A couple months back I finally had a chance to read the Stolen Assets Recovery Initiative (StAR)’s latest report, Left out of the Bargain: Settlements in Foreign Bribery Cases and Implications for Asset Recovery. It’s a very useful report (though a lot of the preliminary material is pretty dull, but fortunately fairly skimmable). The key descriptive finding is that “significant monetary sanctions have been imposed [in foreign bribery cases] with hardly any of the respective assets being returned to the countries whose officials have allegedly been bribed.” The overall tenor of the report is that this is a problem. Although the report uses careful, measured language, I interpreted it as as a call for more aggressive action to force companies that admit to foreign bribery to pay significant fines, penalties, or other damages to the countries in which the bribery took place (either to those countries’ governments, or to NGOs or special funds). The report discusses, and seems to endorse, a range of related measures designed to further this overarching goal.
I’m sympathetic with StAR’s objectives, and with the idea that more can and should be done to help the victims of corruption. But the Left out of the Bargain report suffers from a number of serious flaws—chief among them the failure to give more than cursory attention to the possible adverse incentive effects of promoting duplicative enforcement or substantial redistribution of settlement proceeds.
Before getting to the meat of the argument, I think it’s helpful to draw more sharply two important distinctions that the StAR report sometimes elides. The first is the distinction between asset recovery actions—in which a country seeks the repatriation of assets stolen by the country’s own nationals (usually former officials or their family members)—and actions for penalties or disgorgement brought against a firm or individual for allegedly bribing foreign officials. The second distinction is between a joint or coordinated enforcement action, in which multiple enforcers work together to reach a comprehensive settlement with the defendant corporation, and follow-on (or “me too”) enforcement actions, brought by other jurisdictions or parties after one jurisdiction has already reached a settlement with the defendant.
For purposes of making my critique of the StAR report as clear as possible, let me focus on follow-on actions seeking penalties or restitution from a foreign firm that has acknowledged, in a settlement with its home jurisdiction, that it paid bribes. Imagine, for example, that the Acme Corporation, a (fictitious) U.S. firm, admits to violating the FCPA by paying bribes in Freedonia (a fictitious country), and reaches a settlement with the U.S. DOJ in which it agrees to pay $100 million to the U.S. government. Then the Freedonian government comes along and demands that the firm also pay $100 million to Freedonia (or, alternatively, demands that the U.S. transfer some or all of its $100 million settlement to Freedonia). At first blush, it looks reasonable for Freedonia to make such a demand; after all, it’s the poor Freedonians who were the main victims of Acme’s corrupt practices. I read the StAR report to be taking something like that position. But if we consistently allowed countries in Freedonia’s position to recover separately, or to claim some significant share of the U.S. government’s settlements, we might create a couple of undesirable incentive effects:
First, multiple overlapping actions may have adverse impacts on the incentives of companies to self-report violations. This is no minor matter: although some foreign bribery cases are uncovered by government investigators or by the media, a very large number of foreign anti-bribery cases begin when a company voluntarily discloses a potential violation (or set of violations) to the government. Yet companies do not report all violations (nor, in most cases, are they doing anything illegal in not doing so). When deciding whether to self-report, a company will weigh the costs and benefits. Among the principal benefits is the possibility of resolving the matter quickly and completely. Another, closely related factor that companies will consider is the reasonability of the government prosecutors (say, at U.S. DOJ) with whom they will negotiate a settlement. Self-disclosure is more attractive if a company’s officers can say to themselves, “Well, self-disclosure is going to be a pain, but we should be able to negotiate a reasonable settlement with DOJ, and then we can put this all behind us. And we’re confident we can have candid, behind-closed-doors conversations with the DOJ lawyers, so they can understand what went wrong and what we’re doing to fix it, without that information appearing on the front page of all the newspapers.” If, on the other hand, the company’s officers cannot be sure what their ultimate liability might be—because they cannot predict how the Freedonian enforcers will behave, or whether any information they disclose will remain confidential if the U.S. passes it onto Freedonia—they might decide in the end that the costs of self-disclosure outweigh the benefits, and they’re willing to run the (usually very low) risk that the violations will eventually be discovered.
Second, to the extent that the country where the corruption took place can successfully argue that it is entitled to some or all of the proceeds obtained by an enforcing jurisdiction (say, the U.S.) in a settlement agreement, this will weaken the incentives of those latter jurisdictions to enforce their foreign anti-bribery laws aggressively. To be clear, I find the claim that the DOJ vigorously enforces the FCPA as a way to make money for the U.S. government patently absurd; that’s just petty, tendentious whining. At the same time, the fines and penalties the U.S. achieves in FCPA enforcement actions are surely important to the internal politics of departmental resource allocation and prioritization. If only a modest proportion of settlement recoveries went to the U.S., senior DOJ decision-makers might begin to wonder whether it’s really worth putting as much money and time into FCPA actions, as compared with the whole range of other white collar fraud enforcement actions the Department might pursue–and it might strengthen the hand of FCPA critics who think that the U.S. shouldn’t be taking upon itself the burden of cleaning up corruption in other countries.
So, even if facilitating either separate follow-on actions or more transfer of settlement payments to affected countries would seem to be desirable, we need to keep in mind that those possibilities might reduce both self-disclosure by companies and investigative effort by enforcement authorities in the U.S. and other supply-side jurisdictions. It’s not at all clear that the developing countries (or their citizens) who suffer most directly from transnational bribery would be better off if we were to go that route. This is particularly so when one takes into account that the benefits of deterrence might dwarf those of restitution that might be paid if deterrence fails.
None of this is to say that the StAR recommendations are wrong—I don’t really know, and several of the proposals struck me as sensible. But I was disappointed in the report’s failure to seriously consider incentive effects of the sort sketched above; the report seemed to be written with the background assumption that the type and number of foreign bribery settlements would remain constant, unaffected by the possible reforms the report proposes, and that doesn’t seem plausible.
Now, my criticisms might not apply, or might not apply in quite the same way, to (1) actions to recover stolen assets from an affected country’s own nationals, or (2) actions involving voluntary coordination and cooperation among multiple enforcement jurisdictions with an interest in the same or closely related unlawful acts. The former are quite different, both in the form of the legal proceedings and the incentives they create for aggressive enforcement. (And here repatriation of assets is much more the norm — see, for example, Raj’s recent post on the Abacha asset seizure.) The latter already sometimes occurs, and we may see more of this as more enforcement agencies establish the capacity, credibility, and independence to be treated as peers by more established enforcers. But that process is a gradual one, and we need to be mindful of unintended consequences associated with multi-jurisdictional enforcement.