Recent media reports suggesting Rolls-Royce’s bribery settlement drove the engineering giant to a record £4.6 billion ($5.7 billion) loss are not factually accurate, and contribute to a misleading narrative that big companies are too fragile to be punished robustly for corruption.
Entries in Arthur Andersen (5)
A good friend of mine who ended his career as a very senior police officer once gave me an excellent piece of advice. He told me that anyone can manage an organization when things are going well -- it is when things become difficult that true leaders emerge.
What do we think, a friend asked a few days ago, about paying FCPA whistleblowers 10 to 30 percent of amounts recovered through SEC and DOJ enforcement actions? That idea is part of a financial reform bill introduced last month by Christopher Dodd, chairman of the Senate Banking Committee. It's well covered in Corporate Compliance Insights, with links to the bill itself.
We're in favor of enforcing the FCPA. And we generally admire the job the DOJ and SEC are doing to fight global public corruption -- and to enlist allies in the fight. But we have serious concerns about Senator Dodd's proposal. We explained our thinking to a Washington policy maker two months ago. Whether our comments made it to Senator Dodd's ear, we don't know.
Here's what we said. Under current U.S. law and the way it's applied to white collar criminal cases, including the FCPA, corporate defendants cannot defend themselves if any employee committed an offense. The legal doctrine of respondeat superior makes corporations vicariously liable for crimes committed by employees at any level acting within the scope of their employment, even for actions in direct violation of company policy. This strict liability leaves organizations defenseless -- completely naked when threatened with criminal prosecution.
What do companies accused of FCPA violations do? Instead of mounting a futile and potentially catastrophic defense (remember Arthur Andersen?), they settle. The corporations -- legal fictions that cannot think, plan, speak, chew bubblegum, or act apart from their people -- are "punished" with financial penalties, ultimately paid by completely innocent shareholders. Sometimes, though not always, people from the company are prosecuted as well. But their financial penalties are tiny compared to those paid by the corporations, and on which the whistleblower rewards would be based.
To make matters worse, a settling company may feel pressured to disclose to prosecutors documents and records about employees, usually without the employees' consent. Those records may even include the employees' conversations with the company's lawyers. The employees lose what they thought was the attorney-client privilege, and their right against self incrimination is history.
So let's rephrase the question: Should a whistleblower be rewarded for information leading to the government's extraction of money from a defenseless corporation through a coerced settlement that tramples its employees' expectation of legal privilege and 5th Amendment rights?
Whistleblower rewards would be great if respondeat superior were reformed. If corporations were given the chance to defend themselves, given the chance to prove they tried to prevent bribery but one or more employees went off the rails anyway. That would end shot-gun settlements. Corporate defendants could then make a reasoned decision -- go to trial or seek settlement. And with those on the losing end of a prosecution presumably guilty in a real sense of the crimes committed by their employees, punishing the companies would make more sense.
Under current U.S. law, however, FCPA whistleblower rewards are likely to hurt companies that act in good faith to prevent corruption and employees whose rights are stripped away.
The criminal justice system has a wheel loose and it's called respondeat superior. Let's fix it before we drive any faster.
With so much to lose by going to trial, how many organizations and people will plead guilty to white collar crimes they didn't commit? Ellen Podgor (left) of Stetson University College of Law and the White Collar Crime Prof Blog asks that question in her latest essay, "White Collar Innocence: Irrelevant in the High Stakes Risk Game." She looks at three defendants who claimed their innocence at trial but were convicted -- Arthur Andersen LLP, Jamie Olis, and Jeffrey Skilling. And three who pleaded guilty and avoided trials -- KPMG, Gene Foster, and Andrew Fastow. The first group, as everyone knows, got clobbered. The second group, Prof Podgor says with considerable understatement, enjoyed reduced sentences and finite results.
"The pronounced gap between those risking trial and those securing pleas is what raises concerns here," she says. "Some refer to this as a 'trial penalty' while others value the cooperation and support the vastly reduced sentences."
In Olis's case, for example, she points out that the 'trial penalty' paid by the former Dynegy tax executive convicted of accounting fraud resulted in "an initial sentence that was 288 times greater than a non-risk taker and an eventual sentence that was approximately seventy-two times greater than a co-worker who decided not to take the risk of going to trial. [Olis's] boss, who also did not risk trial, received a sentence less than one quarter of what Olis received."
No wonder guilt or innocence doesn't always figure in decisions to fight white collar charges in court. For individuals, the trial penalty can mean sitting in jail for decades (or as long as they survive); for organizations it can mean a corporate death sentence. Plea bargaining, though, removes the risks and limits the damage.
When the amount and quality of law enforcement are just right, when the guilty are usually punished and the innocent usually go free, we call it the "rule of law." Most of us don't think much about the rule of law. We enjoy its benefits and take it for granted, forgetting that it's a rare blessing -- and very fragile. So when the rule of law is out of balance and someone points that out, we should be grateful. Ellen Podgor is someone we're grateful for.
