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.

Regarding Foreign Evidence, The Echo Of History

[The DOJ] rarely has the ability to obtain the testimony of foreign witnesses. It is difficult to obtain foreign documents. Defense lawyers should put the government to its burden of proof and not confess without a trial.

-- Joel Androphy, John O'Shea's defense lawyer, to the FCPA Blog, January 19, 2012

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Our experience in combatting domestic political corruption, coupled with our own recent efforts to develop prosecution [sic] involving the bribery of foreign officials amply demonstrates the difficulties of gathering sufficient credible and admissible evidence to support prosecution. By its very nature the bribery of public officials is covert and generally involves consensual parties who go to great lengths to conceal the transaction. When the official involved is a representative of a foreign government and most of the critical acts take place outside of the country, the problems of detection, investigation and prosecution are necessarily compounded.

-- Letter from the DOJ to Hon. Harley O. Staggers, Chairman, Interstate and Foreign Commerce Committee, United States House of Representatives, April 20, 1977

Financial Reform School

Two parts of the Financial Reform Bill passed last week by the Senate and which the President has said he'll sign concern us. The first is the whistleblower bounty for securities-law recoveries, including FCPA-related settlements, that exceed $1 million.

The bounty program will result in more FCPA cases against corporations. It won't matter if they have robust compliance programs. Organizations are strictly liable for crimes committed by employees who are doing their jobs. So even if a company has an effective compliance program and has done everything possible to prevent violations, that's no defense under respondeat superior.

When the DOJ and SEC find an employee's FCPA violation, the company is presumed guilty and forced to settle the case, usually by paying a big penalty.

Companies trying to settle are also forced to help the government make cases against employees and other individuals. The companies might have to disclose information to prosecutors that the employees thought was privileged. So the rules of privilege and the right against self incrimination are short-circuited.

Before so-called financial reform creates whistleblower bounties for FCPA-related recoveries, the law of respondeat superior needs to be reformed. Corporations should be given the chance to defend themselves by showing good-faith efforts at compliance. 

The second part of the financial reform bill that concerns us is Section 1504, "Disclosure of Payments by Resource Extraction Issuers." It requires public companies involved in oil and gas and mineral development to disclose in their annual reports all extraction-related payments they or their controlled subsidiaries make to foreign governments.

The FCPA already covers illegal payments to foreign government officials. This new law covers legal payments to governments themselves.

We'll stipulate that some natural resource companies do business with corrupt overseas governments. That's because not all hydrocarbons and minerals are found under land controlled by saintly regimes. But what will happen when the payments are disclosed? Will governments and private groups mount PR campaigns against companies doing business with unpopular overseas governments? Will "extraction issuers" lose their freedom to go where the natural resources are? Will doing business with regimes that can't pass someone's smell test trigger political attacks that punish companies for legal activities that bring needed products to the rest of the world?

There's always tension between big oil and the U.S government. That's natural. They both control vast resources that can be used to influence domestic and foreign policy. But the government shouldn't impose disclosure requirements on businesses that the government itself isn't willing or able to meet.

For more on Section 1504, see Mike Koehler's excellent discussion here. 

The FCPA Isn't Fun And Games

Mark Mendelsohn -- the Justice Department official responsible for criminal prosecutions under the Foreign Corrupt Practices Act -- has left no doubt that the government is targeting individuals. Here's what he told an audience at an American Bar Association panel discussion in Washington, D.C. last week:

The number of individual prosecutions has risen – and that’s not an accident. That is quite intentional on the part of the Department. It is our view that to have a credible deterrent effect, people have to go to jail. People have to be prosecuted where appropriate. This is a federal crime. This is not fun and games.

Mendelsohn is the Deputy Chief of the Fraud Section at the DOJ's Criminal Division. He was quoted in the Sept. 16, 2008 edition of the Corporate Crime Reporter.

How much is enforcement increasing? During the past five years, the DOJ has investigated more overseas public bribery cases than in the prior 20 years. In 2007, the DOJ launched 16 prosecutions, double the number from 2006. What about 2008? There are 84 FCPA investigations pending. Press reports indicate the DOJ has a dozen prosecutors assigned to FCPA cases. They're supported by a team of FBI agents willing to use wire-taps and other surveillance techniques to catch offenders.

Executives still weighing the chances of getting caught should listen to this: "Problems in a faraway country," Medelsohn said, "are more likely to be learned by us – sitting here in Washington – than ever before. People in Bangladesh can e-mail me directly with an allegation that a company in Bangladesh is paying bribes to a government official there. Information about our work is now known around the world. The media is paying a great deal of attention to corruption issues. There is a lot more English language media reporting around the world. It’s more difficult to hide. . . .”

Mendelsohn also said new ways to resolve cases -- including non-prosecution agreements, deferred prosecution agreements, and corporate compliance monitors -- are tools that give companies an incentive to investigate, self-disclose and take corrective actions on their own. He didn't say so, but companies trying to settle with the DOJ are likely to cough up individuals responsible for the illegal behavior.

And hiding evidence abroad probably won't work. “Another factor," Mendelsohn said, "is that we have been increasingly effective in gathering evidence overseas through treaties as well as informal arrangements with law enforcement in other countries. That has made our work easier. Foreign law enforcement authorities are beginning to investigate and prosecute their own cases. That has had a positive effect on our efforts.”

Thanks to the excellent Corporate Crime Reporter for this and other recent stories about FCPA enforcement.

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No Foreign Official, No FCPA Offense

CW (who knows a lot about the Foreign Corrupt Practices Act) asked a great question. Can a payment directly to a foreign government intended to influence decisions in favor of the donor violate the FCPA? Surprisingly, the answer is no.

An FCPA offense requires a corrupt payment to a "foreign official." The law defines "foreign official" as a human being but not a government entity.

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.

CW's question came up in FCPA Opinion Procedure Release No. 97-02 (November 5, 1997). The requestor was a U.S.-based utility developing a plant in an Asian country. There was no primary school in the plant's vicinity and the requestor planned to donate $100,000 to help build one. The donation would go directly to the government entity responsible for constructing the school.

Before releasing any money, the U.S. utility required written assurance from the foreign government that the funds would be used solely to build the school. The government also guaranteed that land for the school would be available, along with other funding needed to build and operate it.

According to the Department of Justice, because the "requestor's donation would go directly to a government entity -- and not to any foreign government official -- the provisions of the FCPA do not appear to apply to this prospective transaction."

Then there's DOJ Opinion Procedure Release No. 06-01 (October 16, 2006). A Delaware corporation headquartered in Switzerland wanted to contribute $25,000 to an African country's regional customs department or ministry of finance. The money would fund incentive awards to local customs officials. The program was intended to improve enforcement relating to seizures of counterfeit products bearing the trademarks of the requestor and its competitors.

Among other controls, the customs department or central government would pay the incentive awards directly to local customs officials and the requestor would have no say in identifying recipients. On that basis, the DOJ said it wouldn't take enforcement action against the requestor for the $25,000 donation.

In both cases, however, it was up to the requestor to make sure the donations were consistent with local law. Payments to foreign governments that aren't FCPA offenses (because no "foreign official" is involved) may still violate local anti-bribery laws.

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