and risky" and said that the "time is not right to consider it."
The floor next returned to John Conyers (D-MI). He stated that ignorance of the law is no excuse and wondered why in the case of bribery does there need to be a de minimis rule. He stated that "corporations have more lawyers than anybody else" and "why do they need to know" how low the bribery threshold should be. He said that "they don't deserve to know that."
Conyers also conducted the most contentious Q&A exchange of the hearing with Regon. Conyers asked - "give me some examples of overcriminalization of the FCPA." He repeatedly interrupted Regon and asked "just give me some examples" "give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization." Conyers stated, "only 140 cases have been brought in 10 years -that averages 14 cases a year - is that overcriminalization to you?" Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occured.
Ted Poe (R-TX) next launched into a criticism of China. He said that "China, through its government, follows a systematic philosophy of corruption" and that China will "do anything in the world to get their way" including stealing from the U.S. and paying bribes. He suggested that "any means necessary" is the Chinese way to get business. "We on the other hand," Poe stated, "believe in the rule of law." Poe stated that the "Chinese are effective in their philosophy" and he observed that he just returned from Iraq where he learned that Chinese companies are going to rebuild Iraqi's oil system and that he suspected money changed hands in order to get this business.
Poe, a former prosecutor, next said that it "disturbs" him when we give DOJ prosecutors too much discretion. Poe said that he was not advocating loosening the standards, but he did prefer "absolute certainty" about what is a violation of the FCPA as "opposed to too much discretion" by the DOJ on what something means and whether it is a bribe.
Judy Chu (D-CA) next asked Andres a series of questions allowing him to further articulate how the DOJ takes into consideration a company's compliance program and how compliance expectations are stated in public documents such as Chapter 8 of the Sentencing Guidlines and the OECD Guidelines. (See here). Andres further stated that there are situations where the DOJ does not pursue an enforcement action because of a variety of factors, including a company's pre-existing compliance program, even if these instances are not made public because the DOJ does not issue a press release. Asked by Chu for reasons why FCPA enforcement has expanded, Andres stated that the "problem is as big as it has ever been" and that "at least one reason" for the increase in enforcement is the result of SOX whereby companies have an obligation to test its internal controls - tests that often uncover FCPA issues that are then often disclosed to the DOJ.
Hank Johnson (D-GA) next asked Regon about prosecutorial discretion and whether it is fair to say that the "looser the law the more prosecutorial discretion and the narrower the law the less prosecutorial discretion." Regon stated that if the DOJ means what it says (i.e. that it targets only explicit instances of bribery and that it does not prosecute based on the actions of rogue employees), then the DOJ should not mind less prosecutorial discretion. Johnson next launched into an unusual statement about illegal crime (blue-collar crime) and legal crime (white collar crime in the sense that prosecutions of white collar crime tend to be less vigorous). Johnson said he was bothered by the fact there has not been much prosecutorial activity as to white collar crime, he said this "seems kind of fishy" and that some "folks are getting off the hook for legal crime."
Sandra Adams (R-FL) next asked Andres whether the DOJ has a definition of "foreign official" or "instrumentality." Andres said, in addition to the statute, there are now several decisions by district courts that further "amplified" the definition of foreign official. Andres stated that DOJ does not support a change to the definition of "foreign official" or "instrumentality."
Adams next Andres several pointed questions about DOJ declination decisions and whether such decisions are published or transparent. Andres stated that this is a difficult area for the government because the DOJ does not want to "penalize a company or individual investigated by not prosecuted."
I've argued before (see here for the prior post) that the DOJ should publish its declination decisions in a manner similar to its FCPA Opinion Procedure decisions. Given that most declination decisions would seem to follow disclosure by a company of FCPA scrutiny (in its SEC filings), Andres's rationale for not making declination decisions public is less than convincing.
Adams asked - in the last year, how many instances of FCPA conduct have been disclosed to the DOJ where no enforcement action resulted. Andres did not offer any specific number, but retreated to the FCPA Opinion Procedure and noted that if a company ever has a question about the FCPA, it has the ability to ask the DOJ and the DOJ is obligated to give an opinion.
Adams next asked Andres whether the DOJ is defining what the law means. Andres said that "everyone of these cases is negotiated with experienced defense counsel" and that counsel has "ample opportunity" to address any issues concerning the DOJ's enforcement.
Mukasey then answered that while resolved FCPA enforcement actions make for interesting case studies, such resolutions are not binding in other cases.
Before her time expired, Adams requested that the DOJ provide the Committee with more detail as to its declination decisions, including the DOJ's reasons and rationale for why enforcement actions did not result. Chairman Sensenbrenner then followed up and said DOJ's responses will be made part of hearing record.
Shelia Jackson Lee (D-TX) next asked Andres how many attorneys and staff are assigned to FCPA enforcement. He stated that the DOJ's FCPA unit, includes a core unit in D.C. of 15 to 20 enforcement attorneys and that assistance in trials is given by local prosecutors. Jackson Lee asked "is this an excessive amount" and Andres said "certaintly not in light of the size and magnitude of the bribery problem ... it is significant." Jackson Lee next received a tutorial from Andres as to the FCPA's jurisdiction over foreign companies.
Ben Quayle (R-AZ) next asked a question very much based on current events and that is the scrutiny of the Macau gaming industry. [Las Vegas Sands recently disclosed that it received subpoenas concerning its conduct in Macau]. Andres stated that it was not appropriate for him to comment on any ongoing investigations.
Quayle next asked Andres whethr General Motors would be considered a U.S. government "instrumentality." Andres said that in addressing this issue, the DOJ considers government ownership or investment as only one factor. Other factors include characterization of the entity under foreign law, the purpose of the entity, and that under these factors General Motors would likely not qualify as a U.S. government "instrumentality." Quayle next asked whether it is relevant if the government has communications with the company's board and the government has the ability to control or influence the entity (a presumed reference to GM's relationship with the U.S. government). Andres again stated that control and ownership is but one factor and he specifically referenced the recent Lindsey prosecution where the Mexican entity at issue was specifically addressed in the country's constitution.
Quayle next asked Terwilliger whether he has any knowledge of companies conceding markets to foreign competitors because of the FCPA. Terwilliger stated that "conceding markets" may be a bit strong, but that American companies have become much more circumspect in dealing with foreign business opportunities because of FCPA enforcement. In particular, Terwilliger said that companies may bypass "smaller opportunities" (that might become bigger opportunities) because of the FCPA in that the cost-benefit analysis and FCPA compliance are too much to worry about.
Chairman Sensenbrenner was the last person to ask questions and he began his time by stating as follows. There is "no question in my mind that we have to bring this law up to date." "No one is in favor of bribery, but there has to be more certainty." Sensenbrenner said he was "a bit befuddled" by Conyer's statement that corporations don't deserve to know what bribery is and he stated that "everyone has a right to know what is illegal."
Sensenbrenner's only question (a long one at that as he basically summarized the Chamber's FCPA reform proposals) was directed to Regon and Andres. Regon focused mostly on the corporate mens rea issue and stated that her organization is supportive of "anything Congress does" to clarify the FCPA. Tara Regon failed to see the rationale for not providing greater clarity as to the FCPA and noted that "we have many bribery statutes on the books, and some of those are written tightly and work well."
Sensenbrenner then asked Andres - which of Regon's suggestions do you agree with and Andres said "I don't agree with any of them." For instance, Andres said with the definition of "foreign official" that "one thing you need to take into consideration is that the statute covers the whole world" and that what might constitute a "foreign official" in China may be different than what constitutes a "foreign official" in Brazil or France.
Sensenbrenner grasped onto this issue and noted that this part of the uncertainty that people are complaining about.
Andres followed with two points. First, that if there is concern, companies subject to the FCPA can ask for a DOJ opinion. This only seemed to enrange Sensenbrenner further as he stated "come on, China is a communist country - they are not going to tell you what the government involvement is" in a company "they don't have the type of disclosure we have."
Andres second point was that the FCPA makes illegal paying a bribe and that if companies aren't paying bribes they have nothing to fear.
Sensenbrenner then seemed to pose a question at the end of the hearing as to whether the DOJ would support an FCPA amendment that simply makee bribery (all bribery) illegal (perhaps akin to the UK Bribery Act). Sensenbrenner did not pause for Andres to respond and he (Sensenbrenner) concluded the hearing by saying "it would behoove the DOJ to realize that the statute needs updating." Andres said that the DOJ is "more than willing to work with Congress" to which Sensenbrenner said "see you later we will be drafting a bill."
Sensenbrenner then commented that if Andres were the general counsel of a corporation advising the CEO and everyone else, he would likely be advising the company in the "most narrow way" and "exercising the greatest amount of caution." "As a result," Sensenbrenner stated, legitimate business activity is not pursued and U.S. companies are put in a significant disadvantage compared to foreign companies.
Sensenbrenner then told Andres - "get the message sir and tell that to the AG."
This post provides a chronological overview of the hearing as well as observations.
Compared to the Senate's FCPA hearing in November 2010 (see here for the prior post) today's hearing (approximately two hours) was much more contentious. For instance, during the hearing Chairman Sensenbrenner noted that FCPA enforcement has become a "considerable windfall for the federal government" and he concluded the hearing by telling Greg Andres (DOJ) that it "would behoove the DOJ to realize that the statute needs updating" and that those on the Committee will be drafting a reform bill.
The hearing focused on a wide range of issues and in many ways was similar to FCPA reform hearings in the 1980's in that a common theme explored during the hearing was whether the current state of FCPA enforcement harms U.S. business.
There is clearly a push to introduce FCPA reform legislation and members of both parties appeared receptive (to at least certain) FCPA reform proposals most notably clarifying the FCPA's definition of "foreign official" / "instrumentality" and exploring an FCPA compliance defense. In fact, John Conyers (D-MI), who appeared most supportive of the current state of FCPA enforcement, stated he would support such reform proposals. The DOJ supports neither of these proposals.
Other issues explored in the hearing included prosecutorial discretion and DOJ declination decisions - including a request that the DOJ provide further information as to its declination decisions.
What happens next is a good question.
It seems like an FCPA reform bill will soon be introduced and hearings as to the specifics of such a bill may occur. Whether such a bill can get out of committee for full consideration by the House, and whether similar bills will be introduced in the Senate, is the open question. Politically, any FCPA reform efforts are likely, because of the topic at issue, to attract substantial opposition - including opposition that is less than informed as to the actual issues.
It bears noting that the last time Congress enacted significant FCPA amendments, the process took eight years and the statute was amended, not through a stand-alone bill, but through Title V, Subtitle A, Part I of the Omnibus Trade and Competiveness Act of 1988.
Opening Statement of Chairman Sensenbrenner
Sensenbrenner began by noting that when Congress passed the FCPA in 1977 the "world was a different place." In response to slush funds and secret payments to foreign governments that adversely affected U.S. foreign policy, Congress passed the FCPA and the law "sent a strong signal." (For an overview of the facts and circumstances motivating Congress to pass the FCPA - see here).
