A House of Cards Falls: Why ‘Too Big to Debar’ is All Slogan and Little Substance

By Jessica Tillipman

No company, regardless of its size or industry, is immune from potential FCPA liability if it does business abroad. Why then, has FCPA Sanctions: Too Big to Debar by Drury Stevenson and Nicholas Wagoner, singled-out and declared war on large government contractors? Because it can—large government contractors are not sympathetic.

My new article A House of Cards Falls: Why ‘Too Big to Debar’ is All Slogan and Little Substance, demonstrates that despite its populist appeal, Too Big to Debar is simply an inflammatory exercise in contractor bashing. Instead of offering practical solutions to improve the government procurement process, the authors use a catchy slogan to promote policies that have little basis in fact or law.

One of the most glaring errors in Too Big to Debar is its incorrect characterization of debarment as a punitive regime. As FAR 9.4 makes clear, debarment is to be used only for the protection of the government, not to punish past misconduct. This nuclear sanction should only be used when absolutely necessary to protect the government from imminent harm—not because it is “far more crippling to a company’s bottom line.” When used properly, the debarment regime facilitates ethical transformations in a company (as the Air Force did when, despite the authors’ bewildering claims to the contrary, it considered BAE for debarment).

Too Big to Debar also misrepresents the true consequences of debarment—the corporate death penalty. It belies reality that a company will be debarred, somehow manage to survive up to three years without government revenue, and come back stronger and more compliant than ever. Moreover, characterizing the debarment of some of the government’s largest contractors as an “inconvenience” is laughable. In certain fields, only one or two contractors have the ability to perform contract requirements. In an era of outsourced government, these large, sophisticated firms not only permit the government to provide critical functions, but employ thousands of hard-working and innocent employees. Imposing debarment for the sake of retribution or deterrence is not only contrary to law, but would be harmful to the country’s diverse interests.

Too Big to Debar appears to assert that it is morally wrong to “reward” government contractors that have misbehaved. By injecting theories of punishment into an administrative regime, the article elevates the simple, almost visceral desire for large-scale retribution over the best interests of the government. A House of Cards Falls exposes Too Big to Debar for what it is: a populist sound bite used to vilify and bash contractors without regard for nuance or reality.

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Jessica Tillipman, pictured above, is the Assistant Dean for Outside Placement and a Professorial Lecturer in Law at The George Washington University Law School where she teaches an Anticorruption and Government Procurement Law seminar. Her recent article, “A House of Cards Falls: Why ‘Too Big to Debar’ is All Slogan and Little Substance,” was published in January 2012 by Fordham Law Review Res Gestae. It's available at SSRN here.

TSKJ: The FCPA's Whale

In April this year, the final TSKJ partner, Japan's JGC, paid $218.8 million in a plea deal with the DOJ. It was the biggest FCPA case in 2011 (so far) and landed sixth on our all-time top ten list.

The TSKJ settlements now make up four of the six biggest FCPA cases of all time. Together, they're twice the size of Siemens' $800 million settlement, still the biggest single-company FCPA enforcement action.

In March, Jeffrey Tesler, an agent who delivered TSKJ's bribes to Nigerian officials, pleaded guilty to an FCPA conspiracy and a substantive count. As part of his plea, Tesler paid $149 million, the biggest FCPA forfeiture by an individual.

The TSKJ enforcement action started in September 2008. Jack Stanley, KBR's former CEO, pleaded guilty in Houston to a two-count criminal information charging him with conspiracy to violate the Foreign Corrupt Practices Act and to commit mail and wire fraud.

Stanley cooperated with prosecutors. Over the next three years, four companies and two more individuals pleaded guilty, eventually paying $1.65 billion in criminal and civil penalties and forfeited assets.

Stanley and KBR had led the TSKJ joint venture. Between 1995 and 2004, it paid $182 million in bribes to Nigerian government officials, winning four contracts to build liquefied natural gas facilities on Bonny Island, Nigeria worth more than $6 billion.

After Stanley's guilty plea, KBR and its one-time parent Halliburton paid $579 million in 2009 to resolve criminal and civil FCPA charges. In 2010, Italy's Snamprogetti paid $365 million to U.S. enforcement agencies, and France's Technip paid $338 million. Then in 2011, JGC paid $218.8 million.

Stanley, 66, received a preliminary sentence of 84 months in prison and was ordered to make a restitution payment of $10.8 million. His jail term hasn't started yet and is subject to review based on his cooperation. Final sentencing is set for February 3. The feds' $1.65 billion payday is sure to help him.

The agent Tesler, 62, is scheduled to be sentenced on February 2.

Wojciech Chodan, 72, a former KBR manager in the U.K. who pleaded guilty in December 2010 to one count of conspiracy to violate the FCPA, is also set to be sentenced on February 2.

Embraer Hit With SEC Subpoena

Brazilian aircraft maker Embraer said this week it received a subpoena from the U.S. Securities and Exchange Commission relating to possible violations of the Foreign Corrupt Practices Act.

Embraer is the world's third largest commercial aircraft manufacturer. It has about 17,000 employees and last year booked $5.3 billion in global sales.

In an SEC filing, it said the investigation centers on three countries, which it didn't name. It said it is cooperating with the SEC and DOJ in an internal investigation.

The aerospace industry has been in the spotlight since early 2010, when U.K.-based BAE paid $400 million to settle FCPA and other charges with the DOJ.

