Occasionally one hears—particularly though not exclusively from the U.S. business community and corporate defense bar—the assertion that aggressive U.S. enforcement of the Foreign Corrupt Practices Act (FCPA) is the result, at least in part, of the desire to raise revenue for the U.S. government. (See here, here, here, and here.) This claim that the FCPA is a government “cash cow” is sometimes offered as a knowing (or cynical) explanation for why the government is allegedly “over-enforcing” the statute. Even among some scholars with less of a personal or professional stake in criticizing the U.S. government’s motives, the idea that FCPA enforcement advances the U.S. national interest by increasing U.S. government revenues seems to be occasionally finding its way into the discourse.
There are, to be sure, lots of legitimate questions about the motives and wisdom of the U.S. government’s current approach to enforcing the FCPA. But the notion that FCPA enforcement is driven by the desire to raise revenue (from beleaguered, helpless multinational corporations) is just implausible. Indeed, I’m surprised so many extremely intelligent people seem to entertain this argument rather than dismissing it outright.
Why do I think it’s so implausible? Two main reasons:
- First, even though the total FCPA fines and penalties paid annually to the U.S. government seem large, they are very small relative to the overall U.S. government budget. Over the five-year stretch from 2010 to 2014, the annual amount recovered by the U.S. government from corporate defendants in FCPA cases was around $972 million, which certainly sounds like a lot. However, total U.S. government revenue in the 2014 fiscal year was a little over $3 trillion. Average annual FCPA penalties are therefore less than a tenth of a percent of total U.S. government revenue. Even compared to the category into which FCPA penalties (and other fines and penalties) fall, “Other miscellaneous receipts,” average FCPA penalties only amount to around 2.6% of the roughly $37 billion that the U.S. government took in in FY2014. By comparison, receipts from corporate income taxes (a relatively small proportion of U.S. revenues) were about $321 billion in FY2014, more than 330 times higher than the average total FCPA penalties over the last five years. Moreover, in thinking about whether the aggressiveness of the DOJ and SEC in FCPA cases is motivated by revenue concerns, what matters is not total FCPA fines and penalties, but rather the difference between (A) total FCPA penalties with an aggressive enforcement strategy (one that, as the critics would have it, whacks the hapless corporate defendants like a piñata until the cash falls out) and (B) total FCPA penalties under a more moderate enforcement strategy. How much of a difference, in annual dollar terms, would that difference in enforcement strategy make? If the U.S. government took a less aggressive approach to enforcing the statute—more along the lines of what the critics claim they want—by how much would it reduce the average annual FCPA penalties paid to the U.S. treasury? By 10%? 20? Let’s be generous and say that if the U.S. government were less aggressive in its FCPA enforcement strategy, average annual FCPA penalties would drop by one-third—that is, by approximately $324 million. If that’s the case, then (again taking FY2014 as a baseline) the U.S. government’s aggressive FCPA enforcement strategy increases the U.S. government’s total revenue why a whopping one-hundredth of one percent.
- Second, and perhaps more importantly, there is no evidence that the DOJ prosecutors and SEC enforcement officials have any structural incentives to focus on revenue generation as an objective, nor is there any reason to suppose that their professional backgrounds would make them think about their jobs in revenue-raising terms. (It’s important to keep in mind here that none of the penalties that the DOJ or SEC collect in FCPA cases go directly into either agency’s budget; under the Miscellaneous Receipts Statute, that money goes to the U.S. Treasury. So claims that the DOJ uses FCPA enforcement to supplement its own budget are particularly wide of the mark.) I’ve never seen anyone point to a shred of evidence that the Treasury Department or the Office of Management and Budget consult with the DOJ or SEC about the the role of the FCPA, or any other criminal statute, as a source of government revenue. This does not mean that DOJ and SEC officials don’t care about getting big fines and penalties. Lots of these folks are career attorneys who take pride—and reap career benefits—from securing big settlements in high-profile cases. Also, as I have argued elsewhere, the large amounts of money collected by the U.S. government in FCPA cases may be helpful to proponents of vigorous FCPA enforcement in arguing for the allocation of government resources to FCPA enforcement–perhaps in the face of skepticism about whether fighting corruption abroad is a worthwhile focus for the U.S. government. I don’t doubt that the rhetoric of “enforcing this statute (more than) pays for itself” sometimes finds its way into these debates about budget allocation. And it’s certainly possible, as FCPA critics often allege or imply, that these incentives to secure large, headline-grabbing penalties might distort enforcement practices in undesirable ways. But to evaluate whether or not this claim is true, we’d need to examine carefully the motives and incentives of prosecutors (or perhaps of the DOJ and SEC as organizations), rather than making broad claims that the U.S. government has an interest in (over-)enforcing the FCPA as a way to raise government revenues. That latter claim is flawed as a matter of logic and lacks any persuasive supporting evidence.
