A while back I posted a commentary on the proposal to add a so-called “compliance defense” to liability under the Foreign Corrupt Practices Act (FCPA). My basic take was that despite all the attention and controversy surrounding this proposal, in fact it would not make very much difference in practice. Without rehashing all the arguments in detail, my reasoning was basically as follows: First, corporate defendants (the only ones who would benefit from a compliance defense) are so reluctant even to be indicted—independent of the likely outcome if a case were actually to go to trial—that the addition of a formal compliance defense to liability would not significantly alter the bargaining game between the government and the corporate defendant. Second, the government already takes compliance efforts into account at several other stages in the process (and believes it is doing so appropriately), so the addition of the formal defense wouldn’t have much of an effect on the government’s position in settlement negotiations (which, as Jordan emphasized in a post from a few months ago, is really where all the action is).
I recently had an opportunity to discuss my hypothesis that the compliance defense wouldn’t actually matter much at a Duke Law School conference, where a bunch of white collar crime and FCPA experts who know much more about this subject than I do—including Duke Law Professor Sam Buell and Richmond Law Professor (and occasional GAB contributor) Andrew Spalding—pushed back against my argument. Among their many cogent criticisms, I wanted to address one in particular: If an FCPA compliance defense would make as little practical difference as I suggest, then why do the interested parties seem to care so much about it? Why (Professor Buell asks) have the Chamber of Commerce and the defense bar made this such a high priority on their FCPA reform agenda? And why (Professor Spalding asks) is the DOJ so dead set against it?
These are fair questions. I don’t have good answers, but in the interest of moving the conversation forward, let me suggest a few possibilities—and maybe folks out there in the blogosphere can react or offer their own explanations.
- One straightforward possibility—and the one that Professor Spalding and Professor Buell may have been driving at—is that I’m simply wrong that the compliance defense wouldn’t make much difference in the bargaining between the government and corporate defendants, because despite the rhetoric about corporations wanting to avoid FCPA indictment at all costs, in fact these negotiations all take place in the shadow of what would happen at trial, if the case were to proceed to trial. After all, very few criminal cases proceed to trial in any context—most settle, usually through plea bargains—but the addition or elimination of substantive defenses has a substantial impact on the content of those settlements (the bargaining takes place in the “shadow of the law“). That’s definitely a possibility, but it’s hard to square with the claim—often made with particular vigor by advocates of the compliance defense—that the FCPA context is special and unusual precisely because corporate defendants cannot generally credibly threaten to go to trial, even if the DOJ adopts an implausible (or at least highly contestable) reading of the statute. If that latter premise is true, then my original critique stands, and the reasonable question posed by Professors Buell and Spalding remains unanswered.
- Another possibility is that the participants in this debate simply haven’t fully understood the reasons why the compliance defense is unlikely to make a practical difference, and they’ve been fighting this out based on a misunderstanding, or at least an overestimation, of what the substantive impact of this defense would actually be. That’s not impossible—people misunderstand these sorts of things all the time—and it would certainly gratify my ego to believe that I’d seen something all these other sophisticated parties had missed. But that same fact makes me skeptical that this is in fact the right explanation.
- Here’s a variant on the last possibility: Some of the strong reaction to the proposed compliance defense (both pro and con) may be a particular manifestation of a more general instinctive reaction to prosecutorial discretion in this area. One of the striking things about the FCPA (and possibly other areas of corporate criminal law enforcement) is that so much of it—including the interpretation of the underlying legal liability standards—is shaped by prosecutorial interpretation, with relatively little judicial involvement. Some people (most of them prosecutors) are fine with this. Others (including many defense lawyers, but also including many lawyers more generally) find this disturbing, and possibly an affront to the very notion of the “rule of law.” So maybe part of the attraction of a compliance defense is that it seems, to its proponents, like a way to make FCPA enforcement more law-like—and prosecutors may react negatively precisely because the implicit message of adding such a defense is a distrust of prosecutors and how they choose to exercise their discretion. Of course, if my original analysis is right, the addition of the defense wouldn’t actually change the role of prosecutorial discretion all that much—but perhaps the addition of the compliance defense might still have an expressive function. And perhaps, contrary to my suggestion in my original post, the expressive value of a formal compliance defense might, through some complex psychological mechanism, influence settlement negotiations between the DOJ and corporate defendants, even if the latter still couldn’t credibly threaten to go to court and test the defense there.
