In my last post, I discussed one aspect of the (very useful) OECD Foreign Bribery Report: the characteristics of the bribe-paying firms in the 427 enforcement actions between February 1999 and June 2014. Today, I want to turn to a different aspect of the report, concerning the penalties levied in those foreign bribery cases. As the report notes, although these cases have often resulted in quite substantial fines (and associated monetary penalties, like disgorgement), one available penalty in the public procurement context–debarment from future government contracts–has been used extremely rarely (in only two of the enforcement actions the OECD examined). The OECD Report concludes that this is a problem, emphasizing as one of the report’s key conclusions that “the fact that only 2 out of 427 cases resulted in debarment demonstrates that countries need to do more to ensure that those who are sanctioned for having bribed foreign officials are suspended from participation in national public contracting.” This conclusion echoes the thesis of a 2011 article by Professor Drury Stevenson and Nicholas Wagoner, who developed the case for expanded use of debarment in FCPA enforcement actions at greater length and in greater depth.

But the title of Stevenson & Wagoner’s article–“Too Big to Debar”–alludes to the main reason debarment is not used more often as a sanction in FCPA or other foreign bribery cases: Debarment, particularly for firms that do much or all of their business with governments, may be effectively a death-sentence for the firm, or at the very least inflict a level of economic loss that seems out of proportion to the wrongdoing. This concern is especially acute when much of the collateral consequences of debarment would fall on “innocent” parties (non-culpable employees and shareholders, as well as the firm’s would-be government customers). Stevenson & Wagoner’s response to this legitimate set of concerns is not all that satisfying: they emphasize the deterrent value of debarment (perhaps suggesting that debarment is a bit like a nuclear weapon, in that a credible threat to use it means in practice you won’t need to use it very much), and they suggest the government could make the threat of debarment more credible by diversifying its set of suppliers.

More recently, Richard Bistrong (a convicted FCPA defendant turned insightful FCPA consultant and commentator) has advanced what I consider a more nuanced and plausible set of proposals that could allow the government to preserve debarment as a remedy, without necessarily imposing a “corporate death sentence.”  Mr. Bistrong’s proposals all entail some form of more limited debarment: debarment only until the firm demonstrates commitment to effective corrective measures; debarment only from certain kinds of contracts; debarment only from foreign contracts requiring export licenses; or debarment only from contracting with certain governments (for instance, with the government that was the subject of the anti-bribery enforcement action). Putting the details temporarily to one side, Mr. Bistrong’s larger point, as he explains it, is as follows: “[T]here is a misperception that debarment equates to a corporate death sentence. I hope that by elevating some of the incremental enforcement and policy options which might be available in the context of [de]barment, that perhaps the ‘all or nothing’ perception might be reassessed.”

I find all of this plausible and helpful, but I think it’s worth taking a step back for a moment to consider why we might want to use debarment as a sanction in the first place. Thinking this through might be helpful in assessing Mr. Bistrong’s intriguing proposals for incremental or partial debarment, as well as the “too big to debar” problem more generally.

I’m certainly no expert in the theory of remedies and sanctions, but to my mind there are three plausible reasons why the government might want to impose a debarment sanction, as opposed to (or rather in addition to) more traditional monetary penalties:

• First, debarment may serve to magnify the penalty amount, over and above what could be achieved with fines or other remedies. This is precisely what Stevenson and Wagoner have in mind: They think the penalties in FCPA cases are just too low to constitute a truly effective deterrent for large government contractors like BAE Systems, Siemens, KBR, and the like. And this is also what prosecutors are probably worried about when they seem reluctant to impose a debarment sanction. It’s important to observe here that if it weren’t for legal limitations on the monetary penalties (fines, disgorgement, etc.) that could be imposed, these other penalties, if large enough, could perform exactly the same deterrent function as debarment.
• Second, debarment may be appropriate because the firm, through its misconduct, has demonstrated that it is not a trustworthy partner. This justification for debarment is especially compelling in cases of fraud committed against the government bringing the enforcement action. If you try to cheat the US government and get caught, a natural response is for the US government to say you can’t do business with us again, at least not for a while. Even though the same legal provisions would authorize debarment for foreign bribery cases, the logic here is less straightforward. It’s plausible that a company that demonstrates dishonesty, or a general failure of internal compliance systems in one context (say, arms sales in the Middle East) may be more likely to exhibit similar failures in another context (say, supply of civilian aerospace technology to the US government), but it seems like a bit more of a stretch.
• Third, debarment may be a form of expressive disapprobation – essentially a symbolic statement that “we” (for example, the US government) don’t do business with dishonest firms. The symbolism or expressive value here doesn’t depend on a conclusion that a firm convicted of FCPA violations would actually be more likely to cheat the US government in future dealings, and the value of this form of condemnation may not depend on its effect on deterrence. Rather, the expression of moral disapproval inherent in a debarment decision could be viewed as an end in itself.

