Richard Bistrong, a writer, speaker, and blogger on anti-bribery compliance issues, contributes the following guest post:
As the recent OECD Foreign Bribery Report made clear, debarment (prohibiting the defendant company or individual to engage in future government contracting) is very rarely used as a sanction in foreign bribery cases, most likely because prosecutors worry that debarment would be an excessive penalty that would often do too much collateral damage to innocent parties. I have argued that debarment can and should be used more frequently, and that the legitimate concerns about disproportionate punishment can be addressed by using various forms of “partial debarment.” In a recent post, Professor Stephenson draws attention to a number of potential shortcomings to my proposal. While I agree with some of his points, I think he understates the ways in which debarment—as distinct from fines or other monetary penalties—can have a distinctive deterrent effect on foreign bribery, and why partial debarment might therefore often be appropriate.
Let me try to clarify where Professor Stephenson and I disagree, where we may disagree, and why partial debarment is a sanction that government enforcers ought to employ more often.
Professor Stephenson reasonably asks why we should bother using partial debarment as an economic sanction, when traditional enforcement fines “perform the same deterrent function as debarment.” In addition, as Professor Stephenson emphasizes, the traditional fining mechanism does “not deprive the government of a potential supplier.” In other words, traditional regulatory fines present the “bite” of financial sanction and deterrence without the potential impact on customers who need these products and services, and who were not part of the fraud and misconduct. Professor Stephenson makes a great point: If the government doesn’t think that the fine is large enough to deter, it can and should increase the fine, as opposed to adding on to it through debarment, which deprives innocent customers of a supplier and may have a devastating impact on innocent employees.
While the point is well-taken, and seems to make economic sense—dollars lost to fines and dollars lost to debarment would seem interchangeable—what I think Professor Stephenson overlooks is how things work on the front lines of business, more specifically at the hotel and conference center bars and restaurants where business teams congregate after corporate meetings. It is in this environment, away from the ears of management, where business personnel are likely to exchange stories, and in this case, frustration with the interruption of business due to debarment. While criminal and enforcement fines, even massive ones, have financial impact on earnings and balance sheets (but not necessarily to share values), they don’t impact field personnel. Debarment does. Be it partial debarment, export sanctions, suspension of the federal supply schedule, or even greater contract cancellations, these disruptions do effect those on the front lines of business. Such sanctions will now adversely impact income streams, revenue models, and incentive compensation to all those who have business development responsibility.
Is that to say these consequences fit the crime? Perhaps not. Is it fair that a US government contract manager should get a “compensation haircut” due to misconduct that took place far from the United States? No. But what do you think those teams are going to share with their overseas colleagues over dinner and drinks? With debarment, the consequences of paying bribes and getting caught now become real to the front-line business teams who are the ones considering paying bribes, and weighing the expected costs and benefits. Perhaps it sounds counterintuitive, but being shut out of a market or territory is worse—for someone who has line business responsibility—than a huge regulatory fine imposed on the company. It is easy for a business manager to say “yeah, that was corporate” when being questioned about an enforcement action or fine; the conversation of “well, we can’t do business with you for a while because we were caught bribing,” has a much different feel. It’s more “real,” for lack of a better term. On top of this, when business teams who have had their forecasts and plans interrupted by debarment start worrying that their bribe-paying peers are “screwing up our market,” the thinking might really start to shift. Those internal pressures should not be underrated. If it is the business teams who are misbehaving, why not have the business teams feel the pain? Even if the ones who are getting the brunt of the punishment are not the ones who committed the fraud, they will be sure to “share the pain and shame” with their cohorts in a way which just might change the corruption calculus to everyone’s long term benefit.
The other point where I might make a slight turn away from Professor Stephenson is when he speaks to whether dishonesty in one area, for example foreign bribery, is an indicator of dishonesty in another area, like government contracting. Professor Stephenson thinks this connection is “a bit more of a stretch.” From an organizational perspective, he is probably correct, as those involved in US contracting might be significantly more on the “straight and narrow” then their brethren operating in low-integrity regions. However, from a macro-perspective–and using the terms from my own “Proposed Debarment Notice”–such conduct, regardless of the nature of the fraud, “questions whether you have the requisite personal integrity and business ethics to be a responsible Government contractor.” Here I agree with the US government in its decision from both a public policy and public interest perspective.