Last month, reports said the U.K. Serious Fraud Office was waiting for approval from the attorney general to pursue a full-scale bribery investigation into EADS, the European aerospace giant. 

The allegations about EADS, like those in the BAE case, concern sales to Saudi Arabia and other Middle East countries.

Embraer SA trades on the NYSE under the symbol ERJ.

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The company's complete FCPA disclosure appeared in its Form 6-K, Report of Foreign Private Issuer, for November 2011.

It said:

In response to a subpoena issued in an investigation by the U.S. Securities and Exchange Commission (“SEC”) relating to possible violations of the U.S. Foreign Corrupt Practices Act , the Company retained outside counsel to conduct an internal investigation into transactions in three specific countries. That internal investigation is ongoing, and the Company is fully cooperating with the SEC and the U.S. Department of Justice (“DOJ”). The Company’s outside counsel has been in regular contact with the SEC and the DOJ and has provided both agencies with documents and other information. The Company’s outside counsel recently met with both agencies to brief them on the status of its investigation. The Company and its outside counsel expect to continue to have discussions with the SEC and the DOJ. The Company is unable to predict duration, scope or results of the investigation.

Is EADS BAE All Over Again?

A report this week in the Telegraph said the U.K. Serious Fraud Office is waiting for approval from the attorney general before pursuing a full-scale bribery investigation into EADS, the European aerospace giant. 

The Telegraph said the SFO has completed 'preliminary inquiries into claims that illegal payments were linked to a £2 billion communications contract awarded to GPT, a subsidiary of EADS.'

The preliminary investigation began after Lt Col Ian Foxley, who worked for GPT, told the SFO that Saudi officials had been given 'luxury cars, jewellery and briefcases full of cash.' Foxley was later fired by GPT.

EADS's £2 billion contract was for an upgrade to the satellite and intranet systems of the Saudi National Guard, which protects the Saudi royal family.

Dominic Grieve, the U.K. attorney general, is reportedly considering diplomatic issues that might arise between the U.K. and Saudi Arabia. In 2006, the SFO dropped a bribery investigation of British aerospace giant BAE because of Saudi threats to end anti-terrorism cooperation with the U.K. BAE eventually paid U.S. enforcers $400 million to settle FCPA-related charges.

EADS -- the European Aeronautic Defence and Space Company -- is based in the Netherlands. It is Europe's biggest aerospace and defense firm. A division makes the Airbus and competes with Boeing.

The Telegraph said the SFO was forced to seek the attorney general's approval because any eventual prosecution would be under the old Corruption Act and not the new Bribery Act, which gives the SFO more latitude.

Second Thoughts About The Second Sting Trial

Another group of defendants went on trial this week in federal court in the District of Columbia in the Africa sting case. 

Patrick Caldwell, John Mushriqui, Jeana Mushriqui, Stephen Giordanella, John Godsey, and Marc Morales each face one count of conspiracy to violate the FCPA. Except for Giordanella, they also face multiple substantive FCPA counts. And the government has included a forfeiture count against all of them.

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Twenty two individuals were charged in the case. All but one were arrested early last year while attending a trade show in Las Vegas. Three have pleaded guilty.

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The trial of four other defendants charged in the case -- Pankesh Patel, Andrew Bigelow, John Benson Weir, and Lee Allen Tolleson -- ended in a mistrial in July when the jury was deadlocked after five days of deliberations.

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During a three-year undercover operation, FBI agents posed as representatives of the president of Gabon. The DOJ alleges the defendants conspired to pay bribes to the phony government officials to win contracts to supply ammunition and body armor to the country's presidential guard.

Richard Bistrong, the DOJ's cooperating witness, introduced the undercover FBI team to his friends and colleagues in the military and police equipment industry. Bistrong had already pleaded guilty to unrelated FCPA violations and has been trying to earn a lighter sentence.

Although they're all on trial for being part of a common conspiracy, some defendants have said they didn't even know each other and were brought together by Bistrong.

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In Mike Koehler's Congressional testimony last year about FCPA enforcement, he described this case and some others involving multiple individual defendants as 'manufactured.'

He said:

Prosecuting individuals is a key to achieving deterrence in the FCPA context and should thus be a 'cornerstone´ of the DOJ's FCPA enforcement program. However, the answer is not to manufacture cases or to prosecute individuals based on legal interpretations contrary to the intent of Congress in enacting the FCPA while at the same time failing to prosecute individuals in connection with the most egregious cases of corporate bribery.

As we said after the mistrial of the first four sting defendants, the feds never needed to use their bag of tricks to dig up FCPA defendants.

'There are plenty of real targets out there,' we said, 'and they're easy to find. Just listen to the whistleblowers. Or look inside Tyson Foods, Siemens, BAE, Daimler, and dozens of other companies that have admitted violating the FCPA, paid big fines, but produced no individual FCPA defendants.'

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An account this week in the Blog of the Legal Times said prosecutor Laura Perkins referred to the sting defendants as 'savvy business people' who knew what they were doing and deserve to be punished.

Is that true?

In July, a law enforcement officer told us many of the defendants and their companies were 'so small or regional that I haven’t heard of them.' He thought any juror would wonder why the government is trying to get rid of some of the same 'hardworking' people who supported America's wars in Iraq and Afghanistan by providing equipment for the troops.

Good question.