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The UK Crime and Courts Bill, which contained the implementing legislation for Deferred Prosecution Agreements (“DPAs”), received Royal Assent on 25 April 2013.  The legislation will enable the UK Serious Fraud Office and the Crown Prosecution Service (the “Prosecutors”) to enter into DPAs with organisations — most likely from early 2014 — to deal with a specified list of economic crimes, including bribery, fraud and money laundering.

The move by the UK government to introduce implementing legislation for DPAs reflected an acknowledgement expressed in the UK Ministry of Justice’s May 2012 consultation paper on DPAs that: (1) there was little incentive for companies to self-report due to uncertainty over where that process would lead and (2) the options available to the Prosecutors for tackling economic crime were unduly limited.

The Prosecutors will welcome the addition of DPAs to their armory and the likelihood of there being a greater number of global settlements in multi-jurisdictional cases involving economic crime.  There are, however, a number of factors peculiar to the UK version of DPAs that organisation will need to examine before a decision is taken to self-report instances of suspected wrongdoing or to enter into DPA negotiations with the Prosecutor.

The Process

The newly-enacted legislation contemplates that – following the commencement of an investigation into suspected economic crime – the Prosecutor may decide to enter into DPA negotiations with an organisation.  Once the Prosecutor and organisation have formulated an agreed statement of facts concerning the alleged offence, which may or may not include admissions, that statement will be presented in private to a Crown Court judge.  Details of the alleged offending, a draft indictment, the agreed – or contemplated – conditions to be included in the DPA and a list of any issues that have not yet been resolved also will be provided to the judge at the preliminary hearing.

At the conclusion of the preliminary hearing, the judge will be asked by the Prosecutor to declare that resolving the matter by means of a DPA is in the interests of justice and that the proposed terms of the DPA are fair, reasonable and proportionate.  The judge could decide that certain steps must be taken, or further lines of inquiry pursued, before he/she will consider issuing the declaration at the subsequent preliminary hearing or hearings.

Following the preliminary hearing(s), agreement of the terms of the proposed DPA between the Prosecutor and organisation and the resolution of any outstanding issues, the Prosecutor and organisation will return to the Crown Court for a final hearing in private.  The purpose of that hearing is for the Prosecutor to seek the judge’s approval of the DPA and its terms.   If the DPA is approved, the Prosecutor must publish details of the DPA and the declarations made and reasons provided by the judge at the preliminary and final hearings.

In the event of an alleged breach of the DPA by an organisation, the Prosecutor can make an application to the Crown Court.  In such circumstances, if the judge finds – on the balance of probabilities – that the organisation has breached the DPA, he/she can either: (1) ask the Prosecutor and organisation to agree to a proposal for remedying the breach or (2) terminate the DPA.  Once the DPA has expired – assuming that the organisation has complied with the terms of the DPA – the Prosecutor is unable to bring criminal proceedings against the organisation for the same offence(s) unless it can be shown that the organisation knew – or ought to have known – that it provided inaccurate, misleading or incomplete information to the Prosecutor.

It is expected that the Director of the SFO and the Director of Public Prosecutions shortly will issue a draft Code for Prosecutors that will contain further detail on the DPA process, including guidance on the principles to be applied by the Prosecutor when deciding whether a DPA is the appropriate means of resolving a particular case and the disclosure obligations of Prosecutors.  In addition, the UK Sentencing Council is expected to produce guidance on corporate criminal fines, including for those offences eligible for resolution by means of a DPA.

A Work in Progress

While the UK approach toward DPAs builds upon the US system, there are a number of noteworthy factors unique to the UK system.  One such factor is the significant role played by the judiciary.  In contrast to the US, the UK DPA process mandates a notable degree of oversight and involvement by the judiciary from an early stage in negotiations through to the handling of any alleged breaches of a DPA.

The level of judicial involvement built into the UK system is intended to enshrine transparency in the DPA process and takes the ultimate outcome of a DPA negotiation out of the hands of the Prosecutor.  An inevitable consequence of this judicial involvement is the introduction of additional uncertainty into the DPA process.  It is not difficult to conceive of negotiations that have taken a number of months to reach the Crown Court being greatly protracted or even terminated by a judge who takes the view that what has been proposed is not fair, just or reasonable or that it is not in the interest of justice to pursue discussions.  By that stage discussions may be at an advanced stage and the Prosecutor will have amassed case materials provided by the organisation in the course of the negotiations.  While the Prosecutor, in most cases, will not be able to rely either on the fact that it conducted DPA negotiations with the organisation, or on any draft DPA in future criminal proceedings, he/she is entitled to rely on evidence obtained from investigations pursued as a result of anything said in any unsigned statement of facts or in the draft DPA.  Any pre-existing material provided by the organisation during the DPA process also could become admissible in subsequent proceedings.

Another factor worthy of consideration is the nature of the admissions that may have to be made by an organisation to secure a DPA.  In particular, it is unclear whether the Prosecutor is likely to need to insist — as a condition of agreeing to a DPA — on an admission of the involvement of a “controlling mind” of the organisation in the alleged wrongdoing or, in the appropriate case, the lack of adequacy of an organisation’s anti-bribery systems and controls.

In order to attribute criminal liability to an organisation for offences requiring mens rea, a UK prosecutor needs to prove that the offender was a directing mind and will of the organisation.  This ‘identification principle’ requires that the acts and state of mind of those who represent the directing mind and will be imputed to the organisation.  The UK courts have restricted the application of this principle to the actions of ‘controlling officers’ of the organisation, namely the Board of Directors, the Managing Director and senior officers who carry out functions of management and speak and act as the organisation.   The Prosecutors have found this test to impose a high barrier to corporate prosecutions, meaning that many cases against organisations do not proceed as sufficient evidence cannot be amassed by the Prosecutor to implicate a controlling mind of that organisation.

It may be that the soon to be issued Code for Prosecutors will address this topics but, at this stage, a question mark remains over whether a Prosecutor can be satisfied with agreeing to a statement of facts or admissions that fall short of implicating a controlling mind of the organisation.  If an organisation seeking to resolve matters by way of a DPA is required to provide documentation or make admissions in relation to the role of a particular senior officer and his or her involvement in any wrongdoing during the early DPA negotiations with the Prosecutor, the organisation could be left at a disadvantage in the event that there is a derailment of the negotiations and a subsequent prosecution of the organisation.