If we take these three objectives as the most plausible justifications for having a debarment remedy in the first place, what are the implications for Mr. Bistrong’s proposals for incremental debarment remedies, or for the “too big to debar” problem in the first place?

Let’s start with the first – the financial consequences of debarment for the firm – which for me is the most important consideration in this context. I guess my main question here is whether partial or incremental debarment has any real advantage over fines or other monetary penalties in terms of achieving appropriate deterrence—and if it doesn’t, why we would ever prefer the former over the latter. Take Mr. Bistrong’s proposal that the US government, instead of imposing total debarment, could instead impose a more limited form of debarment, such as temporary suspension from the (standardized) Federal Supply Schedule (but not for large negotiated contracts). We could do that, sure. But we could also (I think) impose additional fines that would equal the economic loss the firm would suffer if it were temporarily suspended from the Federal Supply Schedule; that would have the same financial impact on the firm, but it would not deprive the government of a potential supplier. And the second and third justifications for debarment noted above presumably wouldn’t apply with much force here: If the supplier is truly untrustworthy, there’d be little reason to allow it to continue contracting with the government for the big, non-standard, negotiated deals (the ones were fraud and corruption are greater risks anyway), and the moral disapprobation would be substantially diminished if the firm remains a government supplier. So in this case, unless we think the legal ceilings on fines and other penalties are simply too low to impose enough financial pain on firms, I’m not sure why we would choose incremental debarment of this kind, rather than simply hitting the firm with a larger fine (if we still think the firm is basically a trustworthy and reliable supplier) or debarring the firm altogether (if we don’t).

My reaction to Mr. Bistrong’s proposals to prevent the firm only from doing business abroad, or perhaps only in the country or countries where it paid illegal bribes, is similar, though I acknowledge the case for partial debarment here is stronger, because the second consideration—trustworthiness—is more salient. But here I’m not sure if that decision is one that the US government ought to be making on behalf of a foreign sovereign. When a US firm, or a firm that avails itself of US capital markets or territory, violates US law, the US has a clear and legitimate interest in punishing that firm. But even though I’m usually sympathetic to aggressive FCPA enforcement, I think it would be a bit problematic if the US were to say (for example) to BAE Systems, “We’re not going to debar you from doing business with us, but we’re going to prohibit you from doing business in Saudi Arabia.” (If the country where the bribes were paid wants to debar, that’s another story – there, the second justification above would be most compelling. But I take it Mr. Bistrong, the OECD, and others are focused on the remedies sought by the “supply-side” enforcing government.)

So while I admire the ingenuity of Mr. Bistrong’s proposals, I’m not (yet) convinced that partial or incremental debarment serves much purpose, as long as the scope for direct monetary penalties is large enough (which in the FCPA context I tend to think it is). If the purpose of debarment is to impose more financial pain on the firm, we can achieve that more efficiently by increasing the fines. If the case for debarment rests on the assumption that the firm had demonstrated that it is not a trustworthy partner, then partial debarment seems like too little—if we’re debarring because we think the past malfeasance indicates an unacceptable risk of future malfeasance, then we don’t want to deal with this firm at all until it cleans up its act. Similarly, if debarment is supposed to be a resounding moral statement that we (the government) refuse to do business with these scofflaws, then partial debarment seems not to serve that purpose, as it signals a kind of moral equivocation.

I’m not terribly sure about any of this, though, and I hope that perhaps Mr. Bistrong or others will weigh in further on the question of whether there may be a valuable role for partial debarment, as an alternative to increased fines.