Sensenebrenner next observed that thirty-four years later, the world has turned upside down, China is a power, the nature of overseas business has changed, and many countries have some state-control over business.
Sensenbrenner noted that there has been a dramatic increase in FCPA prosecution and that last year approximately 1/2 of all DOJ criminal penalties were in FCPA cases (see here for the DOJ release) - a dynamic he called a "considerable windfall for the federal government."
In touching upon themes similar to when Congress held substantive FCPA hearings in the mid-1980's, Sensenbrenner placed the increase in FCPA enforcement in the context of the current economic downturn. Indeed a theme throughout the hearing was that the current state of FCPA enforcement may be harming U.S. business interests.
Sensenbrenner stated that "FCPA prosecutions should be effective and fair," but also "predictable" so that the "rules of the road are clear" so that "business can start moving again."
In closing his opening statement, Sensenbrenner stated that the Committee was well-suited to examine the impact of the FCPA and to ask hard questions - such as whether the FCPA was succeeding in its mission or hurting job creation.
Opening Statement of Ranking Member Scott
Robert Scott (D-VA) next made an opening statement. Scott summarized the reform proposals including providing greater clarity to the "foreign official" definition. As a potential compliance affirmative defense, Scott observed that companies are spending substantial sums - millions of dollars in some cases - on FCPA compliance - a result he indicated may often result in "overcompliance" because companies would rather be "safe than sorry." Scott stated that "punishing those companies and individuals who are operating in good faith runs counter to the basic tenets of fairness and justice." He also indicated that successor liability "runs counter" to a system of justice that should only punish the guilty party.
In closing, Scott said that effective enforcement of the FCPA is "crucial" and he applauded aggressive enforcement of the law. At the same time, Scott noted the necessity of periodically reviewing laws to make sure "they remain fair and just."
Opening Statement of John Conyers
John Conyers (D-MI) also made an opening statement. After a few sentences about unemployment figures and the Obama administration, Conyers asked the following question: will somebody explain to me how 140 cases in 10 years is "overly aggressive prosecution."
Conyers did indicate in his opening statement that he does support certain FCPA reform proposals. As to clarification of "foreign official," Conyers said he can "support this one" because it can create a problem when those subject to the FCPA do not have a clear understanding of who a "foreign official" is. Conyers also said that he can support the addition of a compliance defenses so that companies can fight imposition of criminal liability if individual employees and agents circumvent compliance measures. Conyers did not support other FCPA reform proposals - such as limiting successor liability, limiting parent company liability for acts of foreign subsidiaries, and adding a wilful mens rea requirement for corporations.
Statement by Greg Andres
Greg Andres (Deputy Assistant Attorney General) next delivered an opening statement. His prepared statement can be found here.
Among other things, Andres noted that DOJ's FCPA prosecutions involve "systemic long-standing bribery schemes" not the payment of single bribe payments of nominal sums.
Andres specifically cited the Daimler AG and Siemens FCPA prosecutions to support this point. However, the irony is that neither of these FCPA enforcement actions involved FCPA anti-bribery charges against the parent company or any related individual prosecutions.
As to a potential FCPA compliance defense, Andres stated that the DOJ already considers a company's pre-existing compliance policies and procedures pursuant to the Federal Principles of Prosecution of Business Organizations (see here).
As to providing guidance, Andres noted that the DOJ's goal "is not simply to prosecute FCPA cases" and that senior DOJ officials often speak publicly on the FCPA and highlight relevant considerations and practices companies should adopt. Andres also discussed the DOJ's FCPA Opinion Procedure program (see here for more).
In closing, Andres stated that DOJ is proud of its enforcement record and that it looks forward to working with Congress.
Statement by Michael Mukasey
Former Attorney General and current Debevoise & Plimpton partner Michael Mukasey next delivered an opening statement on behalf of the U.S. Chamber of Commerce. See here for his prepared statement.
Mukasey began by noting that no one favors bribery and that while the FCPA indeed does have merit, "more than 30 years of experience" with the law demonstrates that it can be improved.
His testimony focused on two of the Chamber's FCPA reform proposals: clarifying the definition of "foreign official" and "instrumentality" and amending the FCPA to include a compliance defense.
As to the later, Mukasey observed that statutory guidance can be found in Title VII of the Civil Rights Act which provides for something akin to a compliance defense. Mukasey stated that "dozens, if not hundreds of cases are resolved under this compliance defense" and that the defense reduces discrimination by encouraging employers to have robust compliance systems.
As to "foreign official," Mukasey referenced the recent judicial opinions on this issue (see here and here for the prior posts), yet noted that the judges did very little to clarify the limits of the "foreign official" issue other than say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a "foreign official" varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it "impossible" for companies to determine in advance who is a "foreign official" thereby increasing uncertainty and barriers to U.S. business. According to Mukasey, "majority ownership is the most plausible threshold" for whether a state-owned or state-controlled enterprise constitutes a foreign government "instrumentality."
Statement by George Terwilliger
George Terwilliger (White & Case) next delivered an opening statement. See here for his prepared statement.
Terwilliger opened by stating that he favors "fair enforcement of sensible corruption statutes" and that "leveling the playing field" is essential. He noted that the DOJ and SEC are "realizing their enforcement goal of driving companies into far greater compliance," but also noted the less desirable effects of stepped-up enforcement. He spoke of the "hidden effect" of foregone business opportunities because of FCPA enforcement concerns and noted that the current state of enforcement may hurt job creation.
According to Terwilliger, the "hidden costs" of FCPA enforcement are the result of uncertainty and that companies sometimes forego deals, take a pass on certain projects and withdraw from other projects - not because such companies are necessarily risk averse - but because of the risk-reward ratio in this current FCPA enforcement environment.
Terwilliger proposed a further FCPA reform proposal related to successor liability and that is a statutory safe harbor provision during which an acquiring company could be shielded from FCPA liability for a defined time period post-closing. During this post-closing period, the acquiring company would undertake a thorough review of the target's business operations and have the opportunity to self-disclose any FCPA issues to the enforcement authorities.
Statement by Shana-Tara Regon
Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers) next testified. See here for her prepared statement.
She observed that given the general lack of judicial scrutiny over FCPA enforcement, the FCPA says whatever essentially the DOJ says it means and that the FCPA has, in many instances, become a strict liability statute "in ways that those who created the FCPA could never have envisoned."
Regon stated that NACDL does not advocate bribery and similarly stated that advocating for reform is not akin to advocating for bribery. Her testimony was focused on two reform proposals - clarifying the definition of "foreign official" and strengthening the mens rea requirement for corporate offenses. She stated that the FCPA is "emblematic of the general problem of overcriminalization" and that FCPA enforcement has several "unintended consequences" including over-compliance.
During the hearing, Global Financial Integrity (see here for yesterday's post) tweeted as follos: " This group of witnesses is such a sham. All three non-DOJ witnesses spewing disingenuous pro-#bribery #AmChamb talking points #FCPAHearing." (See here).
Chairman Sensenbrenner reserved his questions for the end and next called on various Representatives present.
Q&A Session
Tom Marino (R-PA) asked Andres (DOJ) about the DOJ's top enforcement obstacle.
Andres stated that because FCPA violations focus on conduct abroad, the DOJ often needs to rely on MLAT requests which can take longer. He noted that the DOJ is in favor of extending the FCPA's statute of limitations given that it generally takes a long time to investigate FCPA cases. Andres further stated that while there is much discussion as to the increase in FCPA enforcement, this discussion often "fails to recognize the size and magnitude of the problem."
Robert Scott (D-VA) next asked Mukasey whether the compliance defense proposed was a total defense or an affirmative defense. Mukasey stated that the proposal was for an affirmative defense and that where there is a proved violation of the FCPA, the question should then become whether the company had a compliance mechanism in place reasonable designed to detect and prevent the conduct. Mukasey noted that this issue may be an "uphill climb" for a company, but that the FCPA ought to at least allow a company to pursue such a defense.
Scott next asked Mukasey about the mens rea reform proposal for corporate liability. Mukasey seemed to be advocating a corporate liability standard similar to the (soon to be old) U.K. standard and the current Canada law standard when he stated that a company should only be held liable if someone in a "policy making position" was involved in or condoned the improper activity.
Scott next asked Andres (DOJ) the general question of whether any de minimis cases have ever been brought by the DOJ. Andres stated "no," the DOJ has never prosecuted "cup of coffee, lunch, taxi-ride type of cases" and he further stated that because of the FCPA's corrupt intent element and the affirmative defense for reasonable and bona fide business expenditures, it is an open question as to whether such facts even violate the statute.
Even so, Andres stated that the DOJ is opposed to creating a de minimis exception to the FCPA because small, recurring payments can amount to significant bribery. He stated that the amount of the bribe is not the relevant consideration, rather the intent of the bribe is and that all bribery is inappropriate. Andres said that all the talk of taxi-ride payments and meals being in violation of the FCPA "is not reflected in our enforcement actions."
Taxi-cabs were a recurring issue throughout the hearing. Mukasey stated, in response to a question, that the taxi-cab example is real and that when "nervous counsel" found out that a company may have paid a "foreign official's" taxi-cab fare, the company disclosed the conduct to the DOJ and the DOJ requested that the company investigate its entire relationship with the "foreign official." Mukasey stated that this investigation cost the company approximately $200,000, no violation was found, and that the company could have used this money for something more beneficial than conducting in investigation as to these facts.
Louie Gohmert (R-TX) next stated that those subject to the FCPA "ought to have a clear enough line" so that people don't have to think "is it or isn't it a bribe" to make this payment. Gohmert said that Congress can define bribery so that companies "can have a clear line" so that a company does not have to spend $200,000 to figure out whehther paying for a cab is an FCPA violation. Gohmert then made an interesting observing that the FCPA allows a "young prosecutor" or an "FBI agent seeking to make a name for himself" the opportunity to pursue all sorts of enforcement actions and that enforcement then ends up being more aggressive than it should be.
Gohmert next asked Andres (DOJ) as follows: why should a company be prosecuted if a company has a compliance program set up according to the standards set forth in Chapter 8 of the U.S. Sentencing Guidelines (see here). Gohmert stated that if a company has done everything it can do, it seems like a strict liability standard if the company is prosecuted because of the act of an employee acting contrary to the company's policy. Andres stated that the DOJ "does not prosecute companies based on the acts of a single, rogue employee."
Rather, Andres stated that the DOJ looks at how pervasive was the conduct or whether the conduct involved a high-ranking employee. Andres specifically stated that the DOJ opposes consideration of an FCPA compliance defense. He stated that DOJ already seriously considers compliance programs in its charging decisions, along with other factors such as cooperation and voluntary disclosure.
Andres called a potential compliance defense "novel" and one that is not "well-defined." He said that such a defense could lead to "paper compliance." He also referenced the U.K. Bribery Act (which does contain such a compliance defense) yet stated that this defense is not yet in effect and thus there is no precedent to analyze to see whether such a defense is effective.
