How the Feds Enforce the FCPA

 

The other day, we drew a contrast between the Manhattan DA’s new public integrity unit and the way the feds go after FCPA violations, and some folks asked just what exactly the feds do in these cases.  That’s a good question.  Especially now, as the FCPA has become a major star of the feds’ redoubled efforts to fight white-collar crime.

The Foreign Corrupt Practices Act, among other things, says it’s against the law for any U.S. citizen or business to pay a bribe to a foreign official.  The penalties can be staggering, with fines calculated as the amount of income the briber hoped to receive down the road as a result of paying the bribe.  “Any” U.S. citizen means just that: anybody, not just a corporate executive.  A “foreign official” means anyone with a government job — including people working in industries that are government-owned or government-controlled.

“Bribery” includes giving anything of value in the hopes of getting something in return.  It’s really a broad standard.  A bribe doesn’t have to be an explicit tit-for-tat, and it doesn’t have to be just for the purpose of landing a choice contract.  A bribe can be just a nice dinner at a fancy restaurant that might make get you looked on with more favor next time contracts are being awarded.  A bribe can be a “facilitation payment” to a petty bureaucrat, some grease to ensure that you are allowed to do what you are already entitled to do (this, by the way, is an example of where Wikipedia, at least as of today, get things wrong).  See here for a more thorough discussion.

As with many white-collar offenses, this one is enforced by both the SEC and the DOJ.  As of this year, the SEC now has a special unit dedicated to investigating and punishing suspected offenders.  As we mentioned the other day, the point is to keep as much expertise in the institutional memory, and also to better coordinate investigation and enforcement.  On the criminal side, the DOJ’s Frauds Section is the main enforcer as a matter of law, though some local U.S. Attorney’s offices like the SDNY will handle most of the work in-house.

Over the past few years, the number of FCPA cases has risen dramatically, in part because the SEC and DOJ have been working together so closely on these cases.  They don’t have to reinvent the wheel so much, which leads to efficient use of resources and manpower.  At the same time, far more resources, lawyers and special agents are being focused on FCPA cases.  In the 2011 budget, the funds allocated to these cases is up 23%.

But that reallocation of resources is a lagging factor, merely reacting to the fact that so many more cases are coming in.  The number of bribes is not changing, so far as anyone can tell — there aren’t more bribes to report, and enforcement isn’t reducing the number that take place — but the number of cases are definitely on the rise.  The reason for more cases is not a bigger budget, however.  As with any investigative law enforcement (as opposed to the fait-accompli street-level policework) the vast majority of cases come from informants.  And now we’re seeing a lot more informants.

FCPA informants can be defendants trying to shave a few months off their sentence, as with other kinds of cases.  But there’s more than that going on in FCPA cases.  There’s a whistleblower provision that awards a first-come-first-served prize of nearly 1/3 the penalties extracted.  With fines that can easily add up to many millions or even billions of dollars (the Siemens fines were something like $1.6 billion), the mercenary temptation has become a huge factor here.

The sharks are already out in force.  A number of plaintiffs’ lawyers are already out there trolling for tipsters, hoping to cash in on the next big score.  A third of a third is still pretty damn big, when you look at some of the fines that get handed down.  The SEC is creating an Office of the Whistleblower just to handle the process.

Informants can also be the companies themselves, once they find out that a bribe took place, and they want to get in the SEC’s good graces and minimize their exposure.  The official term for this is “self-reporting.”  The unofficial term of art used by the SEC and the DOJ to refer to self-reporters is “grovelers.”  This should give some indication of how much respect is given by law enforcement to self-reporters.

As the number of investigations and criminal prosecutions here has risen, prosecuting individuals has become a major priority.  So it’s not just corporations at risk here.  Individuals have some massive potential exposure now.

So lots more informants are coming in, for a variety of reasons.  And more and more of them are (wisely, very wisely) coming in with lawyers.

This is just a bare-bones summary, but already you’ve probably spotted some serious problems with the way we enforce the FCPA.

