Experts question inconsistencies in U.S. anticorruption law and the new methods being used to conduct investigations.
Over the past five years, the U.S. government has ramped up enforcement of The Foreign Corrupt Practices Act of 1977 (FCPA). The FCPA, which makes it illegal for individuals and companies to bribe officials of other countries to gain a business advantage, is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission. Companies frequently settle allegations of FCPA violations with these agencies for millions of dollars. Last year, for example, the settlements included payments of $94 million by automobile manufacturer Daimler, $40 million by chemical firm Innospec, and $265 million by oil and gas company Panalpina.
The government sees this increased enforcement as proof that anticorruption laws are working. DOJ representatives have announced that the agency took in more than $1 billion in fines in 2010. However, as the fines have increased, questions have surfaced about inconsistencies in the act and the new methods the DOJ is using to conduct its investigations. Experts suggest that issues with the law could be addressed by amending the FCPA and getting greater international cooperation for antibribery efforts.
The primary change in the government enforcement of the FCPA over the past few years is the way companies are being investigated. According to Michael Volkov, a partner with Mayer Brown LLP in Washington, D.C., the government is using investigative techniques typically reserved for gangs or organized crime. “They are using undercover officers, confidential informants, and wiretaps,” he says. “They have made it clear that they will go after white collar criminals as aggressively as [they pursue] drug dealers.”
While Volkov stresses that there is nothing inherently wrong or unfair about these tactics, it does show that the government, especially the DOJ, has a renewed commitment to FCPA prosecutions.
What may be unfair, according to some experts, is how the government is interpreting the FCPA. As an example, Mike Koehler, assistant professor of business law at Butler University in Indianapolis, points to the law’s provision on “foreign official conduct,” which accounts for 60 percent of government actions under the FCPA. Under the law, for the government to establish an antibribery violation, there must be a payment to a foreign official. While most people believe that the definition of foreign official should be limited to a member of the government, the DOJ has interpreted the term more broadly to include any employees of state-owned or state-controlled enterprises.
“Sometimes these are employees within publicly traded companies,” explains Koehler. “Under this logic, employees of General Motors and AIG could have been considered government officials at some point because the government owned a majority share of the company.”
Even the issue of what constitutes “state control” is changing. “In one case, the U.S. asserted that a foreign company that was 43 percent owned by a government was an instrumentality of a foreign government, making all employees of that company foreign officials,” says Koehler.
Another issue is that the government can bring a case against a company for the actions of a subsidiary or a company acquired through a merger. This liability exists even if the violation in question occurred before the acquisition or merger and was unknown to the parent company. For example, Alliance One paid $10 million to settle an FCPA action last year; the case concerned employees of an acquired company who had committed criminal acts before the acquisition.
The way cases are solved also creates problems. Almost all violations of the FCPA are resolved through a nonprosecution agreement (NPA) or a deferred prosecution agreement (DPA). In both cases, companies escape prosecution and settle the matter by paying a fine to the government. This makes it attractive for all companies to settle the issue quickly and quietly—even when they were not guilty of the charges.
“Because of these resolution vehicles that the DOJ offers, it’s often more cost efficient to settle than to mount a defense,” says Koehler. “Before a company can challenge the charge, it must first be indicted. What CEO is going to recommend that course of action? Indictment would have a greater effect on the bottom line than the settlement amount.”
The fact that most cases are settled without going to court also means that the FCPA has not faced judicial review. “The way to challenge the legality of the FCPA would traditionally be through litigation but it doesn’t work that way with the FCPA,” says Koehler. “Thirty-five years later and there are still very basic elements of the law that have never been subject to judicial scrutiny.”
In November, Sen. Patrick Leahy (D-VT) and then Sen. Arlen Specter (D-PA) held hearings before the Senate Judiciary Committee’s Subcommittee on Crime and Drugs to discuss FCPA enforcement. Witnesses who testified at the hearing advocated for the FCPA being amended to correct some of these issues, such as clarifying what constitutes a “foreign official.”
Another change that legal experts have recommended would be to add an “adequate procedures” defense. Under this concept, companies with robust compliance procedures would have a defense if a rogue employee does something illegal.
That would be an improvement over the current situation where the conduct of any employee can expose the company to criminal prosecution “notwithstanding the fact that the company has FCPA compliance policies in place,” says Koehler, adding “Many of the current enforcement actions are against companies that are otherwise viewed as ethical. Some had very robust compliance procedures in place.”
According to Volkov, the government could require auditing by a third party and even certification to ensure that companies have up-to-date compliance programs. “If you want people to comply, deterrence is one way. That provides some incentive,” says Volkov. “But I think you would get greater compliance if companies are allowed to prove that they have comprehensive compliance programs.”
An adequate-procedure defense is part of a similar law in the United Kingdom. Called The Bribery Act of 2010, it takes effect this month. Under the U.K. law, a company has a defense against bribery charges if it can demonstrate that, before the illegal conduct took place, it had procedures in place to train, instruct, and educate employees about the law.
Another suggested change to the FCPA is to add a willfulness requirement for businesses. In a report for the U.S. Chamber Institute for Legal Reform, Restoring Balance: Proposed Amendments to the Foreign Corrupt Practices Act, coauthors Andrew Weissman and Alixandra Smith note that an individual’s liability under the FCPA is limited to situations in which he or she broke the law willfully. However, the act contains no such exception for companies.
“This omission substantially extends the scope of corporate criminal liability—as opposed to individual liability—since it means that a company can face criminal penalties for a violation of the FCPA even if it did not know that its conduct was unlawful,” according to the report.
Some experts advocate a shift to international enforcement as a way to thwart corruption around the globe, making FCPA violations scarcer. Getting all nations involved, with a common goal of stopping corruption, would be ideal. “The FCPA only applies to the bribe givers,” notes Volkov. “The bribe takers should also be punished.”
However, there are significant challenges to global enforcement. The Organisation for Economic Co-operation and Development (OECD) issued its Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997; it released new recommendations on preventing bribery of government officials in 2009. But the new recommendations have only 30 signatories. Of those, only seven countries are currently enforcing antibribery laws.
At the December 2010 meeting of the World Bank in Washington, D.C., a high-level meeting was held to discuss international antibribery efforts. According to Volkov, who attended the meeting, countries are willing to work together but the basic infrastructure to facilitate cooperation is missing.
“What was clear is that sometimes countries just don’t have the resources or the training or basic information-sharing capacity,” says Volkov. “For example, a prosecutor in Italy who uncovers information about corruption in France may not have any idea which agency to contact in the French government. The problems are that basic.”
Meanwhile, efforts to amend the FCPA are ongoing but advocates know that the task will not be easy. Such changes would require a sponsor in Congress. According to Leahy’s office, the senator has not yet formalized any plans to bring legislation on this issue and Specter resigned his office at the end of 2010. The last time the FCPA was significantly amended, in 1998, it took eight years for the legislation to work its way through Congress.
One roadblock to change is the perception that amendments would weaken the law and encourage unethical behavior. Koehler points out that these amendments would be designed to protect innocent companies and would not help companies get away with wrongdoing. Companies that foster a culture of corruption would still face significant fines. However, he acknowledges that the amendments are unlikely to be perceived that way.