Given that the DOJ frequently takes FCPA enforcement position that are "novel," are not "well-defined," and are not supported by precedent, Andres response on this issue was less than convincing.
In closing, Andres stated that an FCPA compliance defense could "create a loophole" and allow for some bribery to occur. He called such a potential defense "novel and risky" and said that the "time is not right to consider it."
The floor next returned to John Conyers (D-MI). He stated that ignorance of the law is no excuse and wondered why in the case of bribery does there need to be a de minimis rule. He stated that "corporations have more lawyers than anybody else" and "why do they need to know" how low the bribery threshold should be. He said that "they don't deserve to know that."
Conyers also conducted the most contentious Q&A exchange of the hearing with Regon. Conyers asked - "give me some examples of overcriminalization of the FCPA." He repeatedly interrupted Regon and asked "just give me some examples" "give me an instance of where one case was ever brought by the DOJ that would constitute overcriminalization." Conyers stated, "only 140 cases have been brought in 10 years -that averages 14 cases a year - is that overcriminalization to you?" Regon stated that overcriminlization occurs when a statute provides no reasonable limits and that she is concerned more about prosecutions that may occur in the future more so than prosecutions that have already occured.
Ted Poe (R-TX) next launched into a criticism of China. He said that "China, through its government, follows a systematic philosophy of corruption" and that China will "do anything in the world to get their way" including stealing from the U.S. and paying bribes. He suggested that "any means necessary" is the Chinese way to get business. "We on the other hand," Poe stated, "believe in the rule of law." Poe stated that the "Chinese are effective in their philosophy" and he observed that he just returned from Iraq where he learned that Chinese companies are going to rebuild Iraqi's oil system and that he suspected money changed hands in order to get this business.
Poe, a former prosecutor, next said that it "disturbs" him when we give DOJ prosecutors too much discretion. Poe said that he was not advocating loosening the standards, but he did prefer "absolute certainty" about what is a violation of the FCPA as "opposed to too much discretion" by the DOJ on what something means and whether it is a bribe.
Judy Chu (D-CA) next asked Andres a series of questions allowing him to further articulate how the DOJ takes into consideration a company's compliance program and how compliance expectations are stated in public documents such as Chapter 8 of the Sentencing Guidlines and the OECD Guidelines. (See here). Andres further stated that there are situations where the DOJ does not pursue an enforcement action because of a variety of factors, including a company's pre-existing compliance program, even if these instances are not made public because the DOJ does not issue a press release. Asked by Chu for reasons why FCPA enforcement has expanded, Andres stated that the "problem is as big as it has ever been" and that "at least one reason" for the increase in enforcement is the result of SOX whereby companies have an obligation to test its internal controls - tests that often uncover FCPA issues that are then often disclosed to the DOJ.
Hank Johnson (D-GA) next asked Regon about prosecutorial discretion and whether it is fair to say that the "looser the law the more prosecutorial discretion and the narrower the law the less prosecutorial discretion." Regon stated that if the DOJ means what it says (i.e. that it targets only explicit instances of bribery and that it does not prosecute based on the actions of rogue employees), then the DOJ should not mind less prosecutorial discretion. Johnson next launched into an unusual statement about illegal crime (blue-collar crime) and legal crime (white collar crime in the sense that prosecutions of white collar crime tend to be less vigorous). Johnson said he was bothered by the fact there has not been much prosecutorial activity as to white collar crime, he said this "seems kind of fishy" and that some "folks are getting off the hook for legal crime."
Sandra Adams (R-FL) next asked Andres whether the DOJ has a definition of "foreign official" or "instrumentality." Andres said, in addition to the statute, there are now several decisions by district courts that further "amplified" the definition of foreign official. Andres stated that DOJ does not support a change to the definition of "foreign official" or "instrumentality."
Adams next Andres several pointed questions about DOJ declination decisions and whether such decisions are published or transparent. Andres stated that this is a difficult area for the government because the DOJ does not want to "penalize a company or individual investigated by not prosecuted."
I've argued before (see here for the prior post) that the DOJ should publish its declination decisions in a manner similar to its FCPA Opinion Procedure decisions. Given that most declination decisions would seem to follow disclosure by a company of FCPA scrutiny (in its SEC filings), Andres's rationale for not making declination decisions public is less than convincing.
Adams asked - in the last year, how many instances of FCPA conduct have been disclosed to the DOJ where no enforcement action resulted. Andres did not offer any specific number, but retreated to the FCPA Opinion Procedure and noted that if a company ever has a question about the FCPA, it has the ability to ask the DOJ and the DOJ is obligated to give an opinion.
Adams next asked Andres whether the DOJ is defining what the law means. Andres said that "everyone of these cases is negotiated with experienced defense counsel" and that counsel has "ample opportunity" to address any issues concerning the DOJ's enforcement.
Mukasey then answered that while resolved FCPA enforcement actions make for interesting case studies, such resolutions are not binding in other cases.
Before her time expired, Adams requested that the DOJ provide the Committee with more detail as to its declination decisions, including the DOJ's reasons and rationale for why enforcement actions did not result. Chairman Sensenbrenner then followed up and said DOJ's responses will be made part of hearing record.
Shelia Jackson Lee (D-TX) next asked Andres how many attorneys and staff are assigned to FCPA enforcement. He stated that the DOJ's FCPA unit, includes a core unit in D.C. of 15 to 20 enforcement attorneys and that assistance in trials is given by local prosecutors. Jackson Lee asked "is this an excessive amount" and Andres said "certaintly not in light of the size and magnitude of the bribery problem ... it is significant." Jackson Lee next received a tutorial from Andres as to the FCPA's jurisdiction over foreign companies.
Ben Quayle (R-AZ) next asked a question very much based on current events and that is the scrutiny of the Macau gaming industry. [Las Vegas Sands recently disclosed that it received subpoenas concerning its conduct in Macau]. Andres stated that it was not appropriate for him to comment on any ongoing investigations.
Quayle next asked Andres whethr General Motors would be considered a U.S. government "instrumentality." Andres said that in addressing this issue, the DOJ considers government ownership or investment as only one factor. Other factors include characterization of the entity under foreign law, the purpose of the entity, and that under these factors General Motors would likely not qualify as a U.S. government "instrumentality." Quayle next asked whether it is relevant if the government has communications with the company's board and the government has the ability to control or influence the entity (a presumed reference to GM's relationship with the U.S. government). Andres again stated that control and ownership is but one factor and he specifically referenced the recent Lindsey prosecution where the Mexican entity at issue was specifically addressed in the country's constitution.
Quayle next asked Terwilliger whether he has any knowledge of companies conceding markets to foreign competitors because of the FCPA. Terwilliger stated that "conceding markets" may be a bit strong, but that American companies have become much more circumspect in dealing with foreign business opportunities because of FCPA enforcement. In particular, Terwilliger said that companies may bypass "smaller opportunities" (that might become bigger opportunities) because of the FCPA in that the cost-benefit analysis and FCPA compliance are too much to worry about.
Chairman Sensenbrenner was the last person to ask questions and he began his time by stating as follows. There is "no question in my mind that we have to bring this law up to date." "No one is in favor of bribery, but there has to be more certainty." Sensenbrenner said he was "a bit befuddled" by Conyer's statement that corporations don't deserve to know what bribery is and he stated that "everyone has a right to know what is illegal."
Sensenbrenner's only question (a long one at that as he basically summarized the Chamber's FCPA reform proposals) was directed to Regon and Andres. Regon focused mostly on the corporate mens rea issue and stated that her organization is supportive of "anything Congress does" to clarify the FCPA. Tara Regon failed to see the rationale for not providing greater clarity as to the FCPA and noted that "we have many bribery statutes on the books, and some of those are written tightly and work well."
Sensenbrenner then asked Andres - which of Regon's suggestions do you agree with and Andres said "I don't agree with any of them." For instance, Andres said with the definition of "foreign official" that "one thing you need to take into consideration is that the statute covers the whole world" and that what might constitute a "foreign official" in China may be different than what constitutes a "foreign official" in Brazil or France.
Sensenbrenner grasped onto this issue and noted that this part of the uncertainty that people are complaining about.
Andres followed with two points. First, that if there is concern, companies subject to the FCPA can ask for a DOJ opinion. This only seemed to enrange Sensenbrenner further as he stated "come on, China is a communist country - they are not going to tell you what the government involvement is" in a company "they don't have the type of disclosure we have."
Andres second point was that the FCPA makes illegal paying a bribe and that if companies aren't paying bribes they have nothing to fear.
Sensenbrenner then seemed to pose a question at the end of the hearing as to whether the DOJ would support an FCPA amendment that simply makee bribery (all bribery) illegal (perhaps akin to the UK Bribery Act). Sensenbrenner did not pause for Andres to respond and he (Sensenbrenner) concluded the hearing by saying "it would behoove the DOJ to realize that the statute needs updating." Andres said that the DOJ is "more than willing to work with Congress" to which Sensenbrenner said "see you later we will be drafting a bill."
Sensenbrenner then commented that if Andres were the general counsel of a corporation advising the CEO and everyone else, he would likely be advising the company in the "most narrow way" and "exercising the greatest amount of caution." "As a result," Sensenbrenner stated, legitimate business activity is not pursued and U.S. companies are put in a significant disadvantage compared to foreign companies.
Sensenbrenner then told Andres - "get the message sir and tell that to the AG."
House Hearing - Pregame
Yesterday, Global Financial Integrity ("GFI") and The Task Force on Financial Integrity and Economic Development issued identical press releases (here and here) regarding today's House Judiciary subcommittee hearing on the FCPA (see here).
The releases, titled "Foreign Corrupt Practices Act Under Attack" portray today's hearing as a U.S. Chamber of Commerce sponsored event and states as follows. "Among other things, the hearing will specifically consider amendments proposed to the act by the U.S. Chamber Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, which FCPA-proponents charge will significantly weaken the anti-corruption legislation and undermine efforts to tackle corruption and illicit financial practices abroad. The Chamber’s proposed changes would seriously undermine one of the most important anti-corruption statues we have on the books. [...] This is a blatant attempt by the business lobby to limit accountability and reduce a company’s risk of prosecution for paying bribes. It is a real threat to global efforts to stamp out corruption and foster economic development.”
GFI legislative affairs director and legal affairs council Heather Lowe states as follows. “With the exception of [the DOJ witness - Greg Andres], the witness lineup represents commercial interests. There is no witness on the panel representing those who are working to fight corruption without a commercial interest or government policy driving their testimony. Members of Congress need to have an opportunity to hear those voices as well.”
Attached to the releases are two documents.
The first document is titled "Concerns About the U.S. Chamber Institute of Legal Reform’s Proposals for Amending the FCPA." (For a copy of the Chamber's reform proposals - see here).
The document addresses five topics: (i) limiting liability of a parent company for acts of its subsidiaries; (ii) defining "foreign official"; (iii) allowing companies with compliance programs to escape liability (compliance as an affirmative defense); (iv) limiting the liability of a successor company for the prior acts of a company that has merged into it or that it has acquired; and (v) adding a “willfulness” requirement for corporate criminal liability.
As to "foreign official," the document states as follows. "The U.S. Chamber is promoting the creation of a definition of “foreign official” so that companies have greater legal certainty. Greater certainty of what? Greater certainty of who they are permitted to bribe and who they are not permitted to bribe."
In all due respect, this is a naive statement.
As I noted in this article, because of the enforcement agencies' current interpretation of "foreign official," those subject to the FCPA are spending significant time and money investigating the ownership structure of foreign customers and potential customers for any trace of foreign government ownership or control. Such a costly investigation, often involving lawyers and other investigative firms, is not motivated by the company’s desire to make improper payments to the foreign customer or potential customer to obtain or retain business should the investigation reveal no foreign government ownership or control. Rather, the costly investigation is often motivated for the simple reason that the company wants to treat these foreign customers the same as it treats its other customers. That means hosting such customers at corporate events in which some fun may take place (e.g., golf) or inviting such customers to an industry trade show—events that often take place in tourist locations. Companies fear providing such “things of value” to a “foreign official” (under the enforcement agencies’ interpretation) even though the company is legitimately and legally providing the exact same thing to its non- “foreign official” customers or potential customers. It is highly questionable whether Congress foresaw company lawyers being involved in the simple decision of whether to invite a particular customer to the company’s golf outing or trade show.
As to a potential compliance defense, the document states as follows. "If a company is found to be in violation of the FCPA, then the existence of a company’s compliance program must not have prevented the acts of bribery. So why should the existence of their compliance program be a defense to the charge of bribery?"
Again, an unsophisticated statement.
For instance, the U.K. Bribery Act Guidance (here) states as follows. "The objective of the Act is not to bring the full force of the criminal law to bear upon well run commercial organizations that experience an isolated incident of bribery on their behalf."
"[N]o bribery prevention regime will be capable of preventing bribery at all times."
"[A] commercial organization will have a full defense if it can show that despite a particular case of bribery, it nevertheless had adequate procedures in place to prevent persons associated with it from bribing."
Similarly, in a 1981 FCPA speech (to be profiled in a future post) the SEC Chairman noted as follows. “The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”
Elsewhere in the speech, the SEC Chairman stated as follows. "If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”
This speech was given during the same general time frame when Congress was last seriously considering substantial FCPA reform in the 1980's. Numerous FCPA reform bills included a specific defense which stated a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. An FCPA reform bill containing such a provision did pass the U.S. House.
In my forthcoming scholarship, "Revisiting an FCPA Compliance Defense" (to be presented at the Wisconsin Law Review symposium - see here), I argue that amending the FCPA to include a compliance defense (a defense found in the “FCPA-like” laws of other nations) will best incentivize corporate FCPA compliance and not put a company at risk of FCPA scrutiny, costly FCPA internal investigations, and the growing collateral consequences of FCPA inquiries should a non-executive employee engage in conduct contrary to a company’s pre-existing FCPA compliance policies and procedures and compliance culture.
The second document attached to the GFI releases is titled "The Foreign Corrupt Practices Act in Context." The 2 page document ends with the following in red caps. "WE HAVE SHOWN THE WORLD THAT THE U.S. IS SERIOUS ABOUT COMBATING BRIBERY, AND THE WORLD IS FOLLOWING OUR LEAD. WEAKENING THE FCPA NOW WILL SEND A MESSAGE TO THE WORLD THAT THE U.S. IS SOFT ON CORRUPTION AND OUR COMPANIES ARE DEEP POCKETS FOR BRIBE-SEEKERS. THE U.S. SHOULD FOCUS ON ENCOURAGING WORLDWIDE ENFORCEMENT, NOT CRIPPLING A STATUTE THAT HAS BEEN THE MODEL FOR INTERNATIONAL ANTI-BRIBERY LEGISLATION."
Enjoy today's hearing.
The releases, titled "Foreign Corrupt Practices Act Under Attack" portray today's hearing as a U.S. Chamber of Commerce sponsored event and states as follows. "Among other things, the hearing will specifically consider amendments proposed to the act by the U.S. Chamber Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, which FCPA-proponents charge will significantly weaken the anti-corruption legislation and undermine efforts to tackle corruption and illicit financial practices abroad. The Chamber’s proposed changes would seriously undermine one of the most important anti-corruption statues we have on the books. [...] This is a blatant attempt by the business lobby to limit accountability and reduce a company’s risk of prosecution for paying bribes. It is a real threat to global efforts to stamp out corruption and foster economic development.”
GFI legislative affairs director and legal affairs council Heather Lowe states as follows. “With the exception of [the DOJ witness - Greg Andres], the witness lineup represents commercial interests. There is no witness on the panel representing those who are working to fight corruption without a commercial interest or government policy driving their testimony. Members of Congress need to have an opportunity to hear those voices as well.”
Attached to the releases are two documents.
The first document is titled "Concerns About the U.S. Chamber Institute of Legal Reform’s Proposals for Amending the FCPA." (For a copy of the Chamber's reform proposals - see here).
The document addresses five topics: (i) limiting liability of a parent company for acts of its subsidiaries; (ii) defining "foreign official"; (iii) allowing companies with compliance programs to escape liability (compliance as an affirmative defense); (iv) limiting the liability of a successor company for the prior acts of a company that has merged into it or that it has acquired; and (v) adding a “willfulness” requirement for corporate criminal liability.
As to "foreign official," the document states as follows. "The U.S. Chamber is promoting the creation of a definition of “foreign official” so that companies have greater legal certainty. Greater certainty of what? Greater certainty of who they are permitted to bribe and who they are not permitted to bribe."
In all due respect, this is a naive statement.
As I noted in this article, because of the enforcement agencies' current interpretation of "foreign official," those subject to the FCPA are spending significant time and money investigating the ownership structure of foreign customers and potential customers for any trace of foreign government ownership or control. Such a costly investigation, often involving lawyers and other investigative firms, is not motivated by the company’s desire to make improper payments to the foreign customer or potential customer to obtain or retain business should the investigation reveal no foreign government ownership or control. Rather, the costly investigation is often motivated for the simple reason that the company wants to treat these foreign customers the same as it treats its other customers. That means hosting such customers at corporate events in which some fun may take place (e.g., golf) or inviting such customers to an industry trade show—events that often take place in tourist locations. Companies fear providing such “things of value” to a “foreign official” (under the enforcement agencies’ interpretation) even though the company is legitimately and legally providing the exact same thing to its non- “foreign official” customers or potential customers. It is highly questionable whether Congress foresaw company lawyers being involved in the simple decision of whether to invite a particular customer to the company’s golf outing or trade show.
As to a potential compliance defense, the document states as follows. "If a company is found to be in violation of the FCPA, then the existence of a company’s compliance program must not have prevented the acts of bribery. So why should the existence of their compliance program be a defense to the charge of bribery?"
Again, an unsophisticated statement.
For instance, the U.K. Bribery Act Guidance (here) states as follows. "The objective of the Act is not to bring the full force of the criminal law to bear upon well run commercial organizations that experience an isolated incident of bribery on their behalf."
"[N]o bribery prevention regime will be capable of preventing bribery at all times."
"[A] commercial organization will have a full defense if it can show that despite a particular case of bribery, it nevertheless had adequate procedures in place to prevent persons associated with it from bribing."
Similarly, in a 1981 FCPA speech (to be profiled in a future post) the SEC Chairman noted as follows. “The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”
Elsewhere in the speech, the SEC Chairman stated as follows. "If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”
This speech was given during the same general time frame when Congress was last seriously considering substantial FCPA reform in the 1980's. Numerous FCPA reform bills included a specific defense which stated a company would not be held vicariously liable for a violation of the FCPA’s anti-bribery provisions by its employees or agents, who were not an officer or director, if the company established procedures reasonably designed to prevent and detect FCPA violations by employees and agents. An FCPA reform bill containing such a provision did pass the U.S. House.
In my forthcoming scholarship, "Revisiting an FCPA Compliance Defense" (to be presented at the Wisconsin Law Review symposium - see here), I argue that amending the FCPA to include a compliance defense (a defense found in the “FCPA-like” laws of other nations) will best incentivize corporate FCPA compliance and not put a company at risk of FCPA scrutiny, costly FCPA internal investigations, and the growing collateral consequences of FCPA inquiries should a non-executive employee engage in conduct contrary to a company’s pre-existing FCPA compliance policies and procedures and compliance culture.
The second document attached to the GFI releases is titled "The Foreign Corrupt Practices Act in Context." The 2 page document ends with the following in red caps. "WE HAVE SHOWN THE WORLD THAT THE U.S. IS SERIOUS ABOUT COMBATING BRIBERY, AND THE WORLD IS FOLLOWING OUR LEAD. WEAKENING THE FCPA NOW WILL SEND A MESSAGE TO THE WORLD THAT THE U.S. IS SOFT ON CORRUPTION AND OUR COMPANIES ARE DEEP POCKETS FOR BRIBE-SEEKERS. THE U.S. SHOULD FOCUS ON ENCOURAGING WORLDWIDE ENFORCEMENT, NOT CRIPPLING A STATUTE THAT HAS BEEN THE MODEL FOR INTERNATIONAL ANTI-BRIBERY LEGISLATION."
Enjoy today's hearing.
Friday, June 10, 2011
Friday Roundup
Another FCPA hearing on Capital Hill next week, news regarding Goldmann Sachs, questioning the use of NPAs and DPAs, an informative read regarding India, and something for your "foreign official" file.
Its all here in the Friday roundup.
House Hearing
Next Tuesday, June 14th, the Subcommittee on Crime, Terrorism and Homeland Security of the House Judiciary Committee will hold a hearing titled "Foreign Corrupt Practices Act." According to this report by Christopher Matthews of Main Justice the hearing is expected to focus on the following issues: successor liability, a potential compliance defense, "foreign official," and corporate mens rea issues.
The witness list for the hearing is as follows (see here).
Hon. Michael Mukasey (Former Attorney General, Partner, Debevoise & Plimpton LLP - see here); Mr. Greg Andres (Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice); Mr. George Terwilliger (Partner, White & Case LLP - see here); and Ms. Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers - see here).
Predictably, some are blasting the very existence of the hearing. For instance, Political Correction, a project of Media Matters Action Network (a self-described progressive research and information center dedicated to analyzing and correcting conservative misinformation in the U.S. media), describes the hearing here as "Rep. Lamar Smith's Fight to Make Bribery Easier For Big Business."
The House hearing follows a November 30th Senate hearing titled "Examining Enforcement of the Foreign Corrupt Practices Act." See here for a prior post.
This post, prior to the 2010 hearing provided some guiding words, and if those were not enough, how about this statement from William Brock, U.S. Trade Representative, on April 18, 1983 during a hearing before the House Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs.
"Mr. Chairman, no one minimizes the complexity of the issue before you today. Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”
Well said.
Goldman Inquiry
Yesterday, the Wall Street Journal reported - "Eyes on Goldman-Libya Dealings" - that the SEC is "examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya's sovereign wealth fund." The inquiry appears to be focused on a "$50 million fee Goldman initially agreed to pay [but one that was never paid to] the Libyan sovereign-wealth fund as part of a proposal ... to help the fund recoup losses."
A Goldman spokesman is quoted as follows. "We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation. We retained outside counsel, as is our normal practice for any transaction to ensure that we were compliant with all applicable rules."
Can the FCPA be implicated by payments never made?
Yes. The anti-bribery provisions prohibit "an offer, payment, promise to pay, or authorization of payment ...".
What about payments to foreign governments?
No. The anti-bribery provisions only apply to offers, payments, promises of payment, or authorizations of payments to "foreign officials."
However, according to the WSJ article the inquiry appears to focus on whether the contemplated payment would have been passed on to an outside adviser firm "run at the time by the son-in-law of the head of Libya's state-owned oil company."
For more on the Goldman inquiry, see here from Ashby Jones (WSJ Law Blog) and here from Samuel Rubenfeld (WSJ Corruption Currents).
NPAs / DPAs
Non-prosecution and deferred prosecution agreements ought to be abolished. I've argued here and in other places that these agreements have traded one negative externality of white collar prosecution (the much over-hyped Arthur Anderson effect) for a host of others, including the alarming lack of any meaningful judicial scrutiny to ensure that NPAs and DPAs are truly based on facts and appropriate legal theories to support the charges “alleged.”
Mark Mendelsohn, the former head of the DOJ's FCPA unit during its era of resurgence, stated in a September 2010 interview with Corporate Crime Reporter, that a “danger” with NPAs and DPAs “is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.”
Asked directly – 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,” Mendelsohn stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”
Add W. Neil Eggleston, a former DOJ enforcement attorney currently a partner at Debevoise (here), to the growing list of former DOJ enforcement attorneys critical of these alternative resolution vehicles.
In this recent interview with Corporate Crime Reporter, Eggleston stated as follows. “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”
Well said.
India
If India is a country of concern or focus of yours, you will want to check out the most recent quarterly newsletter of the India Committee of the ABA Section of International Law. (See here).
Guest editor James Parkinson of BuckleySandler (here) provides the following articles, among others, in the newsletter: one devoted to the FCPA risks of doing business in India; another devoted to India's demand-side statute - the Prevention of Corruption Act; another focused on reducing corruption risks in India through compliance programs; and another calling for India to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
"Foreign Official"
And finally, because your "foreign official" file would be incomplete without it, here is a transcript of the May 9th oral argument in the Carson "foreign official" challenge. See here and here for previous posts.
*****
A good weekend to all.
Its all here in the Friday roundup.
House Hearing
Next Tuesday, June 14th, the Subcommittee on Crime, Terrorism and Homeland Security of the House Judiciary Committee will hold a hearing titled "Foreign Corrupt Practices Act." According to this report by Christopher Matthews of Main Justice the hearing is expected to focus on the following issues: successor liability, a potential compliance defense, "foreign official," and corporate mens rea issues.
The witness list for the hearing is as follows (see here).
Hon. Michael Mukasey (Former Attorney General, Partner, Debevoise & Plimpton LLP - see here); Mr. Greg Andres (Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice); Mr. George Terwilliger (Partner, White & Case LLP - see here); and Ms. Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers - see here).
Predictably, some are blasting the very existence of the hearing. For instance, Political Correction, a project of Media Matters Action Network (a self-described progressive research and information center dedicated to analyzing and correcting conservative misinformation in the U.S. media), describes the hearing here as "Rep. Lamar Smith's Fight to Make Bribery Easier For Big Business."
The House hearing follows a November 30th Senate hearing titled "Examining Enforcement of the Foreign Corrupt Practices Act." See here for a prior post.
This post, prior to the 2010 hearing provided some guiding words, and if those were not enough, how about this statement from William Brock, U.S. Trade Representative, on April 18, 1983 during a hearing before the House Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs.
"Mr. Chairman, no one minimizes the complexity of the issue before you today. Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”
Well said.
Goldman Inquiry
Yesterday, the Wall Street Journal reported - "Eyes on Goldman-Libya Dealings" - that the SEC is "examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya's sovereign wealth fund." The inquiry appears to be focused on a "$50 million fee Goldman initially agreed to pay [but one that was never paid to] the Libyan sovereign-wealth fund as part of a proposal ... to help the fund recoup losses."
A Goldman spokesman is quoted as follows. "We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation. We retained outside counsel, as is our normal practice for any transaction to ensure that we were compliant with all applicable rules."
Can the FCPA be implicated by payments never made?
Yes. The anti-bribery provisions prohibit "an offer, payment, promise to pay, or authorization of payment ...".
What about payments to foreign governments?
No. The anti-bribery provisions only apply to offers, payments, promises of payment, or authorizations of payments to "foreign officials."
However, according to the WSJ article the inquiry appears to focus on whether the contemplated payment would have been passed on to an outside adviser firm "run at the time by the son-in-law of the head of Libya's state-owned oil company."
For more on the Goldman inquiry, see here from Ashby Jones (WSJ Law Blog) and here from Samuel Rubenfeld (WSJ Corruption Currents).
NPAs / DPAs
Non-prosecution and deferred prosecution agreements ought to be abolished. I've argued here and in other places that these agreements have traded one negative externality of white collar prosecution (the much over-hyped Arthur Anderson effect) for a host of others, including the alarming lack of any meaningful judicial scrutiny to ensure that NPAs and DPAs are truly based on facts and appropriate legal theories to support the charges “alleged.”
Mark Mendelsohn, the former head of the DOJ's FCPA unit during its era of resurgence, stated in a September 2010 interview with Corporate Crime Reporter, that a “danger” with NPAs and DPAs “is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.”
Asked directly – 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,” Mendelsohn stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”
Add W. Neil Eggleston, a former DOJ enforcement attorney currently a partner at Debevoise (here), to the growing list of former DOJ enforcement attorneys critical of these alternative resolution vehicles.
In this recent interview with Corporate Crime Reporter, Eggleston stated as follows. “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”
Well said.
India
If India is a country of concern or focus of yours, you will want to check out the most recent quarterly newsletter of the India Committee of the ABA Section of International Law. (See here).
Guest editor James Parkinson of BuckleySandler (here) provides the following articles, among others, in the newsletter: one devoted to the FCPA risks of doing business in India; another devoted to India's demand-side statute - the Prevention of Corruption Act; another focused on reducing corruption risks in India through compliance programs; and another calling for India to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
"Foreign Official"
And finally, because your "foreign official" file would be incomplete without it, here is a transcript of the May 9th oral argument in the Carson "foreign official" challenge. See here and here for previous posts.
*****
A good weekend to all.
Thursday, May 19, 2011
Judge Selna Concludes "The Question of Whether State-Owned Companies Qualify as Instrumentalities Under the FCPA is a Question of Fact"
Yesterday, U.S. District Court Judge James Selna denied the Carson "foreign official" challenge. See here for his written decision.
Judge Selna concluded that "the question of whether state-owned companies qualify as instrumentalties under the FCPA is a question of fact."
Judge Selna stated that "several factors bear on the question of whether a business entity constitutes a government instrumentality" including the following.
• The foreign state’s characterization of the entity and its employees;
• The foreign state’s degree of control over the entity;
• The purpose of the entity’s activities;
• The entity’s obligations and privileges under the foreign state’s law,
including whether the entity exercises exclusive or controlling power to
administer its designated functions;
• The circumstances surrounding the entity’s creation; and
• The foreign state’s extent of ownership of the entity, including the level of
financial support by the state (e.g., subsidies, special tax treatment, and
loans).
[In April, Judge Howard Matz (C.D. of Cal.), in denying the Lindsey "foreign official" challenge (see here for the prior post) identified the following "non-exclusive list" of "various characteristics of government agencies and departments" that fall within the description of instrumentality:
• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.
• The key officers and directors of the entity are, or are appointed by, government officials.
• The entity is financed, at least in large measure, through governmental
appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
• The entity is widely perceived and understood to be performing official (i.e., governmental) functions]
Judge Selna stated that his above-listed "factors are not exclusive, and no single factor is dispositive." "As applicable here, their chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an 'instrumentality' under the FCPA - with state ownership being only one of several considerations. Accordingly, for these reasons and those discussed in more detail below, Defendants' Motion is not entirely segregable from the evidence to be presented at trial, and therefore must be denied."
Later in the opinion, Judge Selna stated as follows. "Admittedly, a mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality."
Judge Selna found that the "meaning of the statutory text is clear," "that the meaning of instrumentality should be considered both within the context of the preceding terms of the FCPA [departments and agencies] and in view of the FCPA as a whole," and that the "use of the term instrumentality in the FCPA produces no such crisp exclusion of a state-owned entity." Judge Selna stated: "to the contrary, a state-owned entity - just like an agency or department - is a modality through which a government may conduct its business."
Judge Selna then noted that "the fact that corporations have long been used in this country to carry out governmental objectives supports the conclusion that state-owned companies could be considered an instrumentality." He stated that "given this country's long history of using corporations to carry out governmental objectives, the Court rejects the idea that governmental and commercial actions are necessarily incompatible."
Judge Selna also noted as follows. "The fact that Congress passed FSIA a year before the FCPA, and defined instrumentality to include state-owned companies, ultimately supports the Court's conclusions that an instrumentality could include such entities under the FCPA."
Judge Selna found "that the statutory language of the FCPA is clear, that the statutory scheme is coherent and consistent, and that resort to the legislative history of the FCPA is unnecessary."
Under the heading "Conclusion for Statutory Construction," Judge Selna stated as follows. "The Court concludes that some business entities may be considered an instrumentality but this is a fact-specific question that depends on the nature and characteristics of the business entity." Elsewhere, Judge Selna similarly stated as follows. "state-owned companies may be considered instrumentalities under the FCPA, but whether such companies qualify as instrumentalities is a question of fact."
*****
Earlier this week, Judge Selna issued an "Order Regarding Briefing Schedule and Hearing Date."
Among other things, Judge Selna ordered that "the parties shall submit their proposed jury instructions and legal support for the “instrumentality” and scienter instructions on June 30, 2011. Objections to disputed instructions shall be filed no later than July 25, 2011." "The hearing to address the “instrumentality” and scienter jury instructions, Defendants’ motion to dismiss the Travel Act charges, and Defendants’ Grand Jury motions, shall be scheduled for August 12, 2011 at 1:30 p.m."
Judge Selna concluded that "the question of whether state-owned companies qualify as instrumentalties under the FCPA is a question of fact."
Judge Selna stated that "several factors bear on the question of whether a business entity constitutes a government instrumentality" including the following.
• The foreign state’s characterization of the entity and its employees;
• The foreign state’s degree of control over the entity;
• The purpose of the entity’s activities;
• The entity’s obligations and privileges under the foreign state’s law,
including whether the entity exercises exclusive or controlling power to
administer its designated functions;
• The circumstances surrounding the entity’s creation; and
• The foreign state’s extent of ownership of the entity, including the level of
financial support by the state (e.g., subsidies, special tax treatment, and
loans).