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As highlighted in the below post, some of the most forceful comments on this issue have come from former DOJ and SEC enforcement officials, including most notably the former Assistant Chief of the DOJ’s FCPA Unit. Given the background of these individuals, such comments are hard to ignore.
http://www.fcpaprofessor.com/totally-milking-the-fcpa-cash-cow
You’re right that we shouldn’t ignore the comments of these individuals. But we should of course subject them to critical scrutiny (hence the post). And we should also take a careful look at what they’re actually saying.
The link you included in your comment includes a number of “FCPA is a cash cow” comments, but only two from former SEC/DOJ officials who worked at relatively senior levels specifically on FCPA issues:
* The first is a Forbes article co-authored by Michael Perlis, who worked at the SEC in the 1970s and is currently a partner at a private firm (http://www.forbes.com/2009/12/08/foreign-corrupt-practices-act-opinions-contributors-michael-perlis-wrenn-chais.html). It’s true that this article contains–in passing– the statement “governments will keep pursuing corrupt business practices for one very simple reason–it’s lucrative,” there is no analysis or further development of this idea. The article certainly doesn’t suggest that FCPA enforcement is for budgetary reasons, and in context it seems strongly supportive of the FCPA enforcement uptick (though it’s written mainly as a warning to corporations to take compliance seriously).
* The second, and the one you emphasize, is a quote from a 2010 American Lawyer article (no longer available online) from William Jacobson, former Assistant Chief for FCPA enforcement at the DOJ (until 2008), and now also a partner at a private firm. You quote Mr. Jacobson as saying “[t]he government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.” Again, though, without context, it’s hard to know whether Mr. Jacobson is actually saying that the main reason for increased FCPA enforcement is to raise revenue–something that I highly doubt. I would instead interpret Mr. Jacobson’s comments–and Mr. Perlis’s–as emphasizing that FCPA enforcement is lucrative/profitable in the sense of “successful,” or achieving recoveries sufficient to justify the expenditure of resources (in the political rather than budgetary sense). And in your own interview with Mr. Jacobson (http://www.fcpaprofessor.com/point-counterpoint-with-billy-jacobson), he seems quite clearly in favor of aggressive FCPA enforcement, doesn’t see it as mainly a revenue-raising measure, and indeed emphasizes that the government’s goal (in the specific context of the Siemens settlement) was to sufficiently punish the company to deter future wrongdoing, without destroying the company in the process.
It’s probably also worth noting that, without in any way diminishing the important contributions of Mr. Perlis or Mr. Jacobson, neither of them has been in government during the surge in FCPA enforcement, and so are not in a position to provide any “insider” account of what people in those offices are thinking. And this may seem like a small thing, but neither of them uses the pejorative “cash cow” language. Rather, both of them seem supportive of robust FCPA enforcement.
So, yes, by all means, we should pay attention to what knowledgeable insiders have to say about how their offices function. But we also need to be careful to read their remarks in context, and to subject them to critical scrutiny. Having done so, I stand by my original post. If you want to continue to push the “cash cow” explanation for FCPA enforcement–the claim that it’s really about raising revenue, not about a good faith effort to achieve the objectives of the statute–then I look forward to hearing your substantive arguments.
Jacobson was most certainly in the DOJ’s FCPA Unit when enforcement began to increase.
I am not suggesting that the “cash cow” dynamic is the main or even in the top 3 reasons why FCPA enforcement has generally increased. Those reasons are clear as the below post highlights.
http://www.fcpaprofessor.com/upwardtrend
Rather, the “cash cow” dynamic is relevant to the “total mix” of information sophisticated observers should have regarding the general topic.
One also has to consider what “the numbers” mean to those select few in the top ranks of the DOJ and SEC’s FCPA Units. The below article “For Profit Public Enforcement” is worth a read and there are many FCPA parallels.
http://www.fcpaprofessor.com/for-profit-public-enforcement
Yes, Mr. Jacobson was there in 2007-2008, when the increase started (though right at the very early stage). I certainly respect his views — I only meant to suggest that his “insider” perspective on the last eight years is necessarily limited. My bigger question is whether he really endorses the “cash cow” thesis.
More importantly, thanks for the clarification on the relative significance of the “cash cow” argument in your assessment of FCPA enforcement trends. Perhaps our views are not as far apart as it originally seemed. That said, I do think there’s an important divergence here. First, I would go beyond saying that the “cash cow” dynamic isn’t in the “top 3 reasons,” and would argue (as I did in the original post) that it’s not really a factor at all (at least if the argument is framed, as it often is, in crude revenue-raising terms). Second, I find the argument objectionable because it often seems pitched (intentionally or otherwise) as a way of impugning the DOJ’s motives, and of suggesting a psuedo-sophisticated, cynical explanation for what’s going on. For example, one of the critical comments you link to in the “cash cow” post (the one you linked to in your first comment) declares: “I’m pretty sure using the justice system as an ATM wasn’t what the authors of the FCPA had in mind.” That’s much stronger language than simply suggesting that the “cash cow dynamic is relevant to the total mix of information sophisