Open Season On The FCPA

Thanks to the DOJ's hyper-enforcement since 2007, the FCPA is on its way to becoming one of the most famous laws in the world.

It makes news somewhere every day -- in Africa, the U.K., Asia, South America, or here at home.

Overseas the FCPA is generally admired. But at home it's often under attack. Ever since the Chamber of Commerce declared open season on the statute, others have been piling on.

The latest is Bill Freeza, a contributor to Forbes.

Here's how he opened a column this week:

In the annals of American legislation, few laws are as futile in their impact, capricious in their enforcement, and hypocritical in their content as the Foreign Corrupt Practices Act of 1977 (FCPA). Designed to put a stop to the bribery of foreign government officials, politicians, and political parties by corporations seeking to do business in corrupt countries around the world, the FCPA hangs as a sword of Damocles over any company that hopes to remain competitive in places that are not as enlightened as the U.S. when it comes to finding acceptable ways to bribe government officials.

For our part, we admire the FCPA and what it stands for. We don't agree with every aspect of the DOJ's enforcement policy. We know the FCPA isn't a perfect law and our messy government isn't a model of consistency. And we'll stipulate that bribery will never be completely stopped. 

Still, we think it's always better to fight corruption than to pretend it doesn't hurt people. Graft undermines the rule of law. The poor become weaker. Schools and roads crumble. Hope disappears.

But does the FCPA fall unfairly on U.S. companies? Take a look at our top ten list. Nine companies there are from outside the U.S. If anything, it looks like foreign companies bear the brunt.

The FCPA isn't perfect. But by our measure, it's still a great law.

U.S. Corporate Prosecutions Go Global

By Brandon L. Garrett

Foreign corporate prosecutions can involve headline-grabbing multimillion dollar fines, international corporate scandals, and even diplomatic intrigue. Over the past two decades, federal prosecutors have focused their attention on international antitrust cartels, bribery of foreign governments, ocean dumping, and other crimes that involve corporate conduct abroad. As prosecutors have set their sights on conduct outside the United States that affects us, we have seen more foreign corporations ensnared in their nets.

In an article I just published in the Virginia Law Review, titled Globalized Corporate Prosecutions, I describe how foreign corporate convictions involve bigger average fines and larger firms — perhaps the kinds of cases worth pursuing despite the practical difficulties of pursuing foreign companies.

To study U.S. prosecutions of foreign firms, I assembled a database of over 1,000 publicly reported corporate guilty plea agreements from the past decade.  It is intended to be useful as a resource - all of the plea agreements located are available here.

(And a request for help - if you come across any plea agreements that are missing from the website, which is still being completed, we would certainly appreciate it if you let us know so that we can add them.)

I also analyzed U.S. Sentencing Commission data archives on federal corporate prosecutions and data concerning federal deferred and non–prosecution agreements with corporations. Not only are large foreign firms prosecuted with some frequency, but they typically plead guilty, are convicted, and then receive far higher fines than otherwise comparable domestic firms.

Of the corporate convictions I examined, 14 percent were foreign firms. They had far higher average fines than domestic firms (an average fine of $38 million as compared with $7.5 million for domestic firms). This occurred across the decade that I examined, from 2001 to 2010.  Foreign firms are prosecuted for very different crimes and in a different mixture of cases than domestic firms. The foreign corporate convictions were concentrated in antitrust, Foreign Corrupt Practices Act (FCPA) and environmental cases.  That was not a surprise; in each of those areas, prosecutors have described their goal to more aggressively pursue foreign corporate violators. In some areas, foreign corporations may dominate the industry — or most violators may be foreign, perhaps because they had thought they could avoid U.S. regulations. Many  foreign firms are under investigation. Some are related, as prosecutors identify industries in which violations seem pervasive, and use cases to leverage industry compliance. The enforcement patterns may change over time as new priorities emerge.

Prosecutors increasingly reward firms that voluntarily self-report, cooperate and improve their compliance programs. However, I observed how foreign firms routinely did not receive the benefit of those deferred and non-prosecution agreements, but instead plead guilty and are convicted. I wondered why. While some have called a conviction the "death penalty" for a firm, that is plainly not always the case. As it turns out, most foreign firms are prosecuted in areas where the DOJ does not always offer deferred and non-prosecution agreements.

I also describe a story of convergence in key areas in which foreign firms are prosecuted.  Federal prosecutors coordinate far more with enforcers in other countries, and this would have not occurred to the same degree in the past. After all, corporate criminal liability has long been a form of American Exceptionalism, where other countries do not generally hold corporations criminally accountable for actions of their employees. These foreign corporate prosecutions may be starting to change that as other countries begin to prosecute corporate crime more like we do in the United States. Perhaps we will not remain so exceptional in the area of corporate crime.

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Brandon L. Garrett (pictured above) is the Roy L. and Rosamund Woodruff Morgan Professor of Law at the University of Virginia School of Law. His article, "Globalized Corporate Prosecutions," 97 Va. L. Rev. (2011) can be downloaded from SSRN here. Professor Garrett can be contacted here.

Are Chinese Companies Being Sucker Punched?

Last year, according to the Deal Journal, about 40 Chinese companies listed on U.S. stock exchanges. If recent history is a guide, lots of them will end up in trouble with shareholders and U.S. regulators.

Some recently listed PRC companies come from the internet, biotech, and media space. They often have top private equity backing and sophisticated management. But many of the new listees are manufacturers from traditional industries, with less direct experience outside China.

In an outstanding post this week, Kevin LaCroix in his D&O Diary said already this year, eleven Chinese companies and their directors and officers have become defendants in U.S. shareholder securities litigation, up from ten for all of last year.

What's it prove? Not that all Chinese companies are crooked, but that many don't belong on U.S. exchanges. Can all Chinese owners and managers understand and appreciate the complex and hyper-stringent U.S. accounting and compliance rules? No way. What might be appropriate and acceptable in China -- and may even exceed expectations there -- just won't cut it in the U.S.

But not all Chinese business people know that. And they don't know what they don't know until it's too late -- when they've been sued in the U.S. by shareholders or targeted by the DOJ or SEC for potential FCPA violations.

If so many of the Chinese companies don't belong on U.S. exchanges, why are they trying to be there?

American professionals -- lawyers, bankers, and accountants -- are selling PRC companies on the idea of U.S. listings, sometimes by dangling unrealistically high valuations. There's lots of sales talk that naturally trumpets the rewards of being on a U.S. stock exchange but downplays the risks.

Sure, the American professionals deliver warnings that they may think are adequate. But the Chinese owners and managers, for whatever reasons, aren't understanding the extent of the risks they face once their company appears on a U.S. exchange. 

Who can fix the problem? The American professionals won't do it. They're in selling mode. Only the DOJ and SEC can plug this hole. What's needed is a "scared straight" program for any foreign directors and officers who want a U.S. listing. They should hear that the real price of access to U.S. capital markets is exposure to the full weight and might of American law.

That would save everyone a lot of trouble.

'Majority' Report

Ryan Morgan: With the DOJ’s brief in the Lindsey Manufacturing case as a guide, defining who is or is not a foreign official in the eyes of the DOJ just became clearer.By Ryan Morgan

Last week the DOJ filed a reply brief in U.S. v. Lindsey Manufacturing on the issue of who’s a “foreign official” under the FCPA.

The DOJ makes a compelling argument that Comisión Federal de Electricidad is not only a state-owned enterprise but essentially an agency of the Mexican government itself. The brief also clarifies how the DOJ defines a government corporation.

If the case had not been brought against the Lindsey defendants, the DOJ argues, the United States government would be, in essence, “out of compliance” with its OECD obligations. In fact, in the International Anti-Bribery and Fair Competition Act of 1998, the U.S. Congress said, “This Act amends the FCPA to conform it to the requirements of and to implement the OECD Convention.”

As the prosecutors point out, the OECD defines “foreign official” this way:

“[F]oreign public official” means any person holding a legislative, administrative or judicial office of a foreign country, whether appointed or elected; any person exercising a public function for a foreign country, including for a public agency or public enterprise; and any official or agent of a public international organisation . . . “

And expands the definition this way:

12. “Public function” includes any activity in the public interest, delegated by a foreign country, such as the performance of a task delegated by it in connection with public procurement.

13. A “public agency” is an entity constituted under public law to carry out specific tasks in the public interest.

14. A “public enterprise” is any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case, inter alia, when the government or governments hold the majority of the enterprise’s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise’s administrative or managerial body or supervisory board. (bold emphasis added)

The OECD’s use of the term "majority" is critical. During the past five years, many companies have disclosed to me that they are revising their FCPA program to designate any company with government ownership of over 1% to be high risk and treated as a government-controlled company or SOE. But using this 1% or higher logic could lead to mislabeling a potentially low-risk corporation with a high-risk rating. That in turn could result in dedicating time and resources in the wrong place.

