Private FCPA Enforcement: Some Troubling Trade-Offs

In my last post, I suggested that one possible drawback to dramatically ramping up enforcement of the Foreign Corrupt Practices Act against individuals (from the perspective of those who, like me, favor aggressive FCPA enforcement) is that individual defendants are relatively more likely to litigate than are corporate defendants. This not only might entail a greater drain on the resources of the government enforcement agencies—a familiar and well-understood concern—but it could also lead to adverse appellate rulings on the meaning of key FCPA provisions (particularly if the targeting of more individuals also entails the targeting of relatively more sympathetic individuals). In this post, I want to raise a similar concern in connection with a prominent proposal for increasing the FCPA’s deterrent effect: the addition of a private right of action under the statute.

The FCPA in its current form does not authorize private individuals to sue defendants for alleged violations of the statute. Although some other statutes might authorize certain forms of private FCPA enforcement—for example, in the form of shareholder derivative suits, or suits alleging violations of the antitrust laws or the RICO Act—these forms of private recourse are quite limited in their availability. (I won’t go into all the reasons in this post—Professor Gideon Mark has a nice discussion in his paper on the topic.) Yet many people (including Professor Mark) have advocated the addition of an express FCPA private right of action which, in the view of its proponents, would substantially enhance FCPA deterrence. This idea has attracted at least some interest in the U.S. Congress, though the proposed bills to add an FCPA private right of action have not yet gone anywhere.

My natural instincts are to support a proposal along these lines, both because I’m more of a “hawk” when it comes to FCPA enforcement, and because I’m generally an enthusiast for the “private attorney general” model for enforcing public law. And I could still be persuaded that a private FCPA action is a good idea. But I have concerns similar to those I raised in my last post about greater targeting of individuals, as well as some additional, closely related worries. Here are the main worries, as I see them:

As I discussed in my last post, in the typical FCPA enforcement action—brought against a corporation by the Department of Justice and/or Securities & Exchange Commission)—the corporation has a very strong incentive to settle (prior to indictment). Indeed, these cases are almost never litigated, but rather are resolved through negotiations. In these negotiations, the government has a lot of leverage, precisely because most corporate defendants desperately want to avoid an indictment. This, in turn, has enabled the government to adopt very broad (in my view persuasive, but certainly contestable) readings of many of the FCPA’s provisions, including the definition of “foreign official,” the scope of the exceptions for “facilitating payments” and bona fide promotional expenditures, the “business purpose” test, the meanings of the state-of-mind terms “knowing,” “willfully,” and “corruptly,” the scope of the government’s jurisdiction under the statute, etc.

But this doesn’t mean the government can or does try to impose the harshest FCPA sanctions it can, at any opportunity. Even though the government has adopted a broad view of the statute’s scope, the SEC and DOJ have an incentive to select their targets, and calibrate their sanctions, so that the really severe penalties are reserved for the worst actors (and/or the cases where the evidence of misconduct is clearest). Much of this is no doubt due to the fact that government enforcers, whatever their failings, take their jobs and their responsibilities seriously—they want to make sure the punishment fits the crime. They also have limited resources, which also gives them a strong incentive to choose their battles judiciously. But there are also some strategic concerns at work here:

  • The government has an incentive to preserve a reputation for reasonableness, to encourage self-disclosure by corporations (who are more likely to self-disclose if they expect fair treatment, and if they anticipate that disclosure will, in and of itself, be considered a mitigating factor).
  • The government is likely also aware that, although most corporations are anxious to avoid indictment, if the government overreaches, the target might refuse to knuckle under, and litigating and FCPA case against a well-resourced corporate defendant is both costly and risky for the government.
  • Politically, the DOJ and SEC are well aware of the longstanding efforts by the U.S. Chamber of Commerce and other advocates of FCPA “reform” to use accusations of government overreach and prosecutorial overzealousness to delegitimatize current FCPA enforcement efforts. And DOJ and SEC officials likely want to avoid unnecessarily giving these critics additional ammunition.

