Jon May Argues for FCPA Reform

In an interesting article in the National Journal, Jon May argues for FCPA reform. 

The text of the article and a link is attached:

The U.S. Chamber of Commerce is lobbying Congress to amend the Foreign Corrupt Practices Act to lessen the financial burden on U.S. companies doing business in foreign countries. That burden has cost U.S. companies upwards of a trillion dollars and has made our nation less competitive in the world marketplace. Unfortunately, the most important amendment suggested by the Chamber is likely to make the problem worse. There is a better and simpler solution.

The FCPA is our nation’s effort to prevent companies from bribing government officials to secure business in a foreign country. Companies found guilty of paying bribes, or of failing to accurately describe the bribes in their financial records, have had to pay billions of dollars in fines and have faced the possibility of debarment from government contracts. Why so much money? Under U.S. law, companies are responsible for the acts of their employees even if management is unaware of the employee’s conduct. A typical scenario involves a company executive hiring a foreign consultant to help negotiate a contract with a particular ministry for the sale of a product or service. Unknown to management, the consultant’s fee includes a bribe to a foreign official.

Although intended to level the playing field, the FCPA has actually made it harder for U.S. companies to compete in the marketplace. Money that a company could have used to hire employees, build plants and market its products has been diverted to efforts to show that any illegal conduct was the act of a rogue employee.

If the bribe is uncovered, the company has no defense to criminal liability. Even though the bribe was not authorized by management, no one in management was aware of the bribe and the bribe was specifically against company policy, the company is criminally responsible. The only thing the company can do is try to convince the government not to charge it with a crime.

How does a company do this? Primarily by showing the U.S. Department of Justice that the company had a compliance program designed to prevent such conduct. Companies must evaluate their business environment to identify areas where unlawful conduct might occur. Such an evaluation must include an examination of the business culture of the foreign nation and even a boots-on-the-ground investigation of the company’s foreign partners or intermediaries. Companies must promulgate policies that detail permitted and prohibited practices, and employees must receive regular training on permitted practices and the penalty for noncompliance.

When unlawful conduct is uncovered or suspected, it may be necessary to retain the assistance of outside investigators to interview witnesses and conduct electronic and financial audits. And finally, companies that uncover criminal conduct are expected to demonstrate their commitment to the law by immediately disclosing that conduct to the authorities. If DOJ believes that the company’s efforts were genuine, it will usually agree not to prosecute in exchange for the company entering into a nonprosecution or deferred-prosecution agreement. When the company uncovers the criminal conduct itself and self-discloses, DOJ may also reward the company by permitting it to enter into one of these agreements.

In an effort to lessen this burden of proving compliance, the Chamber has proposed amending the FCPA so that a company would not be responsible “if the individual employees or agents had circumvented compliance measures that were otherwise reasonable in identifying and preventing such violations.” But the most likely consequence of such an amendment will be to force companies to expend even larger sums of money on compliance measures as they attempt to demonstrate their reasonableness in the face of irrefutable proof that these measures failed.

A far more effective reform would be to create an absolute defense to prosecution when a company self-reports a violation. Right now, the vast majority of government investigations are the result of companies uncovering fraud and self-reporting violations. A bar to prosecution would create an incentive for companies to allocate resources to those measures best suited to uncovering illegal activities. Employees would still be subject to prosecution for their criminal conduct. But companies would no longer have to worry that self-reporting could lead to financial devastation.

The government lacks the resources to police industry and relies heavily upon the threat of prosecution to encourage businesses to implement what DOJ considers to be best practices. But what DOJ considers best practices are not necessarily the best means of achieving compliance by a particular company operating in a particular country. Catching offenders and turning them in to the government for prosecution would be a far more effective way to enforce the law (what the government really wants) at a fraction of the cost of current compliance regimes (what business really wants). This is the kind of reform the Chamber should be advocating.

Jon May (crimlawfed@gmail.com) is a partner at May & Cohen in Miami.

http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202534206962

 

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1 Response

  1. Howard says:

    Worst idea ever. And I’m including in that calculus Napolean’s idea to invade Russia in the winter.

    First of all, May says like it’s established fact “[a] typical scenario involves a company executive hiring a foreign consultant to help negotiate a contract with a particular ministry for the sale of a product or service. Unknown to management, the consultant’s fee includes a bribe to a foreign official.”

    That’s not a typical scenario. In fact, I’m hard-pressed to think of a single enforcement action brought by the DOJ that fits that description.

    May then compounds his mistake: “[e]ven though the bribe was not authorized by management, no one in management was aware of the bribe and the bribe was specifically against company policy, the company is criminally responsible.

    That may be true…theoretically. But frankly it sounds like something an outside counsel would say in a presentation in order to generate more fees from a gullible business client scared into spending the kind of money May supposes businesses currently spend on compliance.

    The reality of the enforcement record paints an entirely different picture. A company executive loses a bid for a government contract. The company had won the open bidding process, but his competitor—who got the contract—used a politically-connected agent to “somehow” get the contract out from under our executive. That executive then hires that agent himself to help the company win government contracts. The agent gets paid a commission much higher than market rates. So high, in fact, that after a while, the COO makes the finance people eventually reclassify the commission payment as part commission, part outside services. The company wins a government contract. The agent’s commission payment is used to buy an influential government official a quarter-million-dollar Ferrari. That is more than just a “typical” case, it’s an actual case.

    The reality is that companies get prosecuted because their senior executives know about, connive in creating, or actively put their heads in the sand about a bribery scheme.

    If May’s idea gets implemented, the only result would be a constant flow of prophylactic disclosures. No money would be spent on a thorough investigation. Just disclose and get corporate immunity. Not great for the employees involved, but since the DOJ doesn’t have even remotely the resources to follow up, the vast majority of conduct would be left untouched, no matter how bad it might end up being. Plus, given the flurry, a smart company would know that if they didn’t disclose, there’s virtually no chance of being found out.

    The Chamber’s ideas are bad enough. Let’s not sprint to their left to find new, worse ideas.