- Here’s another possibility, at least for the advocates of the defense: Perhaps the compliance defense would indeed make a difference–not in the negotiations between corporate defense counsel and DOJ prosecutors (as is usually assumed), but rather in the discussions between corporate counsel (internal or external) and corporate executives. There’s a cynical version of this argument and a more charitable version. The cynical version goes like this: The corporate defense bar—FCPA Inc., as it’s sometimes derisively called—has an interest in scaring corporations into spending tons of money on FCPA compliance services. They do this in part by exaggerating FCPA risks (“They’ll come after you if you buy a foreign official a cup of coffee!”), and in part by emphasizing the importance of implementing a “gold-plated” FCPA compliance program. Even if the compliance defense wouldn’t actually make much difference to case outcomes, it may be a lot easier to “sell” the need for a fancy compliance program to corporate executives if one can point to a formal compliance defense in the law; that’s easier for a non-lawyer to understand than a discussion of prosecutorial discretion, sentencing guidelines, etc. So, the cynical version of the argument suggests, the focus on the compliance defense is less about actually changing negotiations and more about drumming up business for FCPA Inc. The charitable version of the argument is actually quite similar, except that it is less cynical about motives and more sympathetic to the need for investing substantial amounts in FCPA compliance programs. On this version of the argument, firms really do need to be spending more on compliance, but it is hard for lawyers and other compliance officers to convince executives who have not been through the ordeal of an FCPA investigation to invest adequately. A formal compliance defense, on this account, would be a helpful way for the lawyers and compliance officers to convince skeptical executives that a more elaborate compliance program is a good investment—even if the compliance defense per se would not make much of a difference. I’m not sure I find either version of this argument persuasive, and neither version fully explains DOJ’s resistance (especially since DOJ seems to want to encourage more investment in compliance programs), but it’s at least an intriguing possibility.
- One more possibility: Maybe the premise of Professor Buell’s and Professor Spalding’s critique is not actually corect—maybe neither the DOJ nor the business community and defense bar really do care all that much about the compliance defense. It’s true that the Chamber of Commerce has advocated for it vigorously, as have academic supporters of the proposal. And it’s true that the Department of Justice, when asked, has vigorously opposed it (again, with the support of many scholarly commentators). But using strong language about a proposal, and investing significant resources or political capital in pushing or resisting it, are two very different things. It’s not at all clear that either side in this debate have shown much of a willingness to make the compliance defense a top priority. So maybe there’s an implicit recognition on the part of both sides that this reform is not worth fighting that hard over (though when it comes up, it’s relatively cheap to use very strong rhetoric, pro or con).
That’s the best I can come up with right now for possible explanations. Anyone out there have further thoughts on why the proposed compliance defense seems to attract so much attention, and such forceful language, despite my arguments as to why it wouldn’t make much difference at all in the expected outcome of FCPA cases?
This is truly insightful. For the most of time when a deal comes into closing, we normally liaise with the special FCPA counsel that the client retains to obtain pages of draft FCPA policy form, which serves as a closing deliverable. Firms are charging their corporate clients a lot of billable hours in connection with the FCPA related services, which sounds like the “FCPA inc.” as mentioned in your article above. It is always a question that I am thinking, to what extent these few pages really influence a corporate’s behavior in their day-to-day business life. Will the extra charge of thousand US dollars or these few pages in the closing bible for a past deal really keep them alert of the FCPA threats?
Or can FCPA guideline put into more details about how to constitute an effective compliance defense? If the compliance defense is really reduced into statutes, I expect at least the guideline can give some hints or specific guidance in connection with the compliance defense and what I can think of now is that a mere policy in words could not be a defense. Something enforcement mechanism shall be added to make it sufficient.