With that as background, what would happen if we were to amend the FCPA to add a private right of action, perhaps similar to the “citizen suit” provisions in many U.S. environmental laws, or to the more narrowly drawn private remedies available under U.S. antitrust and securities laws? On the one hand, we might get a lot more FCPA enforcement, both because we’d have all of these “private attorneys general” who could bring cases that the DOJ and SEC just don’t have the resources to pursue, and because these parties might have strong incentives to uncover more information about potential FCPA violations. But, even if we limit ourselves to the perspective of someone who wants more aggressive FCPA enforcement and stronger deterrence of foreign bribery, opening up the floodgates of private litigation might entail some significant risks:

  • First, the result of private enforcement would likely be much more litigation—including appellate litigation over the statute’s meaning. Corporations may have strong incentives to avoid FCPA indictments at (almost) all cost by settling with the government, but they do not have nearly the same incentive to settle with private plaintiffs. True, settling is often the more economically rational decision, but the possibilities for negotiation breakdown are much higher when the corporation views litigation as a calculated risk rather than a disaster. Indeed, sometimes corporate defendants might have a strong incentive to litigate at least some of the private FCPA suits brought against them, in order to establish a reputation for resolve and deter “nuisance” suits. As I pointed out in my last post, more litigation means a greater risk of an adverse appellate decision (or even a Supreme Court decision) on the FCPA’s meaning, which potentially devastating effects on the DOJ and SEC’s FCPA enforcement efforts.
  • Second, private FCPA plaintiffs don’t have anything like the incentives that government enforcers have to select cases judiciously, by focusing on the most egregious conduct by the least sympathetic defendants, where the evidence of misconduct is strongest. This could have two distinct but related consequences. First, building on the previous point, it may mean that a private right of action under the FCPA would result not only in courts seeing a lot more FCPA cases, but also that the cases that they do see involve much more sympathetic defendants—and where it may seem to the court that the only way to avoid excessive FCPA liability is to curtail the statute’s substantive reach. Second, private FCPA enforcement might make it much more likely that Congress amends the FCPA to limit the statute’s substantive scope. After all, right now when the Chamber of Commerce or some other FCPA “reform” advocate suggest all the crazy potential consequences of the government’s broad construction of the Act, government representatives can (and do) reply by pointing out that these hypothetical absurd consequences are just that—hypothetical. It’s very hard to find actual examples of absurd prosecutorial overreach (and when the Chamber and its allies have tried, their examples have been quickly and easily debunked). But with private suits, it’s much more likely that we’ll see real-world cases where a private plaintiff, relying on the DOJ & SEC’s interpretation of the FCPA, brings a case that the DOJ & SEC would never have brought. And if Congress chooses not to cut back on the private right of action, it might well instead respond by cutting back on the substantive scope of the statute. Moreover, something like the proposed compliance defense—which I have argued is unnecessary and irrelevant in the context of public FCPA enforcement actions—might start to look considerably more reasonable in the context of private FCPA enforcement.
  • Third, potential private liability under the FCPA could alter firms’ incentives to self-disclose FCPA violations. Right now, self-disclosure to the DOJ and SEC is made more appealing by the fact that the people in these agencies are (mostly) reasonable, and have an incentive to take the corporation’s good faith and cooperation into account. Self-disclosure also seems more appealing when, from the corporation’s perspective, settling the case with the government means that the matter is concluded, and the corporation can move on. As I have suggested before in a different context, the possibility of additional liability, and the need to engage with other parties besides the DOJ and SEC, may make self-disclosure less attractive. And that could be a big problem, because self-disclosure is the single most common way that corporate FCPA violations come to light.