[In April, Judge Howard Matz (C.D. of Cal.), in denying the Lindsey "foreign official" challenge (see here for the prior post) identified the following "non-exclusive list" of "various characteristics of government agencies and departments" that fall within the description of instrumentality:
• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.
• The key officers and directors of the entity are, or are appointed by, government officials.
• The entity is financed, at least in large measure, through governmental
appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
• The entity is widely perceived and understood to be performing official (i.e., governmental) functions]
Judge Selna stated that his above-listed "factors are not exclusive, and no single factor is dispositive." "As applicable here, their chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an 'instrumentality' under the FCPA - with state ownership being only one of several considerations. Accordingly, for these reasons and those discussed in more detail below, Defendants' Motion is not entirely segregable from the evidence to be presented at trial, and therefore must be denied."
Later in the opinion, Judge Selna stated as follows. "Admittedly, a mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality."
Judge Selna found that the "meaning of the statutory text is clear," "that the meaning of instrumentality should be considered both within the context of the preceding terms of the FCPA [departments and agencies] and in view of the FCPA as a whole," and that the "use of the term instrumentality in the FCPA produces no such crisp exclusion of a state-owned entity." Judge Selna stated: "to the contrary, a state-owned entity - just like an agency or department - is a modality through which a government may conduct its business."
Judge Selna then noted that "the fact that corporations have long been used in this country to carry out governmental objectives supports the conclusion that state-owned companies could be considered an instrumentality." He stated that "given this country's long history of using corporations to carry out governmental objectives, the Court rejects the idea that governmental and commercial actions are necessarily incompatible."
Judge Selna also noted as follows. "The fact that Congress passed FSIA a year before the FCPA, and defined instrumentality to include state-owned companies, ultimately supports the Court's conclusions that an instrumentality could include such entities under the FCPA."
Judge Selna found "that the statutory language of the FCPA is clear, that the statutory scheme is coherent and consistent, and that resort to the legislative history of the FCPA is unnecessary."
Under the heading "Conclusion for Statutory Construction," Judge Selna stated as follows. "The Court concludes that some business entities may be considered an instrumentality but this is a fact-specific question that depends on the nature and characteristics of the business entity." Elsewhere, Judge Selna similarly stated as follows. "state-owned companies may be considered instrumentalities under the FCPA, but whether such companies qualify as instrumentalities is a question of fact."
*****
Earlier this week, Judge Selna issued an "Order Regarding Briefing Schedule and Hearing Date."
Among other things, Judge Selna ordered that "the parties shall submit their proposed jury instructions and legal support for the “instrumentality” and scienter instructions on June 30, 2011. Objections to disputed instructions shall be filed no later than July 25, 2011." "The hearing to address the “instrumentality” and scienter jury instructions, Defendants’ motion to dismiss the Travel Act charges, and Defendants’ Grand Jury motions, shall be scheduled for August 12, 2011 at 1:30 p.m."
Tuesday, May 17, 2011
"Foreign Official" - What Others Are Saying
What mattered most from the Lindsey matter was not so much the jury verdict (see here for the prior post), but Judge Matz's pre-trial decision on the "foreign official" issue. This is from a jurisprudence standpoint because obviously the jury verdict very much mattered to the defendants, their friends and family, and other employees of Lindsey Manufacturing and I am not trying to diminish or make light of the very human element of the jury verdict.
While we await final rulings in the Carson and O'Shea "foreign official" challenges, let's revisit Judge Matz's April 20th ruling (see here for the previous post) and see what others are saying.
*****
In this client alert, King & Spalding stated as follows. "In his decision, Judge Matz provided a helpful but non-exclusive list of illustrative criteria for determining whether a state-owned entity is sufficiently similar to a government agency or department to consider it a government 'instrumentality.' [...] Importantly, although in this case the court found that CFE may be an instrumentality of the Mexican government, the court’s opinion leaves ample room for argument in future cases that other state-owned corporations – such as those that do not share many characteristics with government departments and agencies, and those that are only
partially owned by a foreign government – may not fall within the FCPA’s reach."
Luce Forward, in this eUpdate, stated as follows. "The Court, however, nimbly sidestepped Lindsey’s legislative history argument. It simply cited the Mexican government’s descriptions of the role of CFE in the government hierarchy and noted that in CFE’s own (English language) website it identified itself as a government agency (and by implication, therefore, a government instrumentality). The Court said its ruling was based on “simple statutory construction” and that its finding on the status of CFE was an issue of law, not of fact, and wouldn’t be subject to further evidence on that question during trial."
This FCPA Update by Debevoise & Plimpton provides a lengthy summary of the recent "foreign official" challenges as well as an overview of Judge Matz's ruling.
In this write-up, Fulbright & Jaworski stated as follows. "The Lindsey Manufacturing ruling is significant as it represents a victory for the DOJ that will, at least for the present time, likely strengthen and embolden the government’s efforts to bring enforcement actions against companies and individuals based on its expansive interpretation of the term “foreign official.” Additionally, while it is not certain to what degree the Lindsey Manufacturing ruling will affect the Carson and O’Shea courts’ decisions, it is probable that the decision will be weighed as both courts consider whether to narrow the current government view of who is a “foreign official” for purposes of FCPA enforcement under the respective facts of each of those cases. The next two decisions will be highly anticipated. Certainty regarding who will be considered a “foreign official” under the FCPA and, thus, who should be considered a potential recipient of an improper payment under the Act, is critical as companies determine how best to formulate an effective compliance program in the current FCPA enforcement environment."
In this memorandum, Simpson & Thacher stated as follows. "The ruling is not a whole-hearted endorsement of DOJ’s broad interpretation of the FCPA’s definition of “foreign official.” The judge did not rule that employees of state-owned entities necessarily fall within the definition of “foreign official.” Rather, he merely left open the possibility that employees of state-owned entities – depending on the specific facts in play – will be “foreign officials.” Indeed, while the judge ultimately ruled that the CFE officers in question may be “foreign officials,” he did so only after a close analysis of factual circumstances that many practitioners might agree presented an easy case for this conclusion. For instance, unlike other types of state owned businesses, CFE provides a service that is constitutionally mandated as an exclusive state function; and CFE even describes itself as a government “agency” on its own website. It remains an open question as to whether employees of other state-owned enterprises that do not share these features – such as a state-owned steel company – would be found to fall within the definition of foreign official. Nonetheless, the judge provided some new guidance for FCPA practitioners seeking to determine whether an entity might be an instrumentality of a foreign government. In the end, the decision leaves ample room for litigants in other situations to dispute whether state-owned enterprises are covered by the FCPA."
In this summary, WilmerHale stated as follows. "Notably, the Court's ruling is a very narrow one. First, the Court clearly rejected the Defendants' argument that no corporation could qualify as an "instrumentality." Second, the Court left open the question of whether all corporations that perform some public function qualify as "instrumentalit[ies]." Finally, the Court's ruling about CFE was based on unusual facts which were unique to the entity. These key aspects of the Court's ruling appear to leave the door open to future challenges."
In this summary, Haynes & Boone stated as follows. "The DOJ and the SEC have been aggressively pushing an expansive interpretation of “foreign official” for years. In the past, the Government’s targets have chosen to settle rather than press the issue and face a jury. That has kept the Government’s analysis from judicial scrutiny. Noriega is the first of several ongoing cases that bucks this trend, puts the Government to its proof, and tests its interpretation of the statute. The result should be a clearer understanding of who is a foreign official for FCPA purposes. The decision released last week is a strong affirmation of the Government’s more forward-leaning stance on the question. The decision’s five-factor test to determine whether a state-owned corporation is an instrumentality of the state offers clarity on a narrow but important question facing global companies doing business overseas. If the foreign company is created by statute, overseen by government officials or appointees, financed through taxes, exercises exclusive control over its designated functions, and is widely understood to be performing government functions, then that company is likely an instrumentality of a government and the FCPA applies. The potential game-changer in the opinion is the Court’s willingness to accept the Government’s contention that “foreign official” should be construed in light of the OECD Convention. The Convention definition of “public enterprise” includes “any enterprise” over which a government “may, directly or indirectly, exercise a dominant influence.” In certain jurisdictions where governments play a more active role in the economy, the Government may have many different ways to directly or indirectly exercise dominant influence. This could potentially expand the scope of covered foreign officials under the FCPA in many jurisdictions."
While we await final rulings in the Carson and O'Shea "foreign official" challenges, let's revisit Judge Matz's April 20th ruling (see here for the previous post) and see what others are saying.
*****
In this client alert, King & Spalding stated as follows. "In his decision, Judge Matz provided a helpful but non-exclusive list of illustrative criteria for determining whether a state-owned entity is sufficiently similar to a government agency or department to consider it a government 'instrumentality.' [...] Importantly, although in this case the court found that CFE may be an instrumentality of the Mexican government, the court’s opinion leaves ample room for argument in future cases that other state-owned corporations – such as those that do not share many characteristics with government departments and agencies, and those that are only
partially owned by a foreign government – may not fall within the FCPA’s reach."
Luce Forward, in this eUpdate, stated as follows. "The Court, however, nimbly sidestepped Lindsey’s legislative history argument. It simply cited the Mexican government’s descriptions of the role of CFE in the government hierarchy and noted that in CFE’s own (English language) website it identified itself as a government agency (and by implication, therefore, a government instrumentality). The Court said its ruling was based on “simple statutory construction” and that its finding on the status of CFE was an issue of law, not of fact, and wouldn’t be subject to further evidence on that question during trial."
This FCPA Update by Debevoise & Plimpton provides a lengthy summary of the recent "foreign official" challenges as well as an overview of Judge Matz's ruling.
In this write-up, Fulbright & Jaworski stated as follows. "The Lindsey Manufacturing ruling is significant as it represents a victory for the DOJ that will, at least for the present time, likely strengthen and embolden the government’s efforts to bring enforcement actions against companies and individuals based on its expansive interpretation of the term “foreign official.” Additionally, while it is not certain to what degree the Lindsey Manufacturing ruling will affect the Carson and O’Shea courts’ decisions, it is probable that the decision will be weighed as both courts consider whether to narrow the current government view of who is a “foreign official” for purposes of FCPA enforcement under the respective facts of each of those cases. The next two decisions will be highly anticipated. Certainty regarding who will be considered a “foreign official” under the FCPA and, thus, who should be considered a potential recipient of an improper payment under the Act, is critical as companies determine how best to formulate an effective compliance program in the current FCPA enforcement environment."
