Ed. Note-we are pleased to post a guest article by our colleague James McGrath.
A fortnight ago, the US Chamber Institute for Legal Reform issued a white paper entitled “Restoring Balance – Proposed Amendments to the Foreign Corrupt Practices Act”. Written by Andrew Weissmann and Alixandra Smith, it is the Institute’s response to stepped-up FCPA enforcement activities over the past five years that have highlighted deficiencies in the statute. These shortcomings make for onerous investigations, prosecutions, and penalties seemingly beyond its legislative intent. This article suggests two additional amendments not in response to any textual deficiency, but rather, to evolving government enforcement philosophy.
The FCPA is only a small part of the larger effort to get American business entities to behave ethically and police themselves, thereby ensuring good corporate citizenship. Since 1991, Chapter Eight of the United States Sentencing Guidelines has provided the framework for these efforts by mandating that companies institute and maintain vibrant compliance and ethics programs to ensure that corporations and their employees are trained in, and adhere to, morally-sound practices within their industries. When there are ethical lapses, as infamously seen with Enron, et al., the Guidelines mandate that companies to respond to these breakdowns.
These responses require businesses to impartially investigate what happened and why, and then to take remedial action to ensure that such breakdowns do not recur. Remedial action may include retraining of employees, wholesale or partial re-vamping of compliance and ethics programs, self-reporting of perceived law-breaking to enforcement authorities, or a combination of these. When companies do self-report and are prosecuted in criminal or civil actions brought by the government, resulting prison sentences, fines, and other penalties – including the disgorgement of profits – can be reduced significantly by cooperating with a federal agency’s investigation of the same.
The problem with the current state of the FCPA is it’s imprecision. An anti-bribery statute, it prohibits U.S. companies from giving, promising, or authorizing the giving of anything of value to a foreign official in order to secure a business advantage in a foreign country. See 15 U.S.C. §78dd-1 through 15 U.S.C. §78dd-3. However, the statute specifies no culpable mental state such as “intentionally” or “knowingly”, provides little guidance as to what constitutes “anything of value”, and is vague in its definition of a “foreign official”. Further, it contains no provisions defining a company’s liability for the prior acts of a company that it has later acquired or for that of a subsidiary acting without the parent’s knowledge.
Compounding this muddy state of affairs is the DOJ’s very aggressive stance on FCPA enforcement. In recent years, it has essentially taken the positions that: (1) the FCPA is a strict liability offense, (2) the value threshold can be very low, even de minimus, (3) a foreign official can be almost any foreign national, and (4) successor and subsidiary liability is unlimited. This makes tough sledding for companies doing business overseas, and DOJ Criminal Division Assistant Attorney General Lanny Breuer’s promise at Compliance Week 2010 of even more heightened FCPA enforcement surely influenced the US Chamber Institute’s formulation of its proposed amendments to that statute.
The Institute white paper suggests five changes to the law: (1) addition of an affirmative “compliance defense”, (2) limiting corporate liability for prior acts of a company it has later acquired, (3) positing “willfulness” as the culpable mental state under the statute, (4) limiting a company’s liability for the acts of its subsidiaries, and (5) more clearly defining a “foreign official”.
All of these are excellent proposals, and amending the FCPA by their incorporation would clarify the statute and go a long way toward leveling the enforcement playing field. However, given statements made in the aforementioned May 27, 2010 address, two more amendments should be considered.
As noted earlier, an effective compliance and ethics program requires companies to conduct internal investigations into possible FCPA violations. In his presentation, Mr. Breuer advised that when a possible violation has been discovered, the corporation should (1) seek the government’s input on the front end of its internal investigation, (2) describe its work plan for conducting the inquiry, and (3) be responsive to DOJ questions, suggestions, and requests to expand the scope of the investigation.
From an internal investigations perspective, this “call first” demand constitutes a seismic shift in the government’s perception of its role in the process and should present tremendous business and legal concerns for a company in its crosshairs. What the DOJ is asking for is access to the inner workings of private-sector companies and how they conduct themselves in a way that has heretofore not been seen.
At present, when an FCPA violation occurs, there is generally the following investigatory timeline: (1) occurrence of the perceived corporate wrong, (2) performance of the company’s internal investigation, and (3) determination by the company of whether to self-report and cooperate with the government’s parallel investigation and potential litigation.
In this sequence, the company conducts its own inquiry before making the critical decision to implicate itself or not. Because these internal investigations are usually conducted by outside counsel, if no wrong is found by that independent investigation, its results are protected from disclosure to third parties by operation of the attorney-client privilege. See: Upjohn Co. v. United States, 449 U.S. 383 (1981). This safeguard to the company is vital. In an era of global markets and instant information, the protection of an exonerated company’s reputation may very well save it from complete ruin, as the mere specter of dirty laundry can be damning on Wall Street.
Alternatively, if a company contacts and co-ordinates its internal investigation from the outset with the DOJ, its ability to protect the direction, yield, and publicity of any such inquiry will be nil. Dirty or not, it will have waived attorney-client privilege and laid open it entire operation to government investigators. That should be unnerving to even the most ethical company.
A line of cases beginning with Coolidge v. New Hampshire, 403 U.S 443 (1971) stands for the proposition that government agents need not ignore evidence of other illegal activities they happen upon when they are lawfully present, even on an unrelated matter. This “plain view” exception to the probable cause and warrant requirement is never lost on law enforcement. It is therefore not difficult to imagine aggressive government investigators with access to a company’s every last document and memoranda hunting until they find wrongdoing to prosecute, be it the FCPA violation that they were invited in on, or something else. That is a daunting prospect to consider.
This is not to advocate that companies should be able to hide their illegalities and avoid prosecution. Quite the contrary. The USSG laudably balances the sometimes-competing and sometimes-cooperating interests of ensuring self-policing, respecting corporate privacy, and doing justice by prosecuting wrongdoers. To establish a precedent where the government is called into, and becomes a partner in, every FCPA internal investigation flies in the face of Chapter Eight of the USSG by eradicating the self-policing that is its purpose.
To be clear, adhering to Mr. Breuer’s suggestion of early government involvement in a company’s internal investigation is not always going to be unacceptable or ill-advised. Whether to do so or not is a business and legal decision that is best made by corporate leadership. However, allowing his present request to ripen into a future demand, and then into a policy that over the course of time and through stare decisis becomes the law of the FCPA land, usurps the authority of Congress and is wrong.
As a result, any prospective legislation amending the FCPA should protect the balance of interests in corporate criminal and civil prosecutions already struck by the USSG. Involving the DOJ at the outset of the internal investigation process as mandatory for receiving cooperation credit under the Guidelines should be expressly prohibited. And for those companies that do invite the government in as investigatory partners from the beginning, there should be some transactional or use immunity – or at least some limitation on penalties and sanctions – for other wrongs uncovered during the course of the FCPA investigation in recognition of their good-faith efforts to cooperate with the government.
While neither of the foregoing proposals can nor will remedy the adverse publicity aspect of early DOJ involvement where elected, the former does safeguard corporate privacy and attorney-client privilege interests, while the latter fairly and justly limits the impact of a “corporate plain view” violation. These are adviseable as counterweights to continued and vigorous government FCPA enforcement activity and will maintain a level playing field between companies seeking to ethically do business abroad and the DOJ.