Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Michael Scher
Senior Editor

Elizabeth K. Spahn Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

FCPA Blog Daily News

Entries in Andy Spalding (56)


Corporate Enforcement Countdown

We're searching for clues about how enforcement decisions are made, and whether corporate settlements might be replacing individual prosecutions. Now we've got some numbers to help in the search.

Click to read more ...


Is The Giffen Case America's BAE?

We're always happy to hear from lawyer Andy Spalding, left. He recently returned from a year-long Fulbright Research Grant in Mumbai, India, and is now on the faculty at the Chicago-Kent College of Law.

He's been thinking about the extraordinary case of James Giffen, the former middleman to U.S. oil companies doing business in Kazakhstan. He writes:

Dear FCPA Blog,

With James Giffen's plea on Friday to a mere misdemeanor, the case is drawing to an anti-climatic and curious close. In an era of ever-increasing fines and penalties for FCPA violations, Giffen's modest settlement seems an aberration; even more peculiar, some have commented on how the otherwise highly-capable Southern District prosecutors fumbled through this case with atypical awkwardness.  

All of this gives rise to speculation that the case was subject to political pressures -- namely, that either the agencies that were asked to produce documents and stonewalled, or outside agencies that may have bore down on the Southern District, determined that the foreign policy implications of this case, involving delicate relations with resource-rich Kazakhstan, were so sensitive as to outweigh any public interest in Giffen's fulsome prosecution.

If political forces did indeed compromise the prosecution (and few of us can know for sure), does this scenario seem familiar to anyone?

Let's recall the similarly strange prosecution of BAE, the British defense contractor who allegedly paid more than $2 billion in bribes and kickbacks to a Saudi Arabian prince. The U.K.'s Serious Fraud Office opened an investigation, which it suddenly closed.  We would learn that pressure to terminate the investigation came from outside (or perhaps, above) the SFO: the Blair government apparently insisted on the file's closure in response to Saudi threats to cease cooperation with the UK's anti-terrorism efforts.  

The High Court in London berated the SFO for capitulating, and on appeal the House of Lords declared SFO's handling of the matter "extremely distasteful"; the SFO director resigned shortly thereafter. In apparent protest of the the SFO's decision, our DOJ opened its own investigation, and the SFO eventually reopened its file. The result? BAE settled with the DOJ for $400 million, the third-highest amount in FCPA history. But the SFO fined BAE a relative pittance -- £30 million. The parallel is unmistakable, and striking: in a case with heightened foreign policy sensitivities, allegations that seem to otherwise warrant a substantial settlement resulted in something far less.

In fairness to the DOJ, this may not be their fault: whether due to an uncooperative client, or irresistible political pressure, they may have wanted to push further but were hamstrung. Still, it raises a compelling question: Is the Giffen case America's BAE?

Andy Spalding


Letter From Central Asia

Andy Spalding, a lawyer on a year-long Fulbright Research Grant in Mumbai, India, writes to us from time to time. Here's his latest dispatch:

Dear FCPA Blog,

I have just returned from a week in Almaty, Kazakhstan, which your readers know to be an FCPA hot spot. I tried to preach the anti-corruption message through a series of lectures at one of the law schools, and interviewed a number of local practitioners.  This experience taught two undeniable lessons:

1.  It is nearly impossible to overstate the importance of curbing corruption in Kazakhstan. Graft is endemic (the country ranked a miserable 120 on the 2009 Corruption Perception Index) and perpetuates all manner of legal and social pathologies. The citizens of Almaty are perhaps as cynical about their government as any I have ever met, and with very good reason. Worse yet, U.S. companies have participated in, and reinforced, this culture of corruption, as we all learned through watching the James Giffen case explode in 2003. But this brings me to the second lesson:

2.  The present FCPA enforcement regime has done that country tremendous harm. How did the U.S. respond to the discovery of systematic bribery by U.S. companies in Kazakhstan? The same way that we respond to nearly every such revelation: we slapped severe criminal sanctions on myriad U.S. persons and hoped that other companies would get the message. Those companies did indeed get a message; whether it is the message we want to convey is a very interesting question. Since Giffen's arrest, western investment in the oil and gas sector in Kazakhstan has dropped precipitously. This is hardly surprising, and some would argue that it is precisely the desired outcome. But consider what happened in its wake. In that same period of time, investment has gone up, just as rapidly, from a well-capitalized country that has refused to adopt the OECD Convention: China.