Moreover, violating the FCPA, is, among other elements, a fraud against the US government. So why should that same Government give such a violator, whether a person or corporation, a “free pass” to continue doing business as usual? The message of “we don’t do business with law breakers,” is the appropriate narrative. So, where Professor Stephenson and I truly part ways, is while he believes that partial debarment does not serve the governmental message of “we don’t want to deal with this firm until it cleans up its act,” I think it does.
GAB | The Global Anticorruption Blog 
How is violating the FCPA a fraud against the US government if by definition a FCPA violation only occurs when a foreign government official is bribed or receives some other benefit?
I had the same question initially — and of course Richard can speak for himself — but I took Richard here to be speaking of fraud against the US government in a looser, more metaphorical sense: the idea, I think, is that if a firm avails itself of the protections of US law (either because it’s a US domestic concern or it took advantage of US territory or capital markets), and then engages in fraudulent conduct, the firm has offended the US government’s sovereign interests. While I think that’s right in the very broad, loose sense (and it’s why it’s perfectly legitimate for the US to pursue FCPA actions for conduct that takes place abroad), I do think we need to be a bit more careful with our language here, because you’re right that an FCPA violation is NOT a fraud against the US government in the more precise, legal sense, and the broader understanding to which I alluded above might imply that ANY corporate violation of ANY US law should be grounds for debarment. One could depend that position, I suppose, but it seems a bit broad.
I think Richard Bistrong meant that the fraud against the government is one of other elements (noncompliance with accounting and disclosure standards is another).
On the fraud theory: perhaps. Nevertheless, I suppose that the U.S. has discretion to sanction and choose those it finds appropriate. UNCAC also agrees.
Thank you for the detailed response to my comments on your proposal. There’s a lot to think over, and I certainly haven’t processed it all yet, so just let me focus on one thread in our exchange.
In addressing whether fines and debarment are essentially interchangeable with respect to their deterrent effect, I appreciate that you bring to bear psychological/organizational considerations to an issue that I was treating as purely economic and rationalist. If I understand the basic divergence, I was pointing out that to corporate HQ (or to the board or the shareholders), a ten million dollar fine and ten million in lost revenues due to debarment are equally bad. Your point, if I follow you, is that this may be, but to the folks at the front lines — the local sales reps and the like — these are not the same at all, because a debarment penalty hurts your peers and colleagues, and then they get angry at you. So there would be a lot more social pressure on the sales reps not to do things that will cause debarment than there would be not to do things that lead to fines, imposed on the distant and abstract corporate entity.
I like the general approach, and in particular the focus on the incentives of the individual agents rather than the corporate principal. But there’s one piece of the internal logic that escapes me: My understanding is that in virtually all cases, when a corporation is found liable because an employee paid or authorized bribes, the responsible employee is fired. And both debarment and fines only occur if the bribery is actually detected and punished. What I don’t think I understand is why the threat of termination of employment isn’t a much more powerful deterrent for the front-line employees than whatever nasty things others might say in the hotel bar about how so-and-so screwed up my line of business. From the perspective of the line employee, I would have thought that the decision whether or not to pay a bribe turns largely on weighing the expected probability of getting caught and fired (usually there isn’t any further punishment, though there are important exceptions) against the expected benefit of paying the bribe. And the probability of getting caught, in turn, depends on how much the corporation invests in monitoring, etc., and that investment is influenced by the impact on the firm’s bottom line.
So I guess the piece of the argument I don’t quite understand is why the line employees would care so much about debarment, when if they get caught they’re liable to get fired anyway, regardless of what additional penalties are imposed on the firm.
