The FCPA Blog

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 World Bank last week debarred a U.K subsidiary of Macmillan Publishers for six years (reviewable after three years) after the parent company self-reported to the bank corrupt payments to public officials in Sudan. The bribes were unsuccessful in landing sales of textbooks under the World Bank-administered Sudan Multi-Donor Trust Fund.

The company also announced last week that it self-disclosed the payments to the U.K.'s Serious Fraud Office.

Graft is always bad. In a country like Sudan, its impact is magnified. After 20 years of civil war and lawlessness, Sudan ranks fourth worst on the Corruption Perception Index and third worst on the Failed States Index, trailed only by Somalia and Zimbabwe. Its people can expect to live about 52 years, compared with 62 in Cambodia, 72 in Indonesia, and 82 in Japan. Per capita gross domestic product (purchasing power) for its 41 million people is $2,300 while the world average is $10,500.

Millions there struggle every day for shelter, drinkable water, food, medicines, and education. Public corruption diverts money from basic necessities. It literally takes food off the table and textbooks out of the hands of children.

The World Bank's press release about the debarment was all business but Macmillan's was different, carrying a hint of sadness that was entirely fitting. In her public statement, Annette Thomas, Macmillan's chief executive, did something rare in the business world: she acknowledged the victims of corruption and the harm inflicted on them (even unsuccessful bribes help perpetuate corrupt systems and rulers).

Awareness of that harm was a factor leading to enactment of the Foreign Corrupt Practices Act. Although this case doesn't involve the FCPA, it's a reminder of why the FCPA and laws like it matter.

When A. A. Sommer, Jr. was a commissioner of the SEC in 1976, a year before the FCPA became law, he said: "[T]here are moral problems as well as legal problems that go far beyond simply the question of illegal payoffs to foreign officials. There are questions concerning the role of multi­national corporations, the extent to which they have obligations to the countries in which they conduct their business, the extent to which they should seek to raise the standards of conduct there, the respect which they should show the laws of other countries." Three decades later the once skeptical Wall Street Journal could say the quixotic Foreign Corrupt Practices Act had turned into one of Congress's finer moments.

Corruption ruins millions, maybe billions of lives. Those who say graft is a crime against humanity are more right than the rest of us like to admit. The DOJ, SEC, Serious Fraud Office, and World Bank should use all available tools to pursue and punish those who commit public bribery anywhere. Prosecutors shouldn't be diverted by the weird corporatization of government services that blurs the distinction of who's a "foreign official." And they shouldn't compromise ethics because "black knights" will rush in where honest companies fear to tread. That's a short-term and short-sighted view of the world and the marketplace.

Macmillan didn't say how much it paid Sudanese officials. But a bribe of any size that could have deprived a child of a textbook would be disturbing. CEO Annette Thomas said, "We are deeply shocked to have discovered these issues, and are sorry for the harm that such behaviour will have done."

The World Bank's April 30, 2010 announcement of Macmillan (U.K.) Limited's debarment is here.

Macmillan Publisher's May 6, 2010 announcement is here.

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

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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.

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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.

Sincerely,

Stephanie Connor

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."

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.