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You may be asking yourself what possible harm is done to the United States when a business pays a bribe in order to get equal treatment in a foreign country, when not paying the bribe would mean the business (and potential tax revenue therefrom) is going to be awarded to a Chinese or Russian firm.  That’s a good question.  But that’s more of a problem with the FCPA itself, than with the way it’s enforced.

One major problem is that our enforcers have created a strong disincentive for anyone to ever self-report.  The costs of hiring Kroll or whomever to do an internal investigation, overseas, can easily set you back somewhere in the tens of millions of dollars.  And once you do self-report, it’s not as if the SEC is going to forgive all and say “go forth and sin no more.”  You may avoid fines, but you’re still going to have to withdraw from the deal, lose the benefit of any associated deals.  The SEC can impose a monitor, claw back the revenue you earned (or expect to earn) from the bribed deal.  And the SEC might go ahead and issue a fine, anyway.  And if you do self-report, it’s not as if the SEC is going to limit its investigation to that one deal — no, they’re going to look at other contracts you got, and see if any bribery was involved there (the presumption being that if it happened here then it must have happened there before), and you’re going to get penalized for not self-reporting any other bribes they uncover.  Only in the rarest of cases will a self-reporter avoid prosecution, and then only if they have already taken care of the matter completely to the SEC’s satisfaction internally, with full documentation and reporting, and it was only a one-off exception that slipped past a strict regime of controls to prevent it, and new stronger controls have now been implemented at great cost, etc.

As a result, more and more companies are just going ahead and taking the chance that the SEC will never find out.  After a serious and thoughtful cost-benefit analysis, it just doesn’t make a lot of economic sense to be a “groveler.”  The feds will screw you.  Being a straight shooter has real, severe consequences.

Well, it’s not as certain as that.  There is no certainty at all about what the feds will do in a given case.  The outcome of every case can be viewed on the Frauds Section’s website here, and if you can spot an underlying principle or rule that makes their behavior even slightly predictable, then do it and go make a lot of money advising corporations on what to do.  Because there is no certainty at all right now, and that’s even worse than the certainty of getting screwed.

The whole whistleblower thing is just a disaster.  Companies have no chance of self-reporting if they don’t find out about the wrongdoing in the first place.  The briber isn’t bloody likely to tell on himself, so the company’s only going to find out about it from a whistleblower.  But there is no incentive to tell the company about it, when there’s a fantastical, unimaginably huge payday out there for whichever tattletale makes it to the SEC’s door first.  The incentive is to report it to the feds, not the company.  Companies and their shareholders (like you, your school, your pension) are justifiably afraid of getting socked by the feds before they ever even had a chance to do something about it.

Corporations are putting all these resources into compliance programs, internal investigations, Sarbanes-Oxley controls, and it doesn’t matter.  A whistleblower can just bypass all that, and take it straight to the feds.  Anyone except for an auditor can be a whistleblower, so the incentive for an employee or manager is to not bother with any investigation, and just report it.  Even with its own mercenary bounty, there’s no way a corporation can compete with the payday offered by the feds.

Meanwhile, what counts as a bribe is getting more and more idiotic.  You sent flowers to the official’s wife on her birthday?  You’re screwed.  You took the officials out for a purely marketing dinner or other social occasion?  No, you didn’t.  The SEC is going to decide for themselves whether the product you were marketing merited such a nice restaurant or the expense of that event.  That training course you offered?  The SEC has decided it was a bribe.  Your day-to-day business decisions are going to be second-guessed by a bunch of lawyers who in all likelihood have never run a business.

It’s no surprise that executives and marketing reps and sales managers are afraid of doing the wrong thing.  Folks are calling in the lawyers and blowing an insane amount of time, money and well-being on little nonsense matters like these that, a few years ago, nobody would have thought twice about.  There are too many FCPA cases these days, and too much is at risk, so it is imperative to stress out about it now.