Query: is Kazakhstan any better off now? I can tell you that the Kazakhstanis most certainly do not think so. There is a level of apprehension there about rising Chinese investment and influence that is quite shocking. A lawyer from a leading U.S. firm said, "My clients used to all be from the west, and now they're almost all Chinese."  Another lawyer said, "The Chinese don't like to spend as much on lawyers, because they solve their legal problems through other means." Those of us in anti-corruption circles know exactly what that lawyer meant. The law students are petrified by the prospect of working for, or with, Chinese companies -- "they don't do business the same way," so many of them told me. And yet, many of these same students are taking Chinese language classes.

Will corruption go down in Kazakhstan after the Giffen case? Certainly not. Has our withdrawal of FDI from Kazakhstan somehow set that country on the road to reform? This answer is also certain.

What's the remedy? Finding a way to enforce the FCPA that deters bribery without deterring investment in developing countries like Kazakhstan. We're smart enough to figure it out. Simply washing our hands of corruption by pulling out of developing countries like Kazakhstan, leaving them to be ravaged by companies that bribe without any fear of penalty, is morally irresponsible.

Andy Spalding

*   *   *

Readers with experiences in Kazakhstan or similar countries are welcome to comment as well.


Speaking Freely

The Miller Center of Public Affairs at the University of VirginiaThe Miller Center of Public Affairs [at the University of Virginia] has a long tradition of luring influential people to speak to engaged citizens, but this genteel practice degenerated on Friday, March 19, at an appearance by the lawyer who wrote the infamous “torture memos” that the Bush Administration used to justify waterboarding terrorist suspects. While irate audience members shouted at the interrupters, the Center’s programs director, George Gilliam, scolded disruptive protesters during the talk by University of California at Berkeley law professor John Yoo. -- Uncivil discourse: Protesters disrupt Yoo at Miller Center, The Hook

*   *   *

Free speech is something most Americans say they believe in. But some don't act that way. Shouting down a speaker because his or her view is unpopular isn't free speech. It's using more volume to drown out less volume. If we're honest, many of us would say we believe in free speech for ourselves but not for our neighbors. That's why we all need the First Amendment.

*   *   *

Andy Spalding's views of FCPA enforcement as a de facto economic sanction against developing countries aren't always popular. But they force us to look again at national and global anti-corruption policy. We think Stephanie Connor's response to Andy's most recent comments in this space sum up the counter-argument nicely. She says,

Dear Andy,

Don’t get me wrong, I think your analysis of the FCPA as a de facto sanction is downright brilliant. But we have to distinguish between increases in investment and decreases in poverty. As many commentators have noted over the last several decades, foreign direct investment does not impact poverty because of corruption. This is one of the most significant factors playing into the relationship between resource wealth and economic failure. Corruption prevents the proceeds of investment from spreading throughout an economy because it creates strong incentives for political actors to control the access to resources. 

Moreover, we cannot gloss over the practical realities that “black-knights” will face when they invest in corrupt economies, and what that means for long-term investment. For example, when the Angolan government rejected IMF funding in 2007, China stepped in as Angola’s benefactor. But the Chinese government soon grew exasperated with the rampant corruption, and demanded greater transparency.

You and I agree that we need robust international anti-corruption enforcement. But others are abusing a short-term analysis of the FCPA's impact on investment to reach the opposite conclusion. I’m referring to a recent suggestion that FCPA enforcement will undermine Haiti’s recovery. For the first time in its sad history, Haiti is getting some attention from the international community, an influx of donor money, and an opportunity to rebuild. This is not the time to advocate for bribery.

No amount of FCPA enforcement will completely stamp out corruption. There will always be local officials who demand bribes, and there will always be free-riding foreign companies who choose to ignore the law. The FCPA seeks to punish comparatively wealthy actors who benefit from and sustain a lack of transparency. We should give the law some time to work.


Stephanie Connor


What They're Saying

Get ready for even more FCPA enforcement against individuals. The DOJ's Mark Mendelsohn was quoted this week by Reuters as saying:

"If you look at who we're prosecuting, we're prosecuting mid-level to senior level corporate officers and employees, CEOs, CFOs, heads of international sales. My point is these are people with significant positions in companies."