It remains to be seen whether concerns about the level of uncertainty inherent in the UK DPA process or about any admissions that may have to be made will be justified and sufficient to deter organisations from reporting instances of possible wrongdoing and seeking to enter into discussions with the Prosecutor.  Experience with DPAs in the US would tend to suggest that, irrespective of the legal arguments that could be deployed, the prospect of a settlement may well prove attractive enough for many organisations to prompt them to explore the UK DPA process in the hope of avoiding a drawn-out and uncertain court battle and the associated business disruption and reputational damage.

Wal-Mart’s FCPA Expenses

In this previous Friday roundup, I calculated Wal-Mart’s 2012 FCPA-related professional fees and expenses as being approximately $604,000 per working day.

Yesterday in a first-quarter earnings conference call (see here), Wal-Mart disclosed as follows.

“Our core corporate expenses [included] $73 million in expenses related to FCPA matters, which was above our forecasted range of $40 to $45 million. Approximately $44 million of the expenses represent costs incurred for the ongoing inquiries and investigations, while $29 million covers costs regarding the global compliance review, program enhancements and organizational changes.”

Doing the math, Wal-Mart’s first quarter FCPA-related professional fees and expenses equal approximately $1.16 million per working day.

I observed in this March 2011 article as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment.  This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved?  For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

Sticking with Wal-Mart, this Bloomberg article provides an update on certain of the civil cases pending against Wal-Mart based on the company’s FCPA scrutiny.

Show Me The Numbers

This previous Friday roundup highlighted comments by Senator Elizabeth Warren concerning the SEC’s neither admit nor deny settlement policy and how it creates conditions in which there is “not much incentive to follow the law.”  Senator Warren now wants to see research and analysis of the pro and cons of this policy and other related regulatory settlement devices.

In this letter to, among others, Attorney General Eric Holder and SEC Chairman Mary Jo White, Senator Warren writes, in pertinent part, as follows.

“There is no question that settlements, fines, consent orders, and cease and desist orders are important enforcement tools, and that trials are expensive, demand numerous resources, and are often less preferable than settlements.  But I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because its lacks resources — the regulator has a lot less leverage in settlement negotiations and will be forced to settle on terms that are much more favorable to the wrongdoer.  [...]  Have you conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilty and going forward with litigation as necessary to obtain such admission, and if so, can you provide that analysis to my office.  I am interested in learning more about how your institution has evaluated the cost to the public of settling cases without requiring an admission of guilt rather than pursuing more aggressive actions.”

Senator Warren is obviously concerned that settlement policies and procedures facilitate the under-prosecution of alleged corporate wrongdoer.  This is a valid concern.  Yet so is the concern that such settlement policies and procedures also facilitate the over-prosecution of corporate conduct.  For more, see my article “The Facade of FCPA Enforcement“, including reference to the SEC’s acknowledgment that settlement of an SEC enforcement action does “not necessarily reflect the triumph of one party’s position over the other.”

Quotable

Michael Crites (Dinsmore & Shohl and the former U.S. Attorney for the S.D. of Ohio) stated as follows in a recent Law360 interview.

“The federal government passed the Foreign Corrupt Practices Act in 1977 after discovering that American companies were making millions of dollars in bribes to various foreign government officials. The law was heralded as solving the problem by prohibiting companies and individuals from offering or making payments to any foreign official with the purpose of inducing the recipient to use their official position by directing business to or continuing business with the briber. Over 35 years later, the basics of this law are still necessary to prevent and punish unethical bribes but businesses have discovered that the Department of Justice’s interpretation of the law is broader than anyone intended.”

“DOJ has increased dramatically the number of investigations and enforcement actions under the FCPA, creating what DOJ calls a new era of FCPA enforcement.  Unlike the activity in 1977, this heightened enforcement does not come from illegal bribes but the DOJ’s broad interpretation of the law which is now being applied to otherwise legitimate and ethical actions. The law is undeniably vague and few judicial decisions exist to provide additional guidance. Without these restraints, DOJ has embraced their power to apply the FCPA to unintended situations, resulting in a climate of fear for American businesses that conduct any business abroad.”

Reading Stack

More from the recent Corporate Crime Reporter sponsored conference.  This article concerns a panel on corporate monitors.  Participating in the panel were Dan Newcomb of Shearman & Sterling, George Stamboulidis of Baker Hostetler, Gil Soffer of Katten Muchin, Joseph Warin of Gibson Dunn, and John Buretta, chief of staff of the Criminal Division at the Department.

Pluck any FCPA-related item from the news and use that news as the hook to write about FCPA compliance services.  Profile any recent instance of FCPA scrutiny and use that scrutiny as the hook to write about a supposed new trend and how that new trend of course indicates the need for FCPA compliance services.

It seems as if everything now-a-days is a “sobering reminder,” that there is constant speculation as to which industry “is going to be the next target,”  and that every company is warned to ask itself will it be prepared when the ”government knocks on the door.”

Previously on his Corruption, Crime & Compliance site (here) Michael Volkov observed as follows.

“The FCPA Paparazzi has done a great disservice to the business community.  Call it a complete lack of credibility.  Legal marketing has become confused in this day and age – marketing has now been turned into the “Fear Factor,” meaning that lawyers need to scare potential clients into hiring them.  That is flat-out wrong.   Each week, new client alerts, client warnings and other cries of impending disaster are transmitted through the Internet to businesses.  If I were a general counsel, I would have them on “auto delete.”  Talk about a waste of time and effort.”

A bit harsh and I don’t know that I would go that far, but marketing of the FCPA is indeed a topic worthy of exploration and this post profiles recent FCPA marketing activity.

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There was a recent FCPA enforcement action against bond traders Tomas Clarke and Alejandro Hurtado (see here for the prior post).

Why of course that was an “unprecedented FCPA wake-up call for U.S. broker dealers” and caused one law firm to ask “has the perfect FCPA storm finally arrived for U.S. financial markets?”  The law firm stated that “this case demonstrates that Wall Street is not immune to the concerns and risks of other industries and global companies, large and small” and that “this case may be the catalyst that jump-starts a government FCPA sweep of Wall Street that has been predicted since 2011, but not realized.”

The alert concluded as follows.

“In the event that there was previous uncertainty, U.S. financial markets are now on notice that the FCPA is an obligation and that the U.S. government has reason to ask more questions. It appears worthwhile for companies to be prepared and have their house in order to potentially avoid problems later. There is no excuse now for medium- to small-broker dealers, companies and funds to avoid looking into these matters, as it may end up being a worthwhile endeavor in the end.”

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Another law firm alert focused on the oil and gas industry and concluded as follows.

