Recently the FCPA Professor posted a blog, entitled “Look in the Mirror Moments”, in which he used written commentary by the US Secretary of the Treasury to the Chinese government about the Chinese governments anti-trust investigations as a mechanism to explore critiques of Foreign Corrupt Practices Act (FCPA) enforcement. In this post, he compared certain aspects of FCPA enforcement to the Chinese corruption enforcement action against GlaxoSmithKline PLC (GSK). Leaving aside the differences in anti-trust enforcement (price-fixing, monopolistic behavior and illegal collusion) and anti-corruption enforcement (bribery), I wanted to review his critiques through the prism of the known facts of the GSK enforcement action.
The FCPA Professor had the following comments about FCPA enforcement, in comparison with the Chinese corruption enforcement action against GSK. He said,
“Without in any way trying to comprehensively compare the overall U.S. legal system to the overall Chinese legal system, the following attributes of FCPA enforcement must at least be acknowledged.
The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.
As to the swiftness of FCPA enforcement actions, one can only assume that the majority of general counsels and board of directors of companies under FCPA scrutiny would be jumping for joy if the scrutiny – from start to finish – would resolve itself in 15 months rather than the typical 3-5 years (and in some instances more) of FCPA scrutiny lingering.”
The difficulty I have with both of these points is that one cannot separate the Chinese enforcement action against GSK from the Chinese legal system that produced it. Let’s start with the ‘jumping for joy’ prong. The initial difference to note is that the Chinese enforcement action was a domestic prosecution based upon Chinese domestic law for bribery and corruption of Chinese. It was not a US (or UK) company violating US (or UK) laws. This means that the relevant documents and witness were in the locality where the investigation was performed. Even when a key witness, GSK China Country Manager Mark Reilly was in the UK, he voluntarily returned to China to give evidence but was prevented from leaving the country without being charged with a crime. So as far as is known, there were no government-to-government requests for information, no Letters Rogatory or use of any other international discovery mechanism to obtain evidence.
Moreover, the procedural protections in place under US (and UK) criminal procedure simply do not exist in China. There is no right to counsel, no right against self-incrimination, no right to confront witness and not even a right to know what the charges against you might be. These lack of rights were certainly borne out in the speed in which the Chinese investigative authorities were able to obtain evidence and public confessions from GSK principals involved in the bribery and corruption. The first 30-day timeline of the GSK investigation went as follows:
- June 28, 2013 – Local Police announced they have place GSK officials under investigation for economic crimes.
- July 11, 2013 – Public Security Ministry issued statement accusing GSK of bribery.
- July 15 , 2013 – Four senior company execs ‘detained’. Finance chief barred from leaving country.
- July 16, 2013 – GSK General Counsel (GC) placed under ‘house arrest’ along with 30 other employees. One of the four GSK China executives who were detained, admited to bribery allegations on Chinese state television.
- July 22, 2013 – GSK formally apologized for breaking Chinese law regarding domestic bribery and corruption.
- July 26, 2013 – Peter Humphrey, a UK citizen and his wife, a naturalized US citizen, both hired by GSK in an ancillary matter related to the GSK corruption scandal were arrested but not told of the charges against them.
A little over one year later, in July, 2014 the trial of Humphrey and his wife was announced. Orignially it was to be held in secret with both Humphrey and his wife still not told of the formal charges against them. However after diplomatic protests by both the US and UK governments, Humphrey and his wife were both convicted and sentenced in an open trial, albeit lasting only one day, on August 8, 2014. The charges against them were announced at trial. Thereafter, GSK pled guilty in a secret one-day trial GSK was fined approximately $491MM and China Country Manager Mark Reilly and four other GSK China business unit executives were found gulity. They were all sentenced to jail but given suspended sentences.
How did the Chinese government develop its evidence so quickly? One of the defendant’s, admitted, on state run televison, his involvement in the bribery scheme only 18 days after the investigation was announced by Chinese authorities. Indeed, GSK itself made a public apology only 24 days after the announcement by the Chinese authorities it was under investigation. We now know that GSK was informed by a whistleblower of allegations of bribery and corruption as early as January 2013 yet in June GSK announced it had not found anything to substantiate these allegations.