At the same time, as we mentioned in passing above, the enormous costs of dealing with the FCPA, all the cases, all the fines, all the tax dollars and manpower thrown at enforcement… none of it is having the slightest effect on the underlying problem.  The actual amount of bribery is unchanged.  The law is not deterring any unlawful conduct that wasn’t already deterred.  (Though it is deterring a lot of perfectly lawful conduct, depressing lawful revenues, and forcing a lot of money to be wasted on non-productive things like lawyers.)

Another huge problem is how the feds decide what the fines and disgorgement ought to be.  There are no consistent internal policies on how to calculate these things.  As with most other economic calculations in the white-collar arena, the feds tend to be appallingly simplistic, exhibiting not even rudimentary familiarity with the kind of financial calculations that would render a meaningful and accurate amount.  As with USSG intended loss calculations on the DOJ side, the SEC’s disgorgement calculations can be pure conjecture, of what they estimate your future revenues would have been had you gotten that deal.  And including other downstream deals that you might not have gotten “but for” that initial nice dinner.  The potential fines are unpredictable, and so disproportionate to the amount of any bribe that “disproportionate” isn’t even the right word to describe them.  (For more on defending against such calculations by the feds, see our CLE lecture at West Legal Ed Center on the subject.

The whole topic of foreign bribery can be confusing.  The kind of bribery the FCPA is concerned with is precisely the kind of bribery that is created and caused by the foreign government.  A morass of regulations and bureaucracy — especially in a place with a high proportion of government employment — creates an incentive to cut through the red tape.  Government functionaries are always paid little, and some countries pay them even less with the full expectation that they’ll be making up the difference in baksheesh.  Prohibiting Americans from paying that baksheesh doesn’t stop the civil servant in Cairo or Juarez from taking his bribes.  All it does is mean that someone else is going to get the contract, or be able to fulfill their contract, instead of the American company.

But let’s say we just want to hold American citizens up to a higher standard.  There’s nothing that says we shouldn’t.  And maybe we’re arrogant enough to think that doing so will raise the standards of the rest of the world.  (Yeah, how’s that going for you, USGAAP?)  Even if we stipulate that the law is necessary and proper, the feds are going about enforcing it in exactly the wrong way.

Hey, you asked.

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  1. Pingback: Take A Seat, and Other Bribes | Orlando Accident Lawyer on October 26, 2010
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5 Comments

  1. shg, October 26, 2010:

    This is an exceptional review of the myriad problems with FCPA, as well as the problematic handling of potential liability by corporations and its inappropriate impact on lawful commerce. Excellent job, Nathan.

  2. Nathan, October 26, 2010:

    Thanks! I appreciated your followup thoughts at Simple Justice. By the way, check out that pingback I see up there — looks like someone’s ripping off your stuff again.

  3. shg, October 26, 2010:

    Yeah, whoever is running that scam site has been feeding off me for a while now. The only part that amuses me is that they do so off my feed, which includes my copyright notice to the effect that they are violating my copyright. Welcome to the internet, where all is free for the taking.

  4. Steve Feldman, October 26, 2010:

    Nathan, you have it wrong when you say, “A bribe can be a “facilitation payment” to a petty bureaucrat, some grease to ensure that you are allowed to do what you are already entitled to do (this, by the way, is an example of where Wikipedia, at least as of today, get things wrong). See here for a more thorough discussion.” Under the statute (and the document you link to explains this), the FCPA only covers bribes paid to obtain or retain business. Because facilitation payments are for ministerial acts, not to get business, they are excluded. The DOJ law-person’s guide you link to explains, “The FCPA contains an explicit exception to the bribery prohibition for “facilitating payments” for “routine governmental action” and provides affirmative defenses which can be used to defend against alleged violations of the FCPA.” So, I think Wikipedia actually has it right.

  5. Nathan, October 27, 2010:

    Good point, Steve. But remember, the defendant must raise it as an affirmative defense, so the burden falls on the defendant to prove that the payment in question was really just a facilitation payment and nothing else. I’d have a hard time advising a client that a mere facilitation payment isn’t something that won’t get called a bribe by the feds. In practice, they take a fairly expansive reading of the statute.

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