“Oil and gas companies operate in a dynamic anti-corruption risk landscape. Recent FCPA prosecutions and developments in related U.S. law have added to the burdens and potential traps facing the industry. Developments in foreign law signal additional evolutions in prosecution risk. Moreover, major changes in the oil and gas industry itself could expose businesses to local prosecution under anti-corruption laws in the states where they operate. Oil and gas firms are accordingly advised to develop comprehensive compliance programs specifically tailored to their unique business activities. History is a useful guide, but evolutions in law and the industry itself require careful assessment and regular updates.”

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Another law firm alert began as follows. “No industry is immune from corruption.”  It then used two examples of clean-energy companies in the news to launch into the following.   “These reports serve as a sobering reminder for companies of the risks and consequences of international corruption and of the importance of implementing compliance programs to reduce the risk that improper conduct will occur in the first instance.”

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A lawyer authored article stated “that the pharmaceutical and medical device industries remain subject to increased anticorruption scrutiny by regulators around the world, largely because of their business models.”

The article further stated as follows.

“The number of global enforcement actions and the size of fines and monetary settlements have increased exponentially in recent years. Coupled with the increasing potential for simultaneous liability under foreign anticorruption laws, companies are at greater risk for devastating financial and reputational consequences.”

“The pharmaceutical and medical device industries remain subject to elevated scrutiny. But as a result many industry players now have in place best-practices anticorruption compliance programs that are tailored to the now well-known and industry-specific risks. There’s no time like the present to make sure that your company’s compliance programs are among those rising to a higher standard.”

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Another law firm alert focused on Hollywood and the film industry.  It stated as follows.

“Companies and individuals across the entire film industry could be at risk and should react accordingly. This risk is not limited to major movie studios, as the FCPA applies to a broad range of entities and individuals. Indeed, the recent uptick in FCPA enforcement actions against individuals, including the convictions of two film executives [...], suggests that the Government may eventually seek FCPA charges against individuals involved in the alleged illegal activity as well as the companies. In addition to disgorgement, fines, and penalties faced by both individuals and companies, individuals can face lengthy prison sentences for violating the FCPA.”

“Companies can take various steps to ensure that they are prepared if and when the Government comes knocking on their door. While it is always advisable to have a robust and effective FCPA compliance program in place, it is even more important now for companies in the film industry to ensure that their compliance programs are up-to-date and being properly implemented so that they can gain credit if the Government launches an investigation. This is especially true for film companies with dealings in China, as these companies are on the SEC’s radar. To this end, film companies should consider a privileged review of their FCPA compliance programs by outside counsel to ensure that they include all the components that the Government deems necessary, including anti-corruption policies and procedures, training and communication, third-party due diligence, anti-corruption contract clauses, internal accounting controls, auditing of program effectiveness, and response to improper conduct and remedial action.”

“At-risk companies should also consider a privileged internal review by counsel to determine whether any FCPA issues exist and, if so, decide whether to disclose the issues to the Government. While companies can earn cooperation credit for self-disclosing potential violations, the question of whether and what to voluntarily disclose to the Government is a complex decision involving both risks and rewards for the company. Irrespective of whether a disclosure is made, however, launching a preemptive internal review will allow the company to stay ahead of the Government and be best prepared in the event that the Government initiates its own inquiry.”

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Another law firm alert focused on “financial institutions” and stated as follows.

“It is clear from U.S. regulators’ pronouncements and the increase in investigations involving financial institutions that U.S. enforcement authorities will continue to carefully scrutinize financial institutions to evaluate their compliance with the FCPA. Financial institutions are well-advised to devote resources to creating compliance programs designed to address anti-corruption risks, and to providing training to personnel to assure that compliance expectations are understood throughout the organization.”

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Another law firm alert was titled “Agribusiness: The Next Frontier for Enforcement of the Foreign Corrupt Practices Act?”

It began as follows.

“In recent years, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have aggressively enforced the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act (FCPA), targeting industries as wide-ranging as energy, health care and Hollywood. The results of these efforts have been staggering. With senior government officials indicating that robust enforcement of the FCPA will continue for the foreseeable future, the natural question to ask is: which industry could be the next target for FCPA regulators?  If recent events are any clue, it may be the agribusiness industry.  In light of this recent development, companies in the agribusiness industry may wish to consider taking some of the steps described below to minimize risks of running afoul of the FCPA or, in the alternative, to maximize their bargaining power when negotiating a settlement with DOJ and the SEC.  Given the risks discussed above and the possibility that the agribusiness industry could be a future target of the government’s continued commitment to aggressive enforcement of the FCPA, companies in this industry should consider taking proactive steps to minimize their potential liability, particularly if they have significant overseas business.

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The recent Griffiths Energy International Inc. enforcement action in Canada under Canada’s Corruption of Foreign Public Officials Act (see here for the prior post) was used to market FCPA compliance services as well.  A law firm alert stated as follows.

“[The enforcement action] certainly has compliance with the CFPOA at the forefront for those Canadian companies engaged in international business. Importantly, compliance should not end there, as many Canadian companies must also comply with the Foreign Corrupt Practices Act”

The alert concluded as follows.

“Given the use by Canadian companies of U.S. agents and partners in business and the number of Canadian companies listed on US exchanges, the potential for FCPA applicability is quite high. As a result, it is important for any Canadian company that is required to comply with the FCPA to consult with a lawyer who is familiar with the U. S. anti-corruption laws.”

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As noted in this recent post,  in-house counsel list the FCPA as the second most “specific regulatory area” seen as a threat.

But is the fear rational?

After all, in any given year there are 10-15 core corporate FCPA enforcement actions.  Compare these numbers to the universe of business organizations subject to the FCPA.

Further, as noted in this post, just three unique historical events served as the foundation for 35% of all corporate FCPA enforcement actions between 2007-2011 and resulted in 55% of settlement amounts during that period.

As highlighted in my article, “What Percentage of DOJ FCPA Losses is Acceptable?” bringing criminal charges and marshalling the full resources of law enforcement agencies against an individual alters the lives of real people and their families, sidetracks real careers, empties real bank accounts in mounting a defense, and causes often irreversible damage to real reputations.

The manufactured Africa Sting case also had a negative impact on companies that employed the individuals charged in the case.  Previous posts here, here and here explored the various business effects of the Africa Sting case.

The Africa Sting case continues to have a negative impact on companies indirectly involved in the manufactured case.  In 2011, BlastGard International Inc. acquired HighCom Security Inc.  HighCom’s former CEO Yochanan Cohen was one of the individuals charged in the Africa Sting in January 2010.  In a recent disclosure BlastGard stated as follows.