I am one of those who feel uncomfortable about the current way FCPA cases are settled — behind closed conference room doors with little information about the settlement put in the public domain. A former federal prosecutor representing the company holds a series of meetings with current federal prosecutors, perhaps ex-colleagues, and a settlement emerges. All very clubby. A bit too clubby for my “rule of law” taste. If a compliance defense helps shine some light of the process, I am all for it.
That all seems reasonable (though perhaps my own instincts are slightly different). Nonetheless, I don’t think it really addresses the question I was trying to raise in my first post, namely: Even if you’re right to be concerned about this, why would you think the compliance defense would make any difference? The cases would still be settled (or so I claim) “behind closed conference room doors … [with a] former federal prosecutor representing the company hold[ing] a series of meetings with current federal prosecutors” (to use your words). If the settlement negotiations are really as “clubby” as you suggest, that’s all the more reason to doubt that the addition of a formal compliance defense to liability defense would make much difference, as you imply the defense counsel aren’t really likely to be aggressive pit bull types, constantly threatening to go to trial, etc.
That said, maybe your reaction provides some suggestive evidence (albeit just one data point) in favor of the hypothesis I raise in my third bullet point in the above post: those who are troubled by the apparent lack of legal constraint on these negotiations my be instinctively drawn to something like the compliance defense, because it _feels_ as if it injects some more “rule of law” into this whole process, even though in practice it wouldn’t (or so I claim). What do you think? Or do you have an account as to why the addition of a formal defense would actually change the culture you describe and criticize?
It is more an instinctual discomfort about the lack of rule of law virtues than evidence that is behind my support for a compliance defense. But since evidence is impossible to come by given that the “process” is secret, what other grounds do I have to argue from? That’s the rub and the thought is that the compliance defense might help, ever so slightly, to alleviate the problem created by the the inability of outsiders to judge the outcome. If the settlement reached during the negotiation gives too little or too much weight to the defendant’s compliance efforts — as spelled out in the statute — then outsiders can gripe.
The real problem is the secrecy of course. Especially when combined with the thicket of agency problems involved. Are the interests of the prosecutors, their former colleagues representing the defendant, and the corporate executives that oversee defense counsel all aligned with the public interest in enforcement? One can easily conjure up scenarios in which they are not: prosecutors want a splashy victory and the executives are happy if they escape personal liability. The former prosecutors can’t ruffle feathers. Litigation is not an option given the impact of an indictment on the client. If the threat of litigation is not credible, they know they will be back before the prosecutors again representing another client,
I can think of three ways to address the problem. One would be to take the sting out an indictment so that companies would be more willing to challenge over-zealous prosecutors. The second would be to make the negotiations a little less clubby by stringent “cooling off” rules. Suppose a former prosecutor were barred from dealing with DoJ on criminal matters for five years? (There are plenty of federal civil cases and state cases of all kinds to keep them employed.)
Third, require greater disclosure about the settlements. How about a statement from prosecutors justifying the settlement terms? Yes, collusion between the parties involved would still be a possibility, but it would require a conscious decision on their part. My instinctual feeling is that today the settlements are the result of an invisible hand — the outcomes produced by the way the parties interests align.
I am not the only one whose instincts make them uncomfortable about secrecy in the criminal justice system. In a November 20, 2014, article in the New York Review of Books federal judge Jed Rakoff cites another individual uncomfortable about secrecy in the process as well: Thomas Jefferson. Rakoff writes that it was “Jefferson’s perception that a criminal justice system that is secret and government-dictated ultimately invites abuse and even tyranny.”
Judge Jed Rakoff has been raising concerns about how the incentives of those in the criminal justice system can produce sub-optimal outcomes for years, first with SEC settlements that let defendants reach a deal with the SEC without admitting wrongdoing and more recently about the one-sides nature of plea bargains with criminal defendants. See http://www.nybooks.com/contributors/jed-rakoff/. His solution for the problems with the latter is judicial oversight of the bargains. Perhaps this would serve to improve outcomes in FCPA cases.
Fair points, Rick.
Do you think a formal compliance defense would provide significant marginal benefit beyond its present recognition as a mitigating factor (in the sentencing guidelines)?