Now, many of these concerns about private FCPA enforcement might be addressed through a variety of mechanisms to limit, channel, or otherwise control these private suits. I may take up some of these possibilities in a future post. Also, the risks I’ve sketched above are only risks, not certainties—and they may be risks worth taking, given the significant advantages of private enforcement in the FCPA context. Nonetheless, as I argued last time with respect to targeting individuals for criminal FCPA liability, these risks seem to me worth taking seriously.

6 thoughts on “Private FCPA Enforcement: Some Troubling Trade-Offs

  1. While I was sympathetic to the concerns you expressed in your post regarding increased individual enforcement, I think your fears are much more well grounded with respect to the private right of action. As I will explain in a (hopefully) forthcoming post inspired by your post last week, I think that individual defendants, as a general matter, pose a far less substantial threat to the DOJ’s robust interpretations of the FCPA. What has insulated the statute for so long is that the government has ordinarily pursued corporate violations of the FCPA through criminal charges alone or criminal charges in conjunction with civil liability; rare is the case that it has pursued substantial civil penalties as a stand alone matter with no prospect of criminal prosecution. The beauty of this model is that it has largely sidelined the biggest, most well-funded and well-motivated defendants — corporations facing hundreds of millions in fines — and removed them from direct battles over the meaning of this statute. DOJ has, in turn, been left with years of cushion to build its program and legal arsenal, and to now deploy that against individual defendants who often — though, obviously not always — have fewer resources and less sophisticated counsel to raise sustained legal challenges to the FCPA. And as long as the DOJ picks and chooses its cases carefully, it can make sure to pick cases that are strong both as a legal and an evidentiary matter.

    The problem with a private right of action, as you point out, is that it removes these two favorable conditions: (1) it brings corporate legal counsel back into courtroom battles over the FCPA and (2) it removes from DOJ/SEC the power to screen and select the most promising cases.

    Though it’s likely quite obvious at this point, it’s worth coming back full circle to why I think the concerns about increased individual enforcement are less well-grounded. Theoretically, increased individual enforcement could lead to more sympathetic defendants and more legal challenges. But the key there — and what is absent with a private right of action — is that (i) corporate defendants remain sidelined and (ii) DOJ and SEC retain the power to pick and choose cases, so they can effect strategic or tactical retreats for the overall well-being of the enforcement program. So the concern about endangering the robust interpretations of the FCPA that have so far carried the day may exist, but control over that risk remains in the government’s hands and safely out of the reach of corporate counsel. Unfortunately, the recommendation to create a private right of action carries neither virtue.

    • Very nice observations, and I look forward to your post on this and related topics.

      While I generally agree with the point you make about individual criminal prosecutions raising less of this concern than private civil actions, what I’d say here is that the main worry is that if the DOJ significantly expands targeting of individuals — if it increases it by 3 or 4 or 10 times — then it’s probably inevitable that there will be a lot more cases with more sympathetic defendants and/or less compelling evidence of egregious wrongdoing, undermining the second of the two factors you highlight as to why DOJ has done so well with these cases in the past. Is this a big concern? I don’t really know. Maybe not. And targeting a few more individuals, carefully selected, would probably make no difference. But going after a substantially larger pool (as some have advocated) poses greater risks, I think.

  2. Matthew, you fear that if the Department of Justice’s broad interpretation of the FCPA is exposed to judicial review, it will be narrowed thus opening the door to corrupt, or at least undesirable, conduct by those subject to the act. I appreciate your preference for the broadest possible interpretation of the act but wonder if it should come at the expense of judicial oversight. By sacrificing it, we leave the Department with a great deal of unchecked power.

    You argue that there are three factors holding this power in check: i) Department personnel’s desire to be seen as “reasonable”; ii) their fear that too broad an interpretation would prompt costly and time-consuming litigation and iii) too aggressive enforcement would fuel support for legislative change. I am not so sure these considerations are that strong, and even if they are today, they may not be tomorrow. Relying the agency’s self-restraint is always a risky proposition. One risk is that the Department might suddenly exercise too much self-restraint. It is not beyond peradventure, as a brief writer might say, that the President taking office in 2017 would find the arguments in favor of a narrow interpretation of the FCPA persuasive.