The one possible explanation I can think of — and I’m not sure if this is what you’re getting at — is that there are actually three layers to consider here: corporate HQ, some kind of middle manager (like a regional sales director), and a front-line sales rep. Perhaps the regional sales director has some ability to monitor and influence the behavior of the sales rep, and perhaps also the regional director cares much more about debarment (which would screw up her professional life quite badly) than about fines, even though HQ is indifferent (caring only about the size of the penalty), and the front-line rep doesn’t really care either (he only cares about the chances he’ll get caught and fired, versus rewarded for putting up good numbers). In that scenario, I can see the argument that if the middle manager’s effort has a big impact on the likelihood that the line agent will comply, and the middle manager is hurt much more by debarment than by fines, then in fact debarment and fines are not interchangeable, and the former has a much more powerful deterrent effect. Is that what you’re getting at? I’m not quite sure. If not, it would be great if you could explain further.
As a disclaimer: I don’t have much knowledge at all on this topic so I’m merely highlighting the views of others (and my apologies for any mischaracterizations). In a debate on the subject of suspension and debarment that played out on The FCPA Blog a few years ago, Jessica Tillipman challenged “Too Big to Debar” primarily on the grounds that, given the severity of the sanction, the Federal Acquisition Regulation allows debarment only as a protective, non-punitive measure. In other words, debarment can only be used to guard the immediate integrity of U.S. government contracts, not to penalize misconduct. There is a lot of definitional wiggle room but, if her argument holds, it seems more difficult to equate debarment with fines and more necessary to justify debarment with “untrustworthy partner” reasoning. I sort of buy that reasoning in the very general sense but I do think it a stretch in the case-by-case, legal scenario, which is likely more relevant for determining sanctions.
While I am looking forward to reading Professor Stephenson’s response in great detail, I wanted to address Tom Fox’s comment (well-taken) and some of the responses about my mentioning the FCPA as a fraud against the US government. As Professor Stephenson points out, I was speaking in broader terms, but let me clarify. As someone who was charged for violating the FCPA, if you look at any of the charging documents, be they the Information, Statement of the Offense, etc, it is a charge for violating US Law. The plaintiff on the documents is the United States of America, and the defendant, in this case, was me. Thus, I was speaking in the sense that when you break US law, even if it involves conduct with an overseas entity, that you are criminally, defrauding the US government as a violator. I think my wording was confusing, and my apologies, as “fraud” is usually referred to in the context of financial as opposed to legal misconduct. Coming from the business field, I need to be careful when wading in the waters of such great legal minds, so I will be mindful to keep a legal dictionary close by in future comments!
Professor Stephenson asks “So I guess the piece of the argument I don’t quite understand is why the line employees would care so much about debarment, when if they get caught they’re liable to get fired anyway, regardless of what additional penalties are imposed on the firm.” A valid question, and lets assume that in this context, that our employee in question is both terminated and prosecuted, as to elevate the consequences of corruption to remaining corporate group. Does that provide enough stand-alone deterrence, making debarment an unnecessary sanction? If we go back to our hypothetical “over drinks” conversation, from my perspective, the conversation remains the same. As Professor Stephenson correctly speculates “Perhaps the regional sales director has some ability to monitor and influence the behavior of the sales rep, and perhaps also the regional director cares much more about debarment (which would screw up her professional life quite badly) than about fines, even though HQ is indifferent (caring only about the size of the penalty), and the front-line rep doesn’t really care either (he only cares about the chances he’ll get caught and fired, versus rewarded for putting up good numbers).” Precisely. Even if the employee in question has suffered the “worse case scenario” of termination and prosecution, debarment is a living reminder of the consequences of that conduct to the rest of the organization, which will remain in the lives of front-line and middle level employees, where corporate fines will not. Thus, our regional or middle level manager is likely to remind his/her line reports of how corruption has impacted everyone’s business plans and to “stay away” from the hazards and dangers which remain in the field, and from which now everyone must “pay the price.”
Thanks very much. This has been (from my perspective) a very productive exchange, and has helped me see more clearly the case for debarment, as opposed to fines or other sanctions. Just to recap, I take it that, in your view, debarment can have a greater deterrent impact than fines, for two reasons:
(1) From the perspective of a middle-level manager (who probably won’t get fired if a line employee gets caught paying bribes, and who is probably not also directly affected by fines levied on the corporation) debarment is a scary sanction, because it could screw up her whole line of business, so she has stronger incentives to monitor her line employees if that’s a possible sanction.