I believe the answer is found in the differences in the Chinese and US legal systems. It all starts with the following: in China you are presumed guilty while in the US (and the UK), you are presumed innocent until proven guilty. In an article in the New York Times (NYT), entitled “Presumed Guilty in China’s War on Corruption”, Andrew Jacobs and Chris Buckley wrote that the “war on corruption often operates beyond the law in a secret realm of party-run agencies”. The process “Known as Shuanggui, it is a secretive, extralegal process that leaves detainees cutoff from lawyers, associates and relatives.” Moreover, even as a case moves through the Chinese criminal justice system, defendants’ counsel “have limited access to evidence, witnesses, and their clients.” It does not get any better when a defendant actually goes to court because “Lawyers say Chinese courts rarely allow them to call defense witnesses, while prosecutors frequently withhold cruical evidence.” Finally, of the 8,110 officials charged with corruption “in the first half of this year, 99.8 percent were convicted”. To this rather amazing trial court conviction rate, I would add the the prosecution does even better on appeal, never losing to a convicted defendant.
Does that sound like a system in which you would jump for joy if you were caught up in, even knowing that the time from announcment of investigation until 99.8% chance of conviction awaited you? Even if the government investigation only took 14 months? In the US, corporations have the same rights as individuals at trial; to cross-examine witness, to be made aware of the charges against it, those charges must be brought with specficity, right to counsel, right to an open trial and right to appeal. These rights are all enshrined in the US Constitution. Those rights are not present for individuals or corporations under Chinese law or jurisprudence.
But the FCPA Professor also critiqued the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in FCPA enforcements with the following observation: The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.When a company enters into negotiation with the DOJ and SEC it is with legal counsel in tow. Even if we in the general public are not privy to these negotiations over the terms and conditions of enforcement actions I am confident that there is some give and take. Further, while I only have personal knowledge of one negotiation for the specific terms of a Deferred Prosecution Agreement (DPA), the lawyer representing the company made clear it was a negotiation. It was not a Diktat with sentencing simply pronounced by the DOJ. Does the office which handles the investigation also handle the settlement negotiation? Yes but that is what prosecutors do each and every day in every city, county, town, hamlet, state and federal jurisdiction in this country.
Just as it takes two to tango, it takes two to negotiate. The DOJ does not negotiate with itself. Another party is sitting across the table and that other party is the company involved in the FCPA investigation. Why is that company there in the room negotiating? Because the company has assessed its interest and determined that it would be better off settling than going to trial. This is in the face of DOJ failures in the trial court in the Gun Sting cases, the O’Shea trial and the trial court overturning the verdict in the Lindsey Manufacturing conviction. Simply because there is a negotiation between the DOJ and a private party does not make it some nefarious process, even if the prosecutors hold the upper hand.
As far as the fines and penalites, there has been nothing to suggest the basis of the $491MM fine assessed against GSK. That amount is a bit less than the amounts initially reported that GSK China paid out as bribes, somewhere over $500MM. At least in the US, there are the Sentence Guidelines which form some basis of the calculation. Of course there is always some prosecutorial discretion to lessen a fine or penalty below the suggested amount. We have seen that occur this year with the HP enforcement action and recently Asst. Attorney General Leslie Caldwell suggested that Alcoa could have been fined over $1bn for its conduct, while the actual fine was $384MM. It is appropriate for prosecutors to have such discretion.
While the DOJ is also critiqued that DPAs (and Non-Prosecution Agreement [NPAs]) are essentially the same as going to trial with a near 100% success rate, I think this belies the number of declinations that the DOJs gives out. Unfortunately (and here the FCPA Professor and I do agree); there is not enough information given out about declinations; either regarding the raw numbers or the specific reasons for a declination. Only if a company agrees or is required to make such information public does it become known. Nevertheless, there is the recent example of Layne Christensen, which received a declination. In an article in Compliance Week, entitled “How Two Companies Got Regulators to Drop FCPA Charges”, Jaclyn Jaeger reported on the reasons the company sustained this result of receiving a declination through interviews with Christensen GC, Steve Crooke, its Chief Compliance Officer (CCO), Jennafer Watson and its outside counsel Russ Berland. Jaeger detailed the specific steps the company took and we can all see the effect it had upon the DOJ, through the declination to prosecute the company.
The debate about the costs of FCPA enforcement actions, the proper role of DPAs/NPAs and length of time of investigations is a healthy one and living in the open society that we have in the US, one that we will continue to have. Since I am not a prosecutor (or ex-prosecutor), I cannot look in the mirror at FCPA enforcement but I can review the facts of the DOJ and SEC’s FCPA enforcement, contrasted with the Chinese domestic bribery and corruption proseuction of GSK and believe that there is no basis for comparing the two systems, as they are so different in too many fundamental aspects.
I can however say one thing with absolute certainly; wherever you do want to be, a Chinese jail is not high on the list.
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© Thomas R. Fox, 2014