*   *   *

Innospec's docs. Thanks to the kindness of a reader, the criminal information, sentencing memo, and plea agreement can now be downloaded from our post here.

*   *   *

For the record. Andy Spalding, whose provocative comments appear in this space from time to time, has never said graft is good. Our over-zealous headline writers came up with that silly phrase.

Andy himself says: "I certainly don't believe that 'graft is good' . . . I do believe, though, that our efforts to reduce bribery can, quite unintentionally, sometimes produce bad results.  But fortunately, we need not choose between enforcing the FCPA or not.  Rather, we should develop an approach to enforcement that is more sensitive to the reality of collateral damage in economically desperate countries, one that punishes bribery without punishing the citizens, for example, of Haiti."

*     *    *

What time is it there? Expanding cooperation between the DOJ and the U.K.'s Serious Fraud Office is one of the year's most important FCPA enforcement trends. How's it working? We don't really know. But it brought to mind this clip from Extras.


More On Graft Is Good, Sometimes

Last week we heard from Washington, D.C. lawyer and former aid worker Stephanie Connor. She disagreed with some comments Andy Spalding, left, has made in this space. Andy's a lawyer on a year-long Fulbright Research Grant in Mumbai, India.

He's questioned whether bribery is always bad and enforcement of the Foreign Corrupt Practices Act always good. (His concepts were discussed without attribution to him in a recent WSJ Law Blog post "Is the FCPA Standing in the Way of Haiti’s Recovery?" here.)

Here's his response:

Hi Stephanie,

First, nice to meet you and thanks for your comments. They have forced me to examine my assumptions in some unexpectedly difficult ways.

I understand the crux of your comment to be that we should not treat the FCPA as if it were primarily designed as a poverty reduction tool. I agree.

Rather, the statute is primarily designed to be a bribery reduction tool, and we should not evaluate its success in the first instance by the extent to which it reduces poverty. But to say that it is not designed to be a poverty reduction tool is very different from saying that we should enforce it without regard to its impact on poverty.

As strongly as I agree with the former statement, I disagree with the latter. Indeed, many believed in 1977 and still believe today that proper enforcement of the FCPA will have the collateral effect of mitigating poverty -- through reducing corruption, we will eventually improve economic productivity. I am among those who subscribe to this theory, when thinking about the very long term.

But what if FCPA enforcement has the more immediate effect, quite unwittingly, of exacerbating already severe social problems, including but not limited to poverty? Should we take notice? Should we modify our approach to enforcement? Can the FCPA be enforced in such a way that it can deter bribery without deterring investment in developing countries? I certainly believe that it can, and that it should. Is there a reason why it should not?

I would truly love to hear your response.

All the best,
Andy Spalding

Views from other readers are also welcome.

Editor's Note: For the record, Andy has never said graft is good. Our over-zealous headline writers came up with that phrase. Andy himself says: " I certainly don't believe that 'graft is good' . . . I do believe, though, that our efforts to reduce bribery can, quite unintentionally, sometimes produce bad results.  But fortunately, we need not choose between enforcing the FCPA or not.  Rather, we should develop an approach to enforcement that is more sensitive to the reality of collateral damage in economically desperate countries, one that punishes bribery without punishing the citizens, for example, of Haiti."


Not-So-Great Expectations, Please

We like hearing from readers. Here's a note from Washington, D.C. lawyer Stephanie Connor, left:

Dear FCPA Blog,

I'm grateful for the insights this blog, and its many contributors, have provided throughout the years. This includes the admirable work of Andy Spalding, Art Carden and Lisa Verdon – academics who cast doubt upon the ultimate utility of the FCPA as a means of combating corruption and reducing poverty in the developing world. As a lawyer and a former aid worker, I don’t always agree.

While I believe anti-corruption enforcement is necessary, I am troubled by the tenor of the recent dialogue surrounding that enforcement. This has nothing to do with the quality of the analyses that Spalding, Carden and Verdon are providing, and everything to do with the fact that expectations for what the FCPA can and should accomplish have grown completely out of hand.

