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.