“On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from both the law enforcement and defense supply industry, one of whom was HighCom’s then Chief Executive Officer, Yochanan Cohen, as an individual for allegedly violating [the FCPA].  (Note: On February 24, 2012, the United States District Court of Columbia, upon consideration of the government’s motion to dismiss, ordered the dismissal (with prejudice) of the indictment and superseding indictments against 22 defendants.)  HighCom was not a party to this indictment. HighCom has always taken, and continues to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad.  Following this indictment, Mr. Cohen stepped down from his daily responsibilities as CEO of HighCom.  As a result of this indictment, although not a named party to the indictment, in March 2010, HighCom was placed under a policy of denial by the U.S. State Department.  This resulted in a suspension of HighCom’s ability to export certain armor products under U.S. Government Regulations.  This effectively ended HighCom’s export capacity and significantly impacted its operations and ability to deliver product to its customers and in particular fulfill its shipment obligations under the U.N. contract awarded in late 2009.  HighCom was suspended by the US Dept. of Defense and added to its Excluded Party List. This severely restricted its ability to sell product in the US defense sector. To regain its export privileges under US State Department regulations, Mr .Cohen, as CEO and majority shareholder, was required to resign as an executive corporate officer and director and fully divest his equity interest in HighCom. On January 25, 2011, Mr. Cohen entered into a binding Letter of Intent to sell his equity interest to BlastGard International Inc. and closing occurred on March 4, 2011.”

“Concurrent with Mr. Cohen’s resignation both as a director and officer of HighCom and the sale of his equity interest to BlastGard, BlastGard filed with the US State Department to have the policy of denial lifted in order to regain HighCom’s ability to export certain armor products again.  As of March 29, 2011 this order of denial had been lifted and HighCom’s export privileges have been reinstated.  HighCom also successfully applied to the US Defense Dept to be removed from the Excluded Party List (“EPLS”). The successful reinstatement of HighCom’s export authority and its removal from the EPLS has dramatically improved HighCom’s ability to sell and market its products.  BlastGard has also been reinstated as a vendor for potential bids under the United Nations and has already completed several small orders since its reinstatement. However, on February 6, 2012, the United Nations notified the Company that the UN Secretariat Review Committee met on January 27, 2012 to review the vendor registration status of HighCom Security, Inc. The Committee noted the indictment of HighCom’s former CEO on four counts. Based on those charges, and in accordance with the UN’s policy with regards to ethics and compliance issues, placed an immediate hold on the registration status of HighCom, pending the UN’s internal review. The Company requested that the UN reconsider their decision as HighCom is under new ownership and management and that since their decision the United States District Court of Columbia dismissed all charges against the former CEO. A final decision is still pending the UN’s internal review.”

“In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks and are currently in the process of finalizing manufacturing agreements with several key partners.  As stated in the paragraph above, BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through both the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security (“BSI”). The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review and in March 2012 HighCom secured ISO certification. Communication with the United Nations is ongoing. On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. To date we have not been re-instated but we are in communication with the United Nations Procurement Division in an effort of securing re-instatement. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. Since the completion of our acquisition of HighCom, the Company has focused its employee time and capital resources primarily on the development of the business of HighCom. Our results of operations for 2012 demonstrate the benefits of these changes.”

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Earlier this year, two judges of the U.S. District Court for the Southern District of New York ruled on motions to dismiss SEC civil FCPA actions, invoking the International Shoe “minimum contacts” and “reasonableness” tests to determine whether the courts had personal jurisdiction over the foreign individual defendants in those cases.  The decisions in the Straub and Steffen cases — one (Straub, arising out of the Magyar Telekom matter) rejecting the motion and the other (Steffen, arising out of the Siemens-Argentina matter) granting the motion and ordering dismissal — mark important boundaries regarding personal jurisdiction over foreign individual FCPA civil defendants.

But does the reasoning of the recent civil enforcement decisions carry over to the criminal enforcement context?  Specifically, does “due process” mean the same thing in both criminal and civil FCPA actions brought against individual foreign defendants?

The answer is that, generally speaking, the civil and criminal “due process” minimum contacts tests overlap significantly, but not entirely.  The argument that it violates due process to prosecute FCPA criminal charges based on the lack of connection of the underlying facts to the United States has rarely, if ever, been raised, let alone litigated to conclusion.  But as the DOJ pursues more aggressive theories against foreign nationals who are not subject to the nationality principle of jurisdiction, and where the principal injured parties are foreign governments or marketplace competitors who may have no connection to the United States, the issue could gain traction.  It is thus worth considering how precedent in the criminal law “minimum contacts” due process arena compares to International Shoe’s test, including how it might apply in the FCPA context.

I.          Due Process “Nexus” Requirements in the U.S. Criminal Law Context

It is generally understood that, despite the limitations of the due process clause of the Fifth Amendment, U.S. federal criminal statutes may be applied to the extraterritorial conduct of foreign nationals when the law’s application would be neither “arbitrary [n]or fundamentally unfair.”  United States v. Davis, 905 F.2d 245, 249 (9th Cir. 1990).

Most of the courts of appeals to have ruled on the issue have held that due process requires a “nexus” between the United States and the defendant.  For non-U.S. citizens acting outside the United States, a “nexus” may exist when the aim of the defendant’s conduct is “to cause harm inside the United States or to U.S. citizens or interests,” including those outside the United States  See United States v. Al Kassar, 660 F.3d 108, 118 (2d Cir. 2011).  In Al Kassar, the defendants were foreign nationals, charged with conspiring to sell arms to a foreign terrorist organization knowing that the weapons would be used to kill U.S. citizens and destroy U.S. property, among other crimes.  The court determined that the aim of the defendants’ conspiracy established a “nexus” with the United States even though the defendants acted entirely outside the territory of the United States.

Cases like Al-Kassar illustrate how courts look to the protective principle in international law to determine whether a U.S. nexus exists.  The protective principle allows a nation to prosecute conduct occurring outside its territory if the conduct threatens the state’s security or similar interests.  See United States v. Perlaza, 439 F.3d 1149, 1161-62 (9th Cir. 2006).  Crimes like those in Al Kassar, as well as drug-smuggling, may support the exercise of jurisdiction under the protective principle, with some courts going so far as to hold no factual connection to the United States is required in drug cases if the acts at issue occur on “stateless” vessels on the high seas or those of nations that have consented to enforcement of U.S. law in their territories.  See United States v. Cardales, 168 F.3d 548, 553 (1st Cir. 1999); United States v. Martinez-Hidalgo, 993 F.2d 1052, 1056 n.6 (3d Cir. 1993).  Compare United States v. Perlaza, 439 F.3d 1149, 1169 (9th Cir. 2006) (requiring some U.S. connection); United States v. Angulo-Hernandez, 576 F.3d 59, 60 (1st Cir. 2009) (Torruella, J.) (dissenting from denial of en banc review) (noting conflicts among circuits as to the approach to narcotics cases).

