If you care about the rule of law, The Foreign Corrupt Practices Act in the New Era by Mike Koehler, is one of the most important books you can read—to learn how it is being eroded. Professor Koehler’s book may not make it to the top of any summer reading list, but it is a must read for people who care about law reform. It is a story of how a good law, the US Foreign Corrupt Practices Act, a criminal law that prevents companies from bribing foreign government officials has been misapplied in recent enforcement actions by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC).
In fact, in Koehler’s view there is now an unholy alliance between the government lawyers who prosecute companies for FCPA violations, and those former government prosecutors now private sector lawyers who defend them—to increase big fines for the government and big fees for the lawyers.
The US Foreign Corrupt Practices Act (FCPA) has a storied beginning with the defense contractor scandals of the 1970s in which companies like Lockheed were caught paying large bribes to sell their goods to foreign countries. At the time it was considered an acceptable business practice to bribe foreign government officials. Senator William Proxmire, among many others in Congress, felt this was inhibiting American foreign policy and corrupting the free market. As in so many cases, the United States was the first to ban the practice in 1977 with the FCPA and give global impetus to reform efforts in the OECD in the 1980s and 1990s to stop global corruption of this kind. In large measure it has worked.
The OECD adopted a Convention on Combatting Bribery of Foreign Public Officials in 1999, and today more than 40 countries have adopted the Convention and put laws on their books against bribery of foreign government officials. Indeed, the United States still takes a leadership role in the war against government bribery by bringing frequent criminal enforcement actions under the FCPA against both companies and individuals. However, in recent years the US government has been stretching its interpretation of the FCPA beyond its original intent, while dragooning many international companies into accepting punitive settlements for crimes they did not commit in order to avoid costly and time consuming government investigations.
According to Koehler, the US government’s record in FCPA criminal enforcement cases, when ultimately put to a jury, is much lower than you might otherwise guess from reading the headlines. The DOJ has only been put to its ultimate burden of proof by a corporation twice in FCPA history (the DOJ lost both cases) and otherwise has an overall losing record in individual FCPA cases when forced to carry “its burden of proof” of proving guilt beyond a reasonable doubt. Rather, what has developed in this “new era,” as Koehler calls it, is the now widespread use by the DOJ and SEC of Non-Prosecution Agreements (NPA) or Deferred Prosecution Agreements (DPA), agreements designed perhaps to improve the government’s losing record. Federal prosecutors no longer need to prove a criminal charge; they merely need to commence an investigation.
In these so-called “voluntary” agreements, the accused, in this case the company alleged to have bribed a foreign government official, agrees to pay a large settlement, without admitting or denying wrongdoing, simply to stop the investigation and prevent the government prosecution. There is never a trial of the case to a jury because almost always the company prefers to capitulate early on, before indictment, rather than endure the severe legal costs of a multi-year investigation. The fine or settlement amount goes straight into the DOJ ‘s or SEC’s coffers to offset their budgets, and not to the US Treasury, thereby giving the government a perverse incentive to bring weak cases and obtain big settlements.
The remarkable thing is that more often than not the companies themselves come forward to report and self-disclose to the government these allegations of bribery on the advice of their private sector counsel who were only months earlier federal government FCPA prosecutors. It is an unusual and not a widely known fact that government decisions to prosecute a company for foreign bribery are made centrally at the DOJ’s headquarters in Washington DC, and not by federal prosecutors across the nation, as would any other criminal prosecution. Accordingly, Koehler has chronicled the rise of what he calls FCPA Inc., the growing revolving door between government FCPA prosecutors who press these cases against international companies, and the big Washington law firms who advise the companies under scrutiny, who are staffed by former government FCPA prosecutors.
In this new FCPA era of mutually beneficial disclosure and prosecution, investigation and settlement, and many billable legal hours, everyone stands to benefit except the accused. Koehler puts the costs of an FCPA allegation of foreign bribery against an international company into three buckets: pre-enforcement, settlement and post-enforcement. Wal-Mart, a company much in the news lately for its alleged bribery of government officials in Mexico, has reported $660 million as its anticipated costs of internal investigations. And there is no indictment or settlement yet. That is equal to $1.1 million a day so far. Siemens, who was rightly punished for its bribery, paid $800 million dollars to settle its case with the DOJ. Post-enforcement compliance measures for Siemens are thought to be in the hundreds of millions of dollars. It is very expensive to be accused of violating the FCPA. From another point of view, it keeps FCPA Inc. fully employed.
All in all, Koehler makes a good case for law reform, for amending the FCPA to right the wrong which now allows the government to be prosecutor, judge and jury all at the same time; and to bring back the rule of law in this important area. The FCPA was enacted in 1977, and amended in 1988 and 1998. There has been nothing sacred about its text. Koehler argues ineluctably that it should be a complete legal defense to prosecution for an alleged violation of the FCPA for a company to prove it had effective and adequate procedures, meaning policies, training and the right corporate culture to prevent bribery. There is nothing that will prevent a rogue employee in a far away country from doing something wrong. There should be something to prevent a company from being in the dock for a rogue employee if it took every precaution and step to prevent it.
This so-called “compliance defense” is not unusual and it exists under most foreign statutes that proscribe bribery of government officials. If it is not your fault, you should not be made to pay for it. Koehler also argues for an end to DPAs and NPAs that place too much power in government hands to bludgeon companies into either settling for big dollars or face indeterminate costs. Most notably, Koehler offers the not entirely irrational proposal to require former government FCPA prosecutors to recuse themselves from cases involving the FCPA for five years after they leave the DOJ or SEC.
Reform of the criminal law in England was a step forward in jurisprudence. The abolition of hanging for theft was an inevitable legal reform because juries stopped convicting. We have a much worse need for reform now in the case of the FCPA. The jury does not even get a chance to convict.