    Moreover, as a matter of national policy the Department’s current interpretation might not be optimal. While it may advance the global interest in less corruption, there may be other considerations that when put into the balance weigh in favor of a less expansive reach. Companies subject to the FCPA may be passing on investing in very corrupt countries because they know the investment would require “protection” in the form of bribes they cannot now pay without running afoul of the statute. Perhaps a narrower interpretation would give them the leeway to invest and that this investment would in turn spark the growth of a middle class that would bring democracy, the rule of law, and other good things.

    Farfetched? Maybe. But isn’t this the kind of policy argument that would be aired if the act were subject to judicial review. Maybe an appellate court would agree with this argument or others in favor of a narrower interpretation; maybe it wouldn’t. Whatever a court or courts decided, it would stimulate public debate, one that might lead Congress to accept whatever interpretation the courts adopted or to amend the law to change it. Yes, the result of the process might be a “bad” decision in the view of anticorruption advocates, but democracy doesn’t always produce “good” decisions. It does, however, produce them more often than any other method of governing.

    • Grist for the mill. A report out in the Wall Street Journal says banks are disputing the Department’s “aggressive” interpretation of FCPA. The banks are apparently claiming that giving jobs to relatives of managers of state-owned companies and other well-connected officials in China to help secure is not an FCPA violation. (One wonders if the banks’s lawyers are taking advantage of the back-and-forth on the issue featured on this blog.).

    • On your most general point, I agree that there are difficult trade-offs here, and the safeguards I point to might well prove inadequate… but I still prefer them (at the moment) to lots of judicial opinions. I realize that this may be somewhat contrary to the usual stereotypes of law professors as judge-worshipers, but I don’t always think judicial oversight is the best mechanism to use. Sometimes it is, and in other contexts I’ve advocated for, or defended, a more aggressive judicial oversight rule. But in this case I actually think the existing institutional and political checks on prosecutorial overreaching are pretty good (though of course there will always be individual cases where things go wrong), and I’m deeply distrustful of federal judges (who don’t know much about the FCPA, and who may be too sympathetic to what I would view as bogus arguments). But I realize that this is conjecture, and reasonable people could disagree as to the relative value of judicial versus non-judicial constraints on prosecutorial overreach.

      On your point about the possibility of an unsympathetic president/AG, I take your point entirely, and I think this is the very legitimate concern that many proponents of a private FCPA right of action have in mind. But I actually think that’s a less serious (though still real) risk. Partly this is because past Republican administrations have favored FCPA enforcement, partly it’s because the DOJ has a strong institutional interest in maintaining vigorous FCPA enforcement, but mostly it’s because I think the risk that private enforcement could ultimately result in very hard-to-undo changes to the statute itself outweighs the concern that individual administrations might pursue less aggressive enforcement strategies. But again, I acknowledge that there’s a tricky trade-off here, and I could certainly be persuaded that my intuitions about how the balance comes out are wrong.

      As for your final point about the possibility that current FCPA enforcement is overly aggressive, and may be deterring firms from entering certain markets: Sure, maybe. That argument has been out there for a while. But on the basis of what I know about this (and I’ll freely admit the empirical evidence is a bit scanty), I just don’t believe this is a major cost, or that we’re on the “downward sloping” part of the social welfare curve on FCPA enforcement. That view is very tentative, but I definitely don’t think federal judges are better-positioned to make these kinds of judgments than are prosecutors (or just about anyone else). And sure, a judicial decision might “stimulate public debate,” as you say, but I have no particular reason to believe that such public debate would move policy in a desirable direction. Call me a cynic if you want, but for the moment I’d prefer to leave well enough alone.

  3. Pingback: Corruption Currents: Vancouver Emerges as Money Laundering Hub - FinancialRegulation

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