In this memorandum, Simpson & Thacher stated as follows. "The ruling is not a whole-hearted endorsement of DOJ’s broad interpretation of the FCPA’s definition of “foreign official.” The judge did not rule that employees of state-owned entities necessarily fall within the definition of “foreign official.” Rather, he merely left open the possibility that employees of state-owned entities – depending on the specific facts in play – will be “foreign officials.” Indeed, while the judge ultimately ruled that the CFE officers in question may be “foreign officials,” he did so only after a close analysis of factual circumstances that many practitioners might agree presented an easy case for this conclusion. For instance, unlike other types of state owned businesses, CFE provides a service that is constitutionally mandated as an exclusive state function; and CFE even describes itself as a government “agency” on its own website. It remains an open question as to whether employees of other state-owned enterprises that do not share these features – such as a state-owned steel company – would be found to fall within the definition of foreign official. Nonetheless, the judge provided some new guidance for FCPA practitioners seeking to determine whether an entity might be an instrumentality of a foreign government. In the end, the decision leaves ample room for litigants in other situations to dispute whether state-owned enterprises are covered by the FCPA."
In this summary, WilmerHale stated as follows. "Notably, the Court's ruling is a very narrow one. First, the Court clearly rejected the Defendants' argument that no corporation could qualify as an "instrumentality." Second, the Court left open the question of whether all corporations that perform some public function qualify as "instrumentalit[ies]." Finally, the Court's ruling about CFE was based on unusual facts which were unique to the entity. These key aspects of the Court's ruling appear to leave the door open to future challenges."
In this summary, Haynes & Boone stated as follows. "The DOJ and the SEC have been aggressively pushing an expansive interpretation of “foreign official” for years. In the past, the Government’s targets have chosen to settle rather than press the issue and face a jury. That has kept the Government’s analysis from judicial scrutiny. Noriega is the first of several ongoing cases that bucks this trend, puts the Government to its proof, and tests its interpretation of the statute. The result should be a clearer understanding of who is a foreign official for FCPA purposes. The decision released last week is a strong affirmation of the Government’s more forward-leaning stance on the question. The decision’s five-factor test to determine whether a state-owned corporation is an instrumentality of the state offers clarity on a narrow but important question facing global companies doing business overseas. If the foreign company is created by statute, overseen by government officials or appointees, financed through taxes, exercises exclusive control over its designated functions, and is widely understood to be performing government functions, then that company is likely an instrumentality of a government and the FCPA applies. The potential game-changer in the opinion is the Court’s willingness to accept the Government’s contention that “foreign official” should be construed in light of the OECD Convention. The Convention definition of “public enterprise” includes “any enterprise” over which a government “may, directly or indirectly, exercise a dominant influence.” In certain jurisdictions where governments play a more active role in the economy, the Government may have many different ways to directly or indirectly exercise dominant influence. This could potentially expand the scope of covered foreign officials under the FCPA in many jurisdictions."
Tuesday, May 10, 2011
Oral Argument in Carson "Foreign Official" Challenge
Jaime Guerrero (Foley & Lardner - here) provides a first-hand account of yesterday's oral arguments in the Carson "foreign official" challenge.
See here for a prior post, including links to the briefs.
*****
On Monday afternoon, May 9, 2011, United States District Judge James V. Selna heard oral arguments on defendants’ motion to dismiss the indictment on the “foreign official” issue in the Carson case in the Central District of California. In their moving papers, the defendants made three separate arguments in support of their motion to dismiss Counts One through Ten of the Indictment. Specifically, the defendants argued that: first, as a matter of statutory interpretation, employees of the state-owned companies identified in the indictment fall beyond the scope of the FCPA’s definition of “foreign official;” second, to the extent there is an ambiguity in the statute, the rule of lenity mandates that the motion be resolved in defendants’ favor; and third, to the extent the FCPA could be construed to proscribe payments made or promised to employees of state-owned companies, the statute is unconstitutionally vague as applied to defendants.
During the hearing, counsel for the defendants focused the majority of their arguments on the FCPA’s purported lack of definition for “instrumentality” within the term “foreign official.” Defendants noted that Congress did not define “instrumentality” within the statute and that the government’s position created a definition that was unworkable and overbroad. Moreover, the defendants argued that it was impractical to wait for the trial to decide the factors that the jury would consider to determine whether the employees of state-owned companies were “foreign officials.” The defendants also argued that the Supreme Court’s recent decision in Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010), was the proper framework for deciding the FCPA “foreign official” challenge. Thereafter, the defendants argued that the FCPA statute was “vague as applied,” as there was no way for the individual defendants to have done anything more to determine if a state-owned entity was an “instrumentality.” The defendants argued that there was no rhyme or reason to the government’s determination of whether a state-owned entity was an “instrumentality,” and, as such, the statute was vague. Finally, the defendants argued that the rule of lenity mandated that the Court dismiss the indictment, as the statute was unconstitutionally ambiguous and that, if it was a tie between the government’s position and the defendants’ position, that the tie should go to the defendants.
The government responded first by noting that the defendants’ ignored the standards the Court had to apply when deciding a motion to dismiss the indictment, as the issues presented in the motion raised factual issues that had to be resolved by a jury. Citing Hagner v. United States, 285 U.S. 427 (1932), the government argued that because there were factual issues outstanding related to whether the state-owned entities were “instrumentalities,” the Court could not grant the motion to dismiss. The government also argued that the statute was not void for vagueness, as the statute’s mens rea or scienter requirement served to defeat the defendants’ claim that they did not know what they were doing was wrong. In particular, however, the government noted that the statute did not require a specific intent, but instead the government need only prove that the defendants knew that what they were doing was wrong.
District Judge Selna permitted the parties to argue their respective positions, interjecting on few occasions. During the defendants’ arguments that the definition of “instrumentality” in the Foreign Sovereign Immunities Act (FSIA) could not be used as a reference point, or definition, for “instrumentality” in the FCPA statute, District Judge Selna asked whether the Court could infer whether Congress intended for the term “instrumentality” to have the same definition in the FCPA as the FSIA. District Judge Selna also inquired whether a finding that a state-owned entity was an “instrumentality” was self-evident, as the nature of the entity would be before the jury.
Ultimately, after hearing all arguments on defendants’ motion to dismiss, District Judge Selna took the motion under submission and reserved a final ruling on the motion for a later date.
See here for a prior post, including links to the briefs.
*****
On Monday afternoon, May 9, 2011, United States District Judge James V. Selna heard oral arguments on defendants’ motion to dismiss the indictment on the “foreign official” issue in the Carson case in the Central District of California. In their moving papers, the defendants made three separate arguments in support of their motion to dismiss Counts One through Ten of the Indictment. Specifically, the defendants argued that: first, as a matter of statutory interpretation, employees of the state-owned companies identified in the indictment fall beyond the scope of the FCPA’s definition of “foreign official;” second, to the extent there is an ambiguity in the statute, the rule of lenity mandates that the motion be resolved in defendants’ favor; and third, to the extent the FCPA could be construed to proscribe payments made or promised to employees of state-owned companies, the statute is unconstitutionally vague as applied to defendants.
During the hearing, counsel for the defendants focused the majority of their arguments on the FCPA’s purported lack of definition for “instrumentality” within the term “foreign official.” Defendants noted that Congress did not define “instrumentality” within the statute and that the government’s position created a definition that was unworkable and overbroad. Moreover, the defendants argued that it was impractical to wait for the trial to decide the factors that the jury would consider to determine whether the employees of state-owned companies were “foreign officials.” The defendants also argued that the Supreme Court’s recent decision in Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010), was the proper framework for deciding the FCPA “foreign official” challenge. Thereafter, the defendants argued that the FCPA statute was “vague as applied,” as there was no way for the individual defendants to have done anything more to determine if a state-owned entity was an “instrumentality.” The defendants argued that there was no rhyme or reason to the government’s determination of whether a state-owned entity was an “instrumentality,” and, as such, the statute was vague. Finally, the defendants argued that the rule of lenity mandated that the Court dismiss the indictment, as the statute was unconstitutionally ambiguous and that, if it was a tie between the government’s position and the defendants’ position, that the tie should go to the defendants.
The government responded first by noting that the defendants’ ignored the standards the Court had to apply when deciding a motion to dismiss the indictment, as the issues presented in the motion raised factual issues that had to be resolved by a jury. Citing Hagner v. United States, 285 U.S. 427 (1932), the government argued that because there were factual issues outstanding related to whether the state-owned entities were “instrumentalities,” the Court could not grant the motion to dismiss. The government also argued that the statute was not void for vagueness, as the statute’s mens rea or scienter requirement served to defeat the defendants’ claim that they did not know what they were doing was wrong. In particular, however, the government noted that the statute did not require a specific intent, but instead the government need only prove that the defendants knew that what they were doing was wrong.
District Judge Selna permitted the parties to argue their respective positions, interjecting on few occasions. During the defendants’ arguments that the definition of “instrumentality” in the Foreign Sovereign Immunities Act (FSIA) could not be used as a reference point, or definition, for “instrumentality” in the FCPA statute, District Judge Selna asked whether the Court could infer whether Congress intended for the term “instrumentality” to have the same definition in the FCPA as the FSIA. District Judge Selna also inquired whether a finding that a state-owned entity was an “instrumentality” was self-evident, as the nature of the entity would be before the jury.
Ultimately, after hearing all arguments on defendants’ motion to dismiss, District Judge Selna took the motion under submission and reserved a final ruling on the motion for a later date.
Friday, May 6, 2011
Recent DOJ Statements At Issue In Carson "Foreign Official" Challenge
On Tuesday, Nathaniel Edmonds (Assistant Chief, DOJ Fraud Section who is specifically involved in the Carson "foreign official" challenge) participated in a webcast sponsored by the Conference Board titled "Enforcement of The Foreign Corrupt Practices Act: A Dialogue with Regulators" (see here).
According to a May 4th article authored by Christopher Matthews and published on the Just Anti-Corruption page of the website Main Justice, during the webcast Edmonds "warned defendants facing charges under the foreign bribery law against contesting that definition."
The article states as follows.
[“It’s not necessarily the wisest move for a company,” Assistant Chief Nathaniel Edmonds said Tuesday during a webcast on the FCPA sponsored by The Conference Board. Edmonds reiterated the Justice Department’s belief that employees of state-owned or controlled companies can be considered foreign officials under the FCPA, which prohibits bribes to foreign officials to obtain or retain business. “Quibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense,” Edmonds said.]
Yesterday, in a supplement to its reply brief (here) the Carson defendants brought the article to the attention of the court and stated as follows.
"Defendants respectfully submit that Mr. Edmonds’ comments supplement at
least two important points made in Defendants’ Motion and Reply. First, there is a reason the Government’s maximalist position on the definition of “foreign official” has avoided serious judicial scrutiny for so long, and the reason is that individuals and companies are reluctant to challenge the Government’s interpretation for fear of the consequences. Second, the Government does not have a definition of “instrumentality” that can withstand judicial scrutiny because, among other things, it is unable to say what would make one state-owned enterprise, but not another, an “instrumentality” under the FCPA."
According to a May 4th article authored by Christopher Matthews and published on the Just Anti-Corruption page of the website Main Justice, during the webcast Edmonds "warned defendants facing charges under the foreign bribery law against contesting that definition."
The article states as follows.