In a decision in a non-FCPA foreign bribery context, the U.S. District Court for the District of Columbia in 2011 rejected a motion to dismiss criminal proceedings brought against an Australian national who, while employed as an advisor to the Afghan government, allegedly solicited $190,000 in bribes to be paid from U.S. funds supplied to a U.S. Agency for International Development (“USAID”) contractor.  Charged with anti-kickback violations and federal program bribery under 41 U.S.C. § 53 and 18 U.S.C. § 666(a)(1)(B), the defendant moved to dismiss on due process grounds, based on the lack of any U.S. nexus.  Rejecting the motion, the court invoked the protective principle as enabling the government to charge him for “conduct outside the nation’s territory [that] threatens the nation’s security or could potentially interfere with the operation of its governmental functions.”  United States v. Campbell, 798 F. Supp. 2d 293, 306-08 (D.D.C. 2011) (internal citations omitted).  The court held:  “Not only might Mr. Campbell’s actions hold the United States up to opprobrium in Afghanistan, every instance of such connivance robs USAID money from its intended purpose, hinders the United States’ substantial efforts in Afghanistan, and also robs USAID of support for its efforts from the U.S. taxpayer.”

II.        Comparison of Civil and Criminal Due Process Standards

The nexus requirement in criminal cases is in many respects similar to the “minimum contacts” test for personal jurisdiction in civil ones.  The Straub court found that the SEC’s complaint alleged sufficient minimum contacts with the United States because the defendants’ alleged concealment of bribes, along with the company’s falsified SEC filings, were sufficient to demonstrate that the defendants’ intent was to cause injury to U.S. interests in the transparent operations of SEC-regulated companies.  SEC v. Straub, 2013 WL 466600, at *7 (S.D.N.Y. Feb. 8, 2013).  The Steffen court found that the defendant did not have “minimum contacts” with the United States when he did not authorize the bribes at issue or falsify any SEC filings.  SEC v. Steffen, 2013 WL 603135, at *5 (S.D.N.Y. Feb. 19, 2013).  Considering that the “nexus” element of due process may be met in the criminal context if the defendant intends to cause injury to the United States or its interests, it is possible that acts similar to those the Straub defendants undertook could be found sufficient to confer jurisdiction in a due process sense in criminal matters involving foreign nationals acting abroad.  But the lack of clear precedent identifying which “U.S. interests” count for criminal law due process purposes in an anti-bribery context in which U.S. funds, property, or lives are not at issue raises possibly significant questions whether criminal jurisdiction might be more circumscribed.

At the same time, because the “reasonableness” due process test in civil matters focuses on several factors not strictly captured by the criminal law test, it is also possible that some defendants facing civil FCPA charges might have valid due process defenses where they might not if they were charged criminally for the same conduct.  In Steffen, the court found that the reasonableness test was not met due to “Steffen’s lack of geographic ties to the United States, his age, his poor proficiency in English, and the forum’s diminished interest in adjudicating the matter” after certain corporate settlements occurred, including in other jurisdictions.  How and whether any of these points would matter if they were raised as part of a due process challenge in the pending criminal case where Mr. Steffen has been charged remains to be seen.  Given that Mr. Steffen has not voluntarily appeared in the United States, is currently not subject to extradition proceedings, and cannot be tried under Federal Rule of Criminal Procedure 43 until he does appear, the issue may never be litigated in his case and may be rarely ripe in the FCPA context.

III.       Conclusion

The recent due process rulings in the civil FCPA matters in Straub and Steffen rightly raise the question of the jurisdictional limits that apply as a matter of due process in the criminal FCPA arena.  These constitutional issues, apart from the threshold matter of how and whether the FCPA was intended by Congress to apply in an extraterritorial context, an issue on which the Supreme Court’s recent decision in Kiobel v. Royal Dutch Petroleum Co., No. 10-1491 (U.S. Apr. 13, 2013) puts a spotlight, may become of increasing importance as the DOJ pursues aggressive jurisdictional theories against individual foreign nationals.  A lack of clear precedent will undoubtedly put pressure on litigants to settle and on the courts to resolve cases on non-constitutional grounds, but may ultimately lead to judicial pronouncements on the constitutional limits of the FCPA.

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Ernst & Young recently released its 12th Global Fraud Survey.  The survey was based on “more than 1,700 interviews … conducted in 43 countries between November 2011 and February 2012.  Survey results included the following:

39% of respondents reported that “bribery or corrupt practices occur frequently in their countries”

The following question was asked:  “what, if any, of the following do you feel can be justified if they help a business survive an economic downturn.”  30% agreed with “entertainment to win/retain business”; 16% agreed with “personal gifts to win/retain business” and 15% agreed with “cash payments to win/retain business.”

“15% of CFOs surveyed would be willing to make cash payments to win or retain business”

“Only 46% of CFO respondents had attended [anti-bribery/anti-corruption] training”

“16% of CFO respondents do not know that their company can be held liable for the actions of third-party agents.”

McGladrey (a company that provides assurance, tax and consulting services focused on the middle market), in partnership with The Institute of Internal Auditors Research Foundation, recently released this ”Global Corruption Law Compliance Report.”  The report was based on a survey of 120 executive leaders at middle-market companies across the globe.  Participants were asked a variety of bribery and corruption related questions.  Survey results included the following.

52% of survey respondents reported dealing with more than 100 foreign business partners on annual basis.  53% of companies with $1 billion or more in annual revenue reported having 50o or more foreign business relationships.

“Only 30% of all survey respondents say their companies always conduct a risk review of existing business relationships and ties to agents in foreign countries.”

“Just 43% of respondents say their companies conduct training at least once a year.”  “Slightly more than one-third of all companies in our survey say they offer no compliance training, with the vast majority of those businesses in the under $500 million annual revenue bracket.  Still, 24% of companies with over $1 billion in annual revenue also say they don’t provide corruption law compliance training.”

The question was asked, “in the past two years, has your organization experienced one of the following events due to a global corruption related incident.  “Dismissal of an employee” – 24% said yes; “potential contract, deal or acquisition restructured” – 10% said yes; “potential contract, deal or acquisition cancelled” – 12% said yes.