Her essay, "White Collar Innocence: Irrelevant in the High Stakes Risk Game," can be found on SSRN here. It'll be published soon in the Chicago-Kent Law Review.
If, as Alba alleges, Alcoa overcharged it for supply contracts by $2 billion, and some or all of the money went into offshore accounts controlled by Alcoa's agent and was used to bribe Alba's personnel and other Bahraini government officials, then the focus of the U.S. government's criminal investigation will be on whether anyone from Alcoa knew what was happening, or if the agent acted alone and without Alcoa's knowledge.
The Justice Department last week intervened in Alba's federal civil suit against Alcoa, asking the court to stay the case while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has said it's innocent. "We will cooperate fully with the DOJ and believe this will help bring this matter to a speedy conclusion," Alcoa communications director Kevin Lowery said.
For U.S. prosecutors to obtain a criminal conviction of an individual under the FCPA, they must prove, among other things, that the defendant acted with "knowledge." The most recent discussion of the knowledge element in an FCPA prosecution is U.S. v. Kay (No. 05-20604, 5th. Cir., 2008). In that case, the United States Court of Appeals for the Fifth Circuit said the government didn't need to prove the defendants had specific knowledge about the FCPA. Instead, the court said, the government could satisfy the knowledge element by proving merely that the defendants understood that their actions were illegal.
Sitting en banc, the U.S. v. Kay appellate court -- which was reviewing the trial court's jury instructions on "knowledge" -- said: To be clear, we return to first principles. That is, this case was tried on the basis that the Government had to prove that the Defendants knew that their actions violated the law, although they did not need to prove that they were aware of the specific provisions of the FCPA. . . . The Government, while responding that they need not prove the specifics of the FCPA, made clear that it had to prove that Defendants knew that their conduct was illegal."
U.S. v. Kay involved bribery offenses under the FCPA, which carry a potential prison term of five years. What about criminal violations of the accounting standards, for which individuals can face up to 20 years? Those prosecutions must include proof that the accused acted willfully. The FCPA says a willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts.
What about Alcoa's corporate exposure for criminal charges? If any employee was involved with the agent and knowingly participated in bribing foreign officials in Bahrain, or intentionally cooked Alcoa's books with respect to the overcharges and bribery, then Alcoa itself might be held criminally responsible under the doctrine of respondeat superior. That could happen even if Alcoa's employees acted secretly, completely outside their authority, and against Alcoa's policies.
“An Overview of the Organizational Guidelines” from the United States Sentencing Commission's May 2004 release says this:
Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
The statement reflects the majority view of the federal appellate courts that have considered whether corporations are criminally liable for the crimes employees commit while acting within the scope of their employment. Courts have said it may be irrelevant that the employee is not a high managerial official, that the corporation may have specifically instructed the employee not to engage in the proscribed conduct, or that the statute is one that requires willful or knowing violations, rather than one that imposes strict liability.
The rationale for applying respondeat superior to corporations is that criminal statutes such as the FCPA impose a duty upon the corporation to prevent its employees from committing the statutory violations. If it fails in its duty to prevent the criminal behavior, then the corporation itself should be made to answer for the same criminal acts.
Despite the doctrine of respondeat superior, the DOJ is now understandably reluctant to charge corporations with criminal offenses. The Arthur Andersen prosecution demonstrated the catastrophic consequences that can result from a corporate felony charge, which for Andersen was a death sentence, even though the firm was later exonerated. The DOJ has since adopted the practice for FCPA and other white collar offenses of offering companies deferred prosecution agreements as an alternative to criminal prosecutions.
In cases involving the FCPA, corporations have additional (albeit largely theoretical) protection from the harshness of the respondeat superior doctrine. The "Overview of the Organizational Guidelines" says this:
The [federal sentencing guidelines mitigate] the potential fine range - in some cases up to 95 percent - if an organization can demonstrate that it had put in place an effective compliance program. This mitigating credit under the guidelines is contingent upon prompt reporting to the authorities and the non-involvement of high level personnel in the actual offense conduct.
If, as Alba alleges, people from Alcoa were involved in activity that may violate the FCPA, then the company's task, among others, will be to show that it has an effective compliance program, that top executives were unaware of any illegal conduct, and that it never concealed the conduct from the DOJ or SEC. If Alcoa can demonstrate these things, it will be eligible for mitigation of the potential criminal penalties. It is certainly true, however, that mitigation is less relevant when deferred prosecution agreements are offered. But the arguments for mitigation should still influence the DOJ's determination of the terms of any eventual deferred prosecution agreement.
Would the presence of actual FCPA violations ruin Alcoa's ability to establish that it has an effective compliance program? No. The Sentencing Guidelines stipulate that the failure to prevent or detect an FCPA offense "does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct."
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Alba's allegations raise a multitude of FCPA issues for Alcoa, its employees and agent. We've mentioned just a few here, and we'll come back to the case from time to time. As one pundit said to us, this will be a zoo.
Please click on the labels below for prior posts on the topics discussed above and for access to the sources and authorities referred to in the post. You can also contact us for the annotations.