[“It’s not necessarily the wisest move for a company,” Assistant Chief Nathaniel Edmonds said Tuesday during a webcast on the FCPA sponsored by The Conference Board. Edmonds reiterated the Justice Department’s belief that employees of state-owned or controlled companies can be considered foreign officials under the FCPA, which prohibits bribes to foreign officials to obtain or retain business. “Quibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense,” Edmonds said.]
Yesterday, in a supplement to its reply brief (here) the Carson defendants brought the article to the attention of the court and stated as follows.
"Defendants respectfully submit that Mr. Edmonds’ comments supplement at
least two important points made in Defendants’ Motion and Reply. First, there is a reason the Government’s maximalist position on the definition of “foreign official” has avoided serious judicial scrutiny for so long, and the reason is that individuals and companies are reluctant to challenge the Government’s interpretation for fear of the consequences. Second, the Government does not have a definition of “instrumentality” that can withstand judicial scrutiny because, among other things, it is unable to say what would make one state-owned enterprise, but not another, an “instrumentality” under the FCPA."
Tuesday, May 3, 2011
Carson "Foreign Official" Challenge Fully Briefed
Yesterday various defendants in the U.S. v. Carson case pending in the Central District of California filed a reply brief (see here).
The brief begins as follows.
"In 1977, Congress could have enacted a general anti-bribery statute that made it a crime to pay a commercial bribe to any foreign national, but it did not. Rather, the FCPA criminalizes improper payments only to a “foreign official.” Thus, making an improper payment to a “foreign official” violates the FCPA; making that same payment to someone who is not a “foreign official” does not. This is undisputed."
"The Government argues that “[s]tate-owned business enterprises [‘SOEs’] may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials.” But Congress (i) knew about SOEs when it enacted the FCPA, (ii) knew that some of the questionable payments in the pre-FCPA era may have been made to employees of SOEs, and (iii) knew how to include SOEs in the definition of “foreign official” if it had wanted to do so. Clearly, Congress did not do so, and contrary to the Government’s arguments, there is no evidence that Congress intended SOEs to be covered by this criminal statute, or intended the word “instrumentality” to encompass broadly anything through which a foreign government achieves an “end or purpose.” In fact, the plain language of the statute and its history illustrate that the FCPA was aimed at preventing improper payments to traditional government officials. If Congress had wanted SOEs to be included in the definition of “instrumentality,” it would have expressly said so – just as it did in 1976 when it enacted the Foreign Sovereign Immunities Act (“FSIA”)."
"Having no statutory authority for its sweeping position, the Government is thus unable to define the “appropriate circumstances” when an SOE allegedly falls within the FCPA. The Government states only that it is a “fact-based determination.” But facts in isolation are irrelevant unless analyzed in the context of a legal framework. And for over two hundred years it has been “emphatically the province and duty of the judicial department” – not the jury – “to say what the law is.” Marbury v Madison, 5 U.S. (1 Cranch) 137 (1803). Thus, while a jury may decide disputed issues of fact, this Court must first decide the law."
"Defendants’ Motion squarely challenges the Government’s unsupported legal
interpretation of the FCPA by arguing that the term “instrumentality” simply does not include SOEs, and thus employees of SOEs are not, as a matter of law, “foreign officials.” The Government labels Defendants’ position as extreme, insisting that it “is not asking for a legal conclusion that all SOEs are instrumentalities,” only for a ruling that “the term instrumentality . . . can include SOEs.” But it is the Government’s position that is unreasonable, because the Government cannot articulate any principled test – and there is no test, other than one invented from whole cloth – for what would make one SOE, but not another, a government “instrumentality” under the FCPA. Accordingly, the Government’s concession, that some SOEs fall within and some outside the statute, coupled with the complete lack of any meaningful or discernable standards for deciding which is which, undermines the Government’s position and requires that it be rejected because it would render the FCPA unconstitutionally vague as applied."
"Accordingly, the Court should hold that employees of SOEs are not “foreign
officials” under the FCPA and should dismiss Counts One through Ten of the
Indictment. Contrary to the Government’s overblown rhetoric, the sky will not fall upon such a ruling; rather, the issue will be returned to its proper forum: Congress. See Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010) (“If Congress desires to go further . . . it must speak more clearly than it has.”)."
This previous post links to the Defendants' motion and my declaration filed in support. This previous post links to the DOJ's opposition brief as well as supporting declarations from the State Department and the FBI.
The Carson defendants also moved (see here) to strike the State Department declaration or in the alternative for a court order requiring the State Department employee to appear for questioning at next week's hearing). As noted in this prior post, the same State Department declaration was ordered stricken in the Lindsey "foreign official" challenge and is also being challenged in the O'Shea "foreign official" challenge - see here.
*****
In a related development, last week the DOJ announced (here) that "Flavio Ricotti, a former executive of [Control Components, Inc. - the same employer as the above referenced defendants challenging the DOJ's "foreign official" interpretation] has pleaded guilty for his participation in a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies." See here for the plea agreement.
As noted in the DOJ release, "Ricotti pleaded guilty [...] to a one-count superseding information [see here] charging him with conspiring to make corrupt payments to foreign government officials, and officers and employees of private companies in several countries, including Saudi Arabia and Qatar, in violation of the Foreign Corrupt Practices Act (FCPA) and the Travel Act."
The DOJ release further states as follows. "In connection with his guilty plea, Ricotti admitted that he conspired with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company, in connection with attempting to obtain a valve contract for CCI in 2003. Ricotti also admitted to conspiring with other CCI employees to make a payment to an employee of a private company so that the employee would assist in awarding to CCI a valve contract in Qatar."
As further noted in the DOJ release:
"In related cases, two defendants previously pleaded guilty to conspiring to bribe officers and employees of foreign state-owned companies on behalf of CCI. On Jan. 8, 2009, Mario Covino, the former director of worldwide factory sales for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $1 million in bribes to officers and employees of several foreign state-owned companies. On Feb. 3, 2009, Richard Morlok, the former finance director for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $628,000 in bribes to officers and employees of several foreign state-owned companies. Covino and Morlok are scheduled to be sentenced in February 2012."
See here for July 2009 enforcement action against Control Components, Inc.
The brief begins as follows.
"In 1977, Congress could have enacted a general anti-bribery statute that made it a crime to pay a commercial bribe to any foreign national, but it did not. Rather, the FCPA criminalizes improper payments only to a “foreign official.” Thus, making an improper payment to a “foreign official” violates the FCPA; making that same payment to someone who is not a “foreign official” does not. This is undisputed."
"The Government argues that “[s]tate-owned business enterprises [‘SOEs’] may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials.” But Congress (i) knew about SOEs when it enacted the FCPA, (ii) knew that some of the questionable payments in the pre-FCPA era may have been made to employees of SOEs, and (iii) knew how to include SOEs in the definition of “foreign official” if it had wanted to do so. Clearly, Congress did not do so, and contrary to the Government’s arguments, there is no evidence that Congress intended SOEs to be covered by this criminal statute, or intended the word “instrumentality” to encompass broadly anything through which a foreign government achieves an “end or purpose.” In fact, the plain language of the statute and its history illustrate that the FCPA was aimed at preventing improper payments to traditional government officials. If Congress had wanted SOEs to be included in the definition of “instrumentality,” it would have expressly said so – just as it did in 1976 when it enacted the Foreign Sovereign Immunities Act (“FSIA”)."
"Having no statutory authority for its sweeping position, the Government is thus unable to define the “appropriate circumstances” when an SOE allegedly falls within the FCPA. The Government states only that it is a “fact-based determination.” But facts in isolation are irrelevant unless analyzed in the context of a legal framework. And for over two hundred years it has been “emphatically the province and duty of the judicial department” – not the jury – “to say what the law is.” Marbury v Madison, 5 U.S. (1 Cranch) 137 (1803). Thus, while a jury may decide disputed issues of fact, this Court must first decide the law."
"Defendants’ Motion squarely challenges the Government’s unsupported legal
interpretation of the FCPA by arguing that the term “instrumentality” simply does not include SOEs, and thus employees of SOEs are not, as a matter of law, “foreign officials.” The Government labels Defendants’ position as extreme, insisting that it “is not asking for a legal conclusion that all SOEs are instrumentalities,” only for a ruling that “the term instrumentality . . . can include SOEs.” But it is the Government’s position that is unreasonable, because the Government cannot articulate any principled test – and there is no test, other than one invented from whole cloth – for what would make one SOE, but not another, a government “instrumentality” under the FCPA. Accordingly, the Government’s concession, that some SOEs fall within and some outside the statute, coupled with the complete lack of any meaningful or discernable standards for deciding which is which, undermines the Government’s position and requires that it be rejected because it would render the FCPA unconstitutionally vague as applied."
"Accordingly, the Court should hold that employees of SOEs are not “foreign
officials” under the FCPA and should dismiss Counts One through Ten of the
Indictment. Contrary to the Government’s overblown rhetoric, the sky will not fall upon such a ruling; rather, the issue will be returned to its proper forum: Congress. See Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010) (“If Congress desires to go further . . . it must speak more clearly than it has.”)."
This previous post links to the Defendants' motion and my declaration filed in support. This previous post links to the DOJ's opposition brief as well as supporting declarations from the State Department and the FBI.
The Carson defendants also moved (see here) to strike the State Department declaration or in the alternative for a court order requiring the State Department employee to appear for questioning at next week's hearing). As noted in this prior post, the same State Department declaration was ordered stricken in the Lindsey "foreign official" challenge and is also being challenged in the O'Shea "foreign official" challenge - see here.
*****
In a related development, last week the DOJ announced (here) that "Flavio Ricotti, a former executive of [Control Components, Inc. - the same employer as the above referenced defendants challenging the DOJ's "foreign official" interpretation] has pleaded guilty for his participation in a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies." See here for the plea agreement.
As noted in the DOJ release, "Ricotti pleaded guilty [...] to a one-count superseding information [see here] charging him with conspiring to make corrupt payments to foreign government officials, and officers and employees of private companies in several countries, including Saudi Arabia and Qatar, in violation of the Foreign Corrupt Practices Act (FCPA) and the Travel Act."
The DOJ release further states as follows. "In connection with his guilty plea, Ricotti admitted that he conspired with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company, in connection with attempting to obtain a valve contract for CCI in 2003. Ricotti also admitted to conspiring with other CCI employees to make a payment to an employee of a private company so that the employee would assist in awarding to CCI a valve contract in Qatar."
As further noted in the DOJ release:
"In related cases, two defendants previously pleaded guilty to conspiring to bribe officers and employees of foreign state-owned companies on behalf of CCI. On Jan. 8, 2009, Mario Covino, the former director of worldwide factory sales for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $1 million in bribes to officers and employees of several foreign state-owned companies. On Feb. 3, 2009, Richard Morlok, the former finance director for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $628,000 in bribes to officers and employees of several foreign state-owned companies. Covino and Morlok are scheduled to be sentenced in February 2012."
See here for July 2009 enforcement action against Control Components, Inc.
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