A case in point is the sovereign wealth fund called the Chinese Investment Corporation, or CIC, through which the Chinese government has ownership positions in many publicly held corporations around the world, including Morgan Stanley.

CIC owned just under 10% of the equity of Morgan Stanley as of February 2011. Applying the 1% or higher logic, every executive at Morgan Stanley would be a foreign official. This could mean anyone taking a Morgan Stanley executive to dinner, or sending them a holiday gift, could be violating the FCPA. It also means the due diligence process requires the vetting of U.S. blue chips and the need to investigate their ownership structures. That would be a wild goose chase and in the end do more harm than good.

The real risk is control by a foreign government. While control is not easily measured on a company balance sheet or in the public domain, ownership, voting power, and board membership are. Using these indications of control are now becoming the standard and, with the DOJ’s brief in the Lindsey Manufacturing case as a guide, defining who is or is not a foreign official in the eyes of the DOJ just became clearer.

Download a copy of the DOJ's memorandum in opposition to the defendants' motion to dismiss in US v. Lindsey Manufacturing et al here.

Ryan Morgan is the FCPA Specialist for WorldCompliance, offering clients insight on risk evaluation, implementing effective due diligence policies, as well as best practices in protecting their company’s reputation. He works with Fortune 500 companies and others to develop effective FCPA policies and procedures. 

SFO To Foreign Companies: Watch Out

By Barry Vitou and Richard Kovalevsky QC

Michael Volkov recently wrote an excellent post The UK Bribery Act: Let’s cool down the hysteria. 

This year, there has been nothing short of a media frenzy in the U.K. about the Bribery Act as April 1 and its entry into force nears.

In recent days much media energy has focused on the impact of the Bribery Act and the claim that when it comes into force it will make U.K. PLC uncompetitive with countries whose laws are weaker or less strictly enforced than the U.K.’s law.

Against this backdrop readers could be forgiven if, when casting their minds back to the U.K.’s own track record not so long ago, the case of Pot vs. Kettle sprang to mind.

In light of this we were delighted to read Michael’s reasoned and considered post advocating a measured and realistic approach to the new law. We agree with all of it. With one exception.

In the article Michael highlights the example of a business headquartered outside the U.K. but which conducts business in the U.K. and the risk that it could be found liable under the Bribery Act for bribery occurring outside the UK. Michael says:

While it is true that such conduct may fall within the ambit of the Act, this scenario is unlikely to occur for two reasons – first, the Serious Fraud Office (SFO) recognizes that it has the authority to prosecute such a scenario but will decline to do so for political and precedential reasons….second, such a prosecution would raise political concerns and the SFO recognizes that the last issue it needs to contend with is political inquiries.

We disagree.

The SFO have said unequivocally that they intend to use the long arm jurisdiction under the Bribery Act. In June last year Richard Alderman the Director of the SFO spelt out his intention:

I shall have jurisdiction in respect of corruption committed by those corporates anywhere in the world even if the corruption is not taking place through the business presence of the corporate in this jurisdiction. What this means is this. Assume a foreign corporate with a number of outlets here. Assume that quite separately that foreign corporate is involved in corruption in a third country. We have jurisdiction over that corruption. This is novel and is a very significant addition to the powers of the SFO.

I have to say that in the SFO it is an extension that we are very excited about.  This is because it will help us answer the question I referred to earlier from corporates along the following lines. They tell me that they believe that they have lost contracts in other countries to competitors based elsewhere who have used bribery. They have asked me what I propose to do to support them.  The new legislation will give me jurisdiction if those other corporates have a business presence here.

He repeated it again earlier this month when he stressed that he wants to prosecute foreign companies with operations in the U.K. who use corruption elsewhere to obtain contracts undercutting U.K. companies.

In prosecuting overseas businesses the SFO will be following in the footsteps of the DOJ’s FCPA enforcement and will silence the UK critics of the Bribery Act who say that the new law will only harm U.K. business.

The SFO has put down a clear marker. 

Overseas corporates who violate the Bribery Act to the detriment of a U.K. business ignore the SFO’s message at their peril.

Barry Vitou and Richard Kovalevsky QC write thebriberyact.com.