The works of Spalding, Carden, and Verdon are important. Poverty reduction strategies need to be evaluated, measured, and critically assessed. But the FCPA is not a poverty reduction strategy. We cannot mistake supply-side anti-corruption enforcement for the wider effort to reduce corruption in the developing world -– a project that will require significant advancements in health, education, and the rule of law, for starters. The FCPA simply aims to ensure that U.S. actors do not provide monetary lifelines to the autocrats and oligarchs who will be threatened by the advancement of their people. It will not solve the underlying problems of poverty.

Holding the FCPA up as the magic bullet for poverty reduction is unfair to those who have foregone lucrative opportunities in order to comply with the law. By framing the anti-corruption effort as a means of vanquishing poverty, we risk handing an early victory to opponents of the Act. When the FCPA is inevitably unsuccessful, the enthusiasm for anti-corruption may dissipate, the resources for FCPA enforcement may quietly disappear, and those companies that have sacrificed so much to act within the confines and spirit of the law would be left at an even greater disadvantage. 

I admire the business people and aid workers who refuse to pay bribes. They often make that choice because they realize that paying one official will lead to a torrent of other requests. The FCPA supports them. The law allows them to tell a soldier with a greedy glint in his eye that they would pay him but cannot do so without risking their company and their job. This is much easier than telling him that they could pay him but just don’t feel like it. 

A successful anti-corruption effort will take more than a few years, or even a few dozen years, of enforcement. Maintaining that effort over a prolonged period requires that we also manage our expectations. It should be enough that the FCPA reduces some high-level corruption. We need not, and should not, ask it to do more.

Best Regards,

Stephanie Connor

The views expressed in this post belong to the author and do not necessarily reflect the views of her employer.


BAE: Bribery, Bombs And Black Knights

Photo by Annie MoleIs there a place where anti-corruption policy stops and international politics begins? Andy Spalding -- a lawyer and Fulbright scholar who's a familiar face around here -- thinks so. He sent this dispatch from Mumbai, India:

Dear FCPA Blog,

The BAE matter leaves many of us bewildered, struggling to grasp its greater significance. While several FCPA commentators have deemed 2009 "The Year of the Individual," I wonder if BAE points to another trend that is emerging. . . or rather, re-emerging.  Consider:

1. BAE, Saudi Arabia, and Terrorism. The UK's anti-bribery enforcement was severely obstructed by seemingly unrelated foreign policy objectives.  Since when, we may ask, did foreign policy impact FCPA enforcement? 

2. Iran and Nuclear Proliferation. Mike Jacobson of the Washington Institute recently suggested that the FCPA might be enforced selectively against companies doing business in Iran, as a form of economic sanctions. I understand that at least some FCPA insiders found Mike's core idea -- selective enforcement of the FCPA to advance foreign policy objectives -- not inconceivable.

3. China, Russia, and Political Alliances in the Developing World. Another piece ran earlier this year which demonstrated that as companies subject to the FCPA do less business in heavily bribery-prone countries, the resulting void of foreign capital will be filled by companies from countries that are not enforcing, or have not adopted, anti-bribery laws -- so-called "black knights." Economists predicted that the FCPA specifically would produce this effect, and we are indeed observing it today as China and Russia invest aggressively in Africa, Latin America, Central Asia, and the Middle East without fear of a bribery penalty. This dynamic is likely to significantly alter international politics for many years to come, though the FCPA community seems loathe to admit it.

4. History is Circular: the Forgotten Cold War Origins of the FCPA. Though we generally think of the FCPA as the product of Watergate, legislative history makes all too clear that the FCPA was also conceived, for better or for worse, as a tool of the Cold War -- punishing bribery was deemed essential to maintaining capitalism's credibility and ultimately spreading liberal democracy to politically unstable countries. This was not a partisan idea, advocated by a mere handful of arch-conservatives; to the contrary, both sides of the aisle readily endorsed it, including vociferous, high-profile critics of the Vietnam War such as George Ball. 

With the end of the Cold War, we largely stopped thinking about the FCPA's foreign policy implications, and were probably happy to do so. But alas, realpolitik has reared its ugly head once again, unlikely to return whence it came. So we're right back where we started, wrestling with the awkward convergence of anti-bribery laws and international politics. It may not be pleasant, but we should probably get used to it. 

With thanks,
Andy Spalding

 As always, other views are welcome.


The Good Bribes

Lawyer and Fulbright Scholar Andy Spalding: The idea that deterring bribery must always be good is too simple.Yesterday's post about corruption's positive influence in poor, unfree countries brought the following comment from Andy Spalding. He's a lawyer on a year-long Fulbright Research Grant in Mumbai, India whose own view of anti-corruption laws has caused a stir.

