This month GAB is delighted to feature a series of guest posts from Andy Spalding, Assistant Professor at the University of Richmond School of Law and Senior Editor of the FCPA Blog.  This is the second in the series of three posts on how to compensate the victims of transnational bribery:

In my last post, I weighed in on the discussion concerning whether the UN Convention Against Corruption (UNCAC) Article 53(b) (or any other provision), establishes a duty to allocate anti-bribery penalty money to the overseas victims. I’d like to suggest now that regardless of how one answers that question, using enforcement monies to benefit those victims is a good idea. We could engage any number of ethical, economic, foreign policy, or other arguments on this point; I’ll save those for another day. For the remainder of my post, I’ll assume that: 1) the citizens of corrupted governments are the principal victims of transnational bribery; and 2) enforcement should somehow benefit them. The next question, which is no less difficult, is how.

For starters, who within the foreign state should receive the compensation or damages?

The UNCAC Legislative Guide concerning Article 53(b) (paragraph 715) seems to contemplate that the government is the victim (or the legitimate representative of the citizen-victims), and that proceeds should be returned to that government. That’s not a counter-intuitive proposition, on its face. But we’ve been through this once before, and arrived at a regrettable but quite predictable conclusion. It occurred in the Alcatel-Lucent action, in which the French parent company and several of its subsidiaries bribed officials in Costa Rica to obtain telecommunications contracts. The bribe recipient, Costa Rica’s state-run electricity and telecommunications provider (known by the acronym “ICE”) argued that it, the agency, was the victim, and sought restitution under the Crime Victims Rights Act (CVRA) and the Mandatory Victims Restitution Act (MVRA). Both of these statutes define a crime “victim” as a “person directly and proximately harmed,” and can include organizations. The federal courts, however, were unpersuaded, ultimately agreeing with the US Department of Justice that ICE was more properly understood as a conspirator than a victim. I don’t think it’s overly cynical to suggest that this will be the case more often than not. Rarely is the official accepting the bribe a lone bad apple; the corruption is typically systemic, such that allocating penalty monies to the host government makes the problem worse, not better. (As an alternative to awarding restitution to the government, we might award it to a civil society organization. But this could only be done under the CVRA and MVRA if the organization could show that the organization itself — and not merely the citizens it purports to represent — was directly and proximately harmed. And that could prove difficult, perhaps impossible.) So, under US law as it currently exists, it seems highly unlikely that it will be possible to allocate penalty monies to overseas victims under the restitution statutes.

If we can’t use the restitution statutes, an alternative would be the reallocation of disgorged profits in enforcement actions brought by the Securities  & Exchange Commission (SEC). This is probably legal under the SEC’s statutory grant of disgorgement authority (which comes not from the FCPA itself, but from the 1990 Penny Stock Reform Act and then from the Sarbanes-Oxley Act). Indeed, a Nigerian organization – the Socio-Economic Rights and Accountability Project (“SERAP”) has proposed this very thing. Represented by an excellent Washington lawyer, Sandy Sierck, SERAP has asked the SEC to consider, on a case-by-case basis, sending ill-gotten gains to community organizations in the states harmed by the bribe. I’m quite sympathetic to the aims of this proposal (as well as to a number of SERAP’s other initiatives, such as its push for return of assets stolen by former dictator Sani Abache and recently recovered by the US).  However, in addition to the concerns Matthew has already expressed concerning using disgorgement this way, I’m not sure that diverting ill-gotten gains to foreign jurisdictions fits in very well with the SEC’s fundamental mission. That mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” And as the US Supreme Court reminded us in Morrison v. National Australia Bank, the markets herein referenced are US markets. (Interestingly, this was the reason that the SEC vociferously objected back in the 1970s to having jurisdiction over the FCPA’s anti-bribery provisions.) I have difficulty imagining that the SEC would recognize an obligation to provide restitution to overseas victims.

Yet another possible mechanism for compensating the true victims of bribery might be found in the 2002 enforcement action against James Giffen, a U.S. attorney who bribed officials in Kazakhstan on behalf of U.S. oil companies. In settling the case, the United States arranged with officials in Kazakhstan and Switzerland to release the $80 million in alleged bribes from their Swiss accounts and establish a trust fund. That fund now finances a Kazakh NGO called the BOTA Foundation, whose purpose is to “improve the lives of children, youth and their families suffering from poverty in Kazakhstan through investment in their health, education, and social welfare.” The fund’s board of trustees includes several Kazakhstani academics and professionals, as well as government representatives from the U.S. and Switzerland; it does not include any Kazakhstani government officials. By all accounts, BOTA has worked marvelously. And thus it sets an important anti-bribery precedent: proceeds can in fact be used effectively to fund projects in the communities harmed by the bribe, so long as we keep the money out of the hands of the government. But it brings us back to where this conversation started. The Giffen case was unusual in that the bribe payments were frozen and recovered. But as I noted in my last post, this is the exception rather than the rule. Typically the money available to allocate to victims is penalty money, not recovered bribe money.

So what we need is a mechanism, authorized under existing federal law, by which US enforcement agencies could use penalty monies from FCPA enforcement actions to fund projects that benefit overseas victims.

I think I’ve found it. Next post.