(2) Because debarment has longer-term consequences that directly impacts the lives of the personnel in the field, it’s a more salient reminder that bad things can happen if you get caught paying bribes. Employees who got fired a couple years ago are easily forgotten, as are fines paid by corporate HQ, but debarment is an in-your-face reminder of the consequences of bribery.
Both fair points. I’d need to think a bit more about whether I’m ultimately persuaded, but the logic is certainly cogent. I do think, though, that before we conclude debarment (partial or full) is the way to go, we’d need to think through a couple of important issues.
First, of course, we need to weigh the additional increment of deterrence against the collateral consequences to innocent parties. Your original post was correct that we can mitigate those impacts through partial/limited debarment, but that mitigation would presumably also reduce debarment’s deterrent effect. We still need to do that comparison at the margin.
Second, as Liz points out, under current law it’s not clear that it’s legal under the FAR to use debarment as a general punitive/deterrent sanction. We could change that law, of course, but perhaps that legal issue deserves more attention if you (or the OECD or anyone else) wants to advocate greater use of debarment as a regular sanction, to be used even in cases where there isn’t a plausible case to be made that debarment is necessary as a protective (non-punitive) measure.
Debarment should be used in appropriate cases which is what legislators intended. Otherwise there is no point in having the sanction.
Of course this must be weighed against what is in the public interest – maybe partial debarment is a solution in that it would not necessarily amount to corporate death -instead disabling the corrupt arm.
On the economics at play – there is plenty of evidence that people do not always behave purely in accordance with economics.
Love would be one example, the day after Valentines Day.
So it’s important to focus on using various strategies to nudge people into the behaviour you’re after. Richard’s idea is one strategy. Others can also and should be deployed.
Essentially the ultimate objective is to stop bribery. One weapon in doing so is to make bribery socially unacceptable to potential bribers and their peers to help drive compliant behaviour. Not 100% effective but when bribery is socially acceptable – and the constant refrain that it equates to local custom and practice and who are we to impose our values on others is a big red flag that it’s considered acceptable – then bribe payers are able to rationalise their behaviour extremely easily against a backdrop where perceived enforcement risk is considered low.
Put another way. Present deterrents are plainly not working.
I very much agree with you on the general point that we need to do more to deter foreign bribery. I also agree that it’s important to do away with the idea that bribery is part of local custom and therefore socially acceptable.
I do think that your first sentence may beg the question. As LIz points out, it’s not clear that using debarment as a punitive sanction is consistent with the intent of those who drafted the Federal Acquisition Regulations. And as you say in your next paragraph, the benefits of any sanction (including increased deterrent effect) must be weighed against the cost (here, most importantly, the collateral cost to innocent third parties).
And related to that, even if we want to strengthen deterrence, the question at issue concerns the appropriate means to use. In particular, would it be better to use debarment, or to substantially increase fines or other penalties? (If your answer is “both,” then the next question would be, for whatever amount of debarment you would favor in a given case, wouldn’t it be better to scrap the debarment sanction, and simply add on more fines — however much would be needed to reach the equivalent deterrent impact of debarment?)
I’ll add one more small piece of what is obviously a much larger picture here. In regards to the motivation not to be fired, let’s remember – due to informal conversations to broader corporate culture and everything in-between – that particular incentive (risk of job loss) can easily seem tiny compared to the formal and informal incentives to engage in corrupt practices. The prospect of big business right now can more-than-easily outweigh “maybe I’ll get caught at some point and maybe then I’d get fired.” The proximity of immediate deal-creation against the vague potential of some downstream consequence isn’t a fair fight. That imbalance is a particularly large and powerful one when corporate incentives are quite literally based on the amount of business done.
Christopher, thank you for your contribution, and deepening the discourse. I totally agree with your perspective with bringing in the front-line calculation of “will I get caught and if I get caught will I get fired?” In my opinion, debarment is a living memory to front-line and middle-level managers of “what happened to the last guy who got caught,” and how the rest of the organization now has to live with those consequences. Will that tip the scale, maybe not, but will it have some impact on the thinking, I deem yes.
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