Here's what he said:

Dear FCPA Blog,

I was delighted to read yet another article in our field written in the ever-important vein of constructive criticism.  For those of us who support the FCPA, it is tempting to categorically dismiss the suggestion that in some economies, some of the time, bribery may actually promote development.  But I'm not sure that this is the right response, for at least two good reasons:

1.  This idea has been around for a very long time.  As Carden and Verdon readily admit, theirs is a new permutation on an idea that has circulated in mainstream economics and political science for over forty years.  It grew out of the study of Soviet bureaucracy, and many of us lawyers who took undergrad majors in poli sci, econ, or history, may at least vaguely recognize names like Samuel P. Huntington.  This idea is not new, and it's not radical.  We would do well to see the FCPA, and the problem of corruption, in a broader context of human experience and intellectual inquiry.

2.  Hasn't the FCPA community understood this since 1988?  That was the year that we amended the FCPA to include the affirmative defense -- which some find counter-intuitive, or worse -- for facilitating payments.  How many of us have had the experience of describing this defense to non-lawyers in a compliance seminar, a meeting with clients, or around the dinner table, only to be met with chuckles of astonishment? The non-FCPA world believes that "a bribe's a bribe," and so did we when we originally drafted the FCPA in the mid-70s.  But ten years of experience taught us otherwise.  For those of us today who endorse the affirmative defense -- who do not believe it is a "loophole" that should be abolished, but instead strikes an important balance -- haven't we tacitly accepted at least some version of Carden and Verdon's thesis? 

We may tend to assume, perhaps unconsciously, that if bribery is bad, then deterring bribery must always be good; the logic is seductive in its simplicity.  But as Holmes taught, "the life of the law has not been logic; it has been experience."  Experience in bribery-prone countries, with all its irony and tragedy, teaches us that though bribery is indeed bad, the alternative may sometimes be worse.  Those who amended the FCPA in 1988, and myriad observers of the human condition dating much further back, understood this regrettable fact.  In today's prosecutorial zeal we may try to ignore it, but those who live and work under corrupt and inefficient regimes cannot escape it. 

With thanks,
Andy Spalding


Graft Is Good, Sometimes

Profs Art Carden of Rhodes College and Lisa Verdon of Florida State, both economists, asked: When is corruption bad for economic growth? When is corruption good for economic growth? (It wouldn't occur to us to ask the second question; that's why we read what smart people have to say.)

Carden and Verdon surveyed the literature, analyzed studies and examples that might reveal clues -- there's not much meaningful data about corruption because it usually happens in secret -- and came to some thoughtful, if unpleasant, conclusions.

In their August 2009 paper, they argue that in some circumstances, graft can actually create beneficial change. In a healthy economy, they say, corruption is bad -- it's like sand in the gears of society. But in poor and undemocratic countries, corruption can be oil in the gears. It can help bring change and economic progress. It can be a substitute for freedom by allowing entrepreneurs to beat red tape and get things done.

Here's what they say:

In relatively poor, un-free countries, corruption can overcome some of the barriers presented by formal and informal institutions that would otherwise restrict trade. Bureaucracies and regulators are in a position to exercise veto power over mutually beneficial trades—they can prevent people from picking up the bills left on the sidewalk, so to speak, and thereby reduce specialization, trade, and growth. When this is the case, corruption can increase economic growth by allowing trade.

They cite others who, looking at data from countries such as Zaire, South Korea, and the Philippines, conclude: Corruption is always detrimental in countries where institutions are effective, but it may be positively associated with efficiency in countries where institutions are ineffective.

Does it mean the Foreign Corrupt Practices Act is bad for those places that are the worst off? Are we missing what Carden and Verdon and other scholars would call the "cultural context" of corruption? Do anti-corruption laws like the FCPA and other OECD versions promote suffering in the least developed countries by preserving a miserable status quo? Is America making a cosmic mistake with the FCPA?

The paper is "Corruption Creates Growth When People Aren't Free" by Art Carden and Lisa Verdon (August 20, 2009). It's available at SSRN here.

Readers -- you're invited to give us your two cents. You might also want to look at what Andy Spalding had to say in this space last year.