“75% of all companies agree that their corruption law-related internal controls need some level of improvement”

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As noted in this previous post concerning the November 2012 FCPA Guidance, the DOJ and SEC recognized in the Guidance that “positive incentives” can drive compliant behavior.  However, much of this recent data is consistent with prior data – and all point in the same direction: despite the general increase in FCPA enforcement and despite the incentives currently in place, a meaningful percentage of business organizations are not doing what the enforcement agencies want them to do.  The enforcement agencies current incentive – that such compliance policies and procedures can only lessen the impact of legal exposure – is not the right positive incentive.  An FCPA compliance defense (see here) is.

Of course, we don’t know what any of the above percentages would be if there was a compliance defense.  However, I am confident that many categories would be “better” if there was an FCPA compliance defense.  “Better” numbers would mean better compliance, which would likely mean less instances of improper conduct, which would likely mean less bribery, which would mean the objectives of the FCPA are being better achieved.

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This recent Grant Thorton survey of in-house counsel found that “‘regulatory compliance and enforcement’ was considered the second-highest threat to growth – even more threatening than traditional business concerns such as ‘global or domestic competition’ and the ‘lack of customer demand.’”  Behind labor law violations, the FCPA was listed as the second most “specific regulatory area” respondents saw as a threat.

The survey was conducted online between January 15, 2013, and March 1, 2013.  There were 243 respondents, all of whom were in-house counsel, 44% of whom were general counsel. The respondents were split evenly from among publicly traded and privately held companies,

Enforcement Agency Speeches

This prior post detailed comments by Mary Jo White prior to becoming SEC Chairman.

Last week, White spoke before the Investment Company Institute on the general topic of the SEC’s role in an increasingly global financial and regulatory system.  She stated as follows (see here) concerning the SEC’s enforcement of the FCPA.

“Of course, misrepresentations and other unlawful actions travel in both directions across borders, which is another reason why our partnership with our regulatory counterparts abroad is so important.  Among the most prominent concerns in this regard is bribery by U.S. companies overseas, which not only undermines international markets and governments but also simultaneously undermines the reporting and disclosure integrity of our own markets.  Thus, strong and fair enforcement of the Foreign Corrupt Practices Act, which forbids U.S. companies from bribing foreign officials, has been and will continue to be a priority for us. Our first objective is to help companies avoid FCPA violations by educating them. And so our staff along with our colleagues at the Department of Justice recently published a comprehensive Guide to the FCPA to give clear guidance and clear up some myths.  Of course, the other side of education is deterrence.  Deterrence can mean strong enforcement actions with tough disgorgement and penalties.  But it can also mean the tangible benefits that come with cooperation – as demonstrated by the Non-Prosecution Agreement with Ralph Lauren Corporation we announced in April. In this particular case, the corporation’s Argentine subsidiary paid bribes to government and customs officials to improperly secure the importation of their products into the country.  The bribes occurred during a period when the U.S. parent company lacked meaningful anti-corruption compliance and control mechanisms over its foreign subsidiary.  The misconduct came to light as a result of the company’s efforts to improve internal controls and compliance.  And the company immediately reported the problem to the SEC and provided exceptional assistance to our investigation. Successful FCPA cases also increasingly require assistance from foreign law enforcement authorities.  That is why we recently partnered with the DOJ and FBI in conducting a foreign bribery training program that provided intensive training to 130 foreign investigators and prosecutors from 30 countries, many on which the SEC staff relies for mutual legal assistance in FCPA cases.”

Yesterday, Daniel Suleiman (DOJ Deputy Chief of Staff for the Criminal Division) spoke at the Minnesota Bar Association’s Annual International Business Law Institute.  (See here).  Suleiman offered “some views from the U.S. Department of Justice on the topic of anti-corruption enforcement” and “what the Justice Department is doing in the area of criminal enforcement to fight corruption at home and abroad.”  He stated, in pertinent part, as follows.

“I think of our anti-corruption efforts as falling into three principal buckets:  number one is criminal prosecution; number two is assisting foreign countries to build up their judicial, prosecutorial, and investigative institutions; and number three is the pursuit, through civil actions, of the proceeds of foreign official corruption.  I will discuss each of these buckets in turn.

First and foremost, the Criminal Division is a litigating operation.  We investigate and prosecute cases.  Our corruption prosecutions are of two kinds:  we prosecute corruption by domestic officials, and we prosecute foreign bribery offenses under the Foreign Corrupt Practices Act, or FCPA.”

[...]

“[W]e have an incredibly strong team of prosecutors who focus exclusively on enforcing the FCPA.  Depending upon how familiar you are with FCPA enforcement, you may know that the Criminal Division is the entity in the United States with primary responsibility for criminal enforcement of the Act.  It is Justice Department policy that no FCPA prosecution can be brought without authorization from the Criminal Division, which distinguishes FCPA prosecutions from most other kinds of federal criminal cases.  The Securities and Exchange Commission, which is a few blocks up the street from us, has primary responsibility for the Act’s civil enforcement.”

“Foreign bribery enforcement has for a long time been an important aspect of U.S. policy.  The FCPA was enacted roughly 35 years ago, around the same time that our Public Integrity Section was created to focus on public corruption prosecutions, and it was the first effort of any nation to specifically criminalize the act of bribing foreign officials.  The statute was enacted in the wake of the Watergate scandal, but it took more than 20 years for the Act to become a strong enforcement tool.  And, over the past several years, the Justice Department has substantially increased its enforcement of the Act.”

“One important aspect of our FCPA enforcement involves, of course, our corporate resolutions.  We have collected billions of dollars in criminal fines and penalties to resolve FCPA investigations against companies doing business abroad, including BizJet International Sales and Support Inc., a Lufthansa subsidiary; Alcatel-Lucent; Johnson & Johnson; and many others.”

“But another, critically important aspect of our enforcement regime involves holding individuals responsible for FCPA offenses.  There is no greater deterrent to corporate crime than the prospect of prison time.  As many have recognized, if people don’t go to prison, then enforcement can come to be seen as merely the cost of doing business.  In the past four years, the Criminal Division’s FCPA Unit has obtained over three dozen criminal convictions of individuals, including of people who have been sentenced to as many as 15 years in prison.”

“We are as active today in this area as we have ever been.  In the past month alone, we have announced charges against several key defendants in ongoing, active FCPA investigations.  In mid-April, in a case that we are prosecuting with the U.S. Attorney’s Office in Manhattan, we secured the arrest of a defendant in connection with an alleged bribery scheme to secure mining rights in the Republic of Guinea.  In a separate case, which we are prosecuting with the U.S. Attorney’s Office in Connecticut, we also secured the arrest last month of a defendant in connection with an alleged bribery scheme to secure power contracts in Indonesia.  And just two days ago, together with the U.S. Attorney’s Office in Manhattan, we announced charges against two broker-dealer employees and a senior Venezuelan banking official for engaging in a multi-million dollar bribery scheme.”

[...]

“Finally, I want to tell you about a relatively new Justice Department initiative.  About three-and-a-half years ago, Attorney General Holder gave a speech in Qatar, at which he pledged to increase the United States’ commitment to recovering foreign corruption proceeds.  Since that time, the Criminal Division has led the charge in developing what we refer to as the Kleptocracy Asset Recovery Initiative.”

“The initiative’s purpose is to identify the proceeds of foreign official corruption – in other words, the spoils – forfeit them through civil actions, and, to the extent possible, repatriate the forfeited funds for the benefit of the people harmed. In most criminal prosecutions, a court can order forfeiture, upon conviction, as part of the defendant’s sentence.  Often, however, it may be impractical or impossible to bring a criminal prosecution against a particular person – because that person is immune from prosecution, for example, beyond our jurisdiction, or otherwise unavailable.  In these circumstances, we have begun bringing civil forfeiture actions to recover the stolen property.”

“We have brought several Kleptocracy cases in the past couple of years, and forfeited millions of dollars in corrupt proceeds.  The most high-profile of our Kleptocracy cases to date involves two civil actions we have brought against approximately $70 million in assets allegedly belonging to a government minister in Equatorial Guinea who is also the son of that country’s president.  According to court papers, despite an official government salary of less than $100,000 per year, this minister amassed wealth of over $100 million.  Among the items we are seeking to forfeit are nearly $2 million worth of Michael Jackson memorabilia (including the white glove), a Gulfstream G-V jet worth $38.5 million, and a $30 million house in Malibu.  These are hard, and hard-fought, cases, but we believe strongly that foreign officials who amass wealth through corruption should not be permitted to use the United States as a haven for their ill-gotten gains.”

“Foreign Official” Delay

Oral argument in the “foreign official” challenge pending in the 11th Circuit – originally scheduled for later this month, has been postponed until the week of October 7th.

This is a historic appeal in that it will be the first instance in which a circuit court directly confronts the enforcement theory that employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA (see here for a prior post, including embedded links).

Scrutiny Alerts

For more on Barclay’s scrutiny, on both sides of the Atlantic, see this recent article in Middle East Monitor concerning the bank’s relationship with the Abu Dhabi government, including Sheikh Mansour, the deputy prime minister of the United Arab Emirates.

Samuel Rubenfeld (Wall Street Journal Risk & Compliance Journal) has the latest (here) regarding BSG Resources Ltd. a Guernsey-based company in the news after Frederic Cilins, a French citizen associated with the company, was recently arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.  (See here for the prior post).  As noted in the WSJ article, BSG recently released this detailed statement concerning its conduct in Guinea.

Reading Stack

Several articles of interest to pass along from last week’s Corporate Crime Reporter conference.  This article details comments made by Denis McInerney (DOJ Criminal Division Deputy Assistant Attorney General) regarding non-prosecution and deferred prosecution agreements.  This article details comments made by McInerney concerning my suggested two-step reform plan (see here for the prior post) and also details McInerney’s response to my question concerning the definition of a declination.  Articles here and here concern corporate monitors.

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Over the years, Bloomberg’s David Glovin has written some excellent articles concerning Viktor Kozney, Frederic Bourke, et al.  With Bourke soon to report to prison, Glovin pens another great article here.

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This prior post discussed the NY Times recent “With Bags of Cash, CIA Seeks Influence in Afghanistan” story and how the story put our stark double standards in the headlines once again.  More recently, the NY Times reports (here) as follows. ”[Afghan President] Karzai said he had called a meeting [...] with the CIA’s Kabul station chief. “I told him because of all these rumors in the media, please do not cut all this money, because we really need it,” he said. “We want to continue this sort of assistance, and he promised that they are not going to cut this money.”  For more on the situation, including the views of others, see here from Alison Frankel’s On the Case column.

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See here from Josh Goodman (an attorney at the Federal Trade Commission) titled “The Anti-Corruption and Antitrust Connection.”

*****

A good weekend to all.

Respondeat superior corporate criminal liability is broad, but not this broad.  Absent an “alter ego” / “piercing the veil” analysis, legal liability of any kind does not ordinary hop, skip, and jump around a multinational enterprise as the DOJ or SEC see fit.

In this prior post, I collected RLC enforcement action commentary hits and misses.  Contrary to many, I found nothing to trumpet in the RLC enforcement action, but much to lament.

There has been another “hit” when it comes to RLC enforcement action commentary, and this one is a home run.

It comes from former DOJ Assistant Chief of the Fraud Section Philip Urofsky (currently a partner at Shearman & Sterling).  Urofksy has always been one of the best, most insightful, FCPA commentators.  His writings were cited in my article the “Facade of FCPA Enforcement,” his critiques of DOJ enforcement theories (such as jurisdictional issues and obtain or retain business) have frequently been highlighted on these pages – see here for instance.

In short, when Urofsky writes, given his prior experience and insight, we really ought to read and take notice.

His latest is “The Ralph Lauren FCPA Case:  Are There Any Limits to Parent Corporation Liability?” recently published in Bloomberg BNA’s Securities Law Daily.

Urofsky and his co-author state, in pertinent part, as follows.

“The facts of the case … point to the steady entrenchment of a more ominous prosecution theory:  an approach that appears to approximate strict criminal and civil liability of parent corporations for their subsidiaries’ corrupt acts.  Although this disregard of corporate structures has been hinted at in previous SEC matters – and the theoretical underpinnings discussed in last year’s DOJ/SEC Resource Guide – the RLC case puts both agencies firmly in the camp of this aggressive and unprecedented expansion of corporate liability.”

“This approach, however, fails to honor the corporate form and the black-letter rule that to ‘pierce the corporate veil’ the government and other litigants must show that the parent operated the subsidiary as an alter ego, and itself paid no attention to the corporate form.  Moreover, it is contrary to the language of the [FCPA's] original history.”

In conclusion, the article states as follows.

“It is disquieting [that in the RLC case] the DOJ appears to have jumped on the charge-the-parent bandwagon, bringing a bribery case against a parent without alleging any involvement by the parent in those violations.  One can only speculate that it did so because it had no jurisdiction over the foreign subsidiary itself, given that it also did not allege any act by the subsidiary in U.S. territory.  However, as always, the maxim that bad facts make bad law applies, and evidentiary weaknesses cannot excuse the distortion of the statute’s previously clear and reasonable allocation of responsibility.”

I can write about the “facade of FCPA enforcement,” legislative history, how many FCPA enforcement actions seemingly violate basic black-letter principles and the like until the cows come home.

But hopefully more people will finally pay attention to this new era of FCPA enforcement when someone like Urofsky uses terms like ”disquieting” “jump on the bandwagon” and “distortion of the statute.”

In November 2010, the SEC conducted a periodic examination of Direct Access Partners LLC (“DAP”), a broker-dealer registered with the SEC.  DAP’s Global Markets Group (“DAP Global”) primarily executed fixed income trades for customers in foreign sovereign debt.  One of its customers was Bandes, an alleged Venezuelan state-owned banking entity that acts as the financial agent of the state to finance economic development projects.

According to the DOJ and SEC, the SEC examination lead to the discovery of a “fraud that was staggering in audacity and scope” (see here for the SEC release).  A component of the alleged fraud included payments by Tomas Clarke (a DAP Executive Vice President who worked out of the company’s Miami office) and Alejandro Hurtado (a back-office employee of DAP in Miami) to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes).  According to this DOJ criminal complaint, Gonzalez oversaw Bande’s trading by DAP.

According to the criminal complaint, Clarke, Hurtado and others “directed kickback payments” to Gonzalez “in exchange for Gonzalez steering Bandes business to [DAP] and authorizing Bandes to execute bond trades with [DAP].  According to the complaint, between 2008 and 2010 “Gonzalez received at least $3.6 million in payments through insiders and affiliates of [DAP].  According to the complaint, during this time period, “with Gonzalez both acting as the authorized trading contact in regard to [DAP] and managing the relationship between Bandes and [DAP], Bandes directed substantial business to [DAP] and carried out bond transactions that resulted in [DAP] generating tens of millions of dollars in revenue.”  The criminal complaint alleges various payments made or authorized by Clarke and Hurtado to an account in Switzerland held in the name of Gonzalez and/or a company owned in part by Gonzalez.

Based on the above core set of conduct, the criminal complaint charges Clarke and Hurtado with the following offenses:  conspiracy to violate the FCPA, substantive FCPA violations, conspiracy to violate the Travel Act, substantive Travel Act violations, conspiracy to commit money laundering, and substantive money laundering violations.

Gonzalez, the alleged “foreign official,” was charged with conspiracy to violate the Travel Act, substantive Travel Act violations, conspiracy to commit money laundering, and substantive money laundering violations.  (For other examples of “foreign officials” being criminally charged with non-FCPA offenses in connection with an FCPA enforcement action, see here and here).

In this DOJ release, Acting Assistant Attorney General Mythili Raman stated as follows.  “Today’s announcement is a wake-up call to anyone in the financial services industry who thinks bribery is the way to get ahead.  The defendants in this case allegedly paid huge bribes so that foreign business would flow to their firm.  Their return on investment now comes in the form of criminal charges carrying the prospect of prison time.  We will not stand by while brokers or others try rig the system to line their pockets, and will continue to vigorously enforce the FCPA and money laundering statutes across all industries.”

As noted in the DOJ release, “the government [also] filed a civil forfeiture action … seeking the forfeiture of assets held in a number of bank accounts associated with the scheme, including several bank accounts located in Switzerland.  The forfeiture complaint also seeks the forfeiture of several properties in the Miami area related to Hurtado that were purchased with his proceeds from the scheme.”

The above core conduct also resulted in this SEC civil complaint against Clarke and Hurtado (and others) charging a variety of non-FCPA securities law violations.

After listening to fellow panelist Denis McInerney (DOJ, Deputy Assistant Attorney General) describe the goals of DOJ prosecution – among other things, to better promote compliance and to hold individuals accountable – I offered a solution in the Foreign Corrupt Practices Act context that could help the DOJ achieve these laudable goals.

Have a compliance defense and abolish NPAs and DPAs.

A compliance defense, along the lines I outlined in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” would not eliminate corporate criminal liability.  Far from it.  Rather, a compliance defense would only apply when, notwithstanding a company’s pre-existing compliance policies and procedures and its good-faith efforts to comply the law, a non-executive employee or agent acts contrary to those policies and procedures in violation of the law.

If a company did not have pre-existing compliance policies and procedures, it could not avail itself of a compliance defense.  Similarly, even if a company did have pre-existing compliance policies and procedures, the company could not avail itself of a compliance defense if executive officers or employees (a concept already used in the U.S. Sentencing Guidelines) were involved in the improper conduct.

If this were the framework governing corporate criminal liability, then NPAs and DPAs should be abolished and the DOJ would return to the historical choice of two options:  charge or do not charge.

At the conference, I stated my genuine belief that such a two-step reform would better incentive more robust corporate compliance, reduce improper conduct, and thus best advance the FCPA’s objectives of reducing bribery.  Such a two-step reform would also increase public confidence in FCPA enforcement actions and allow the DOJ to better allocate its limited prosecutorial resources to cases involving corrupt business organizations and the individuals who actually engaged in the improper conduct.  (See the article for additional details).

In short, this two-step reform will better allow the DOJ to achieve many of the objectives McInerney articulated.

However, not surprisingly, McInerney’s response to my two-step reform was the comment that this would be like returning to the “dark ages.”

The question is why?

Presumably most countries have an incentive to better promote compliance and to hold individuals accountable for wrongdoing.  Does this mean that the following OECD Convention countries that have a compliance-like defense relevant to their FCPA-like laws are living in the “dark ages” – Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, Switzerland, and the United Kingdom.  (See here).

Are Stanley Sporkin (former Director of the SEC Division of Enforcement, among other positions), James Doty (current head of the PCAOB), and Andrew Weissmann (former Director of the Enron Task Force and current General Counsel of the FBI) all living in the “dark ages”?  All have supported compliance-like defenses or concepts relevant to the FCPA.  (See here, here, and here).

Are former Attorney Generals Michael Mukasey and Alberto Gonzales or other former high-ranking DOJ officials such as Larry Thompson living in the “dark ages”? (See here, here, and here).  Is former DOJ FCPA Unit chief Joseph Covington living in the “dark ages.”  (See here).

Or have all these individuals, and others who support an FCPA compliance defense, seen the light and it’s the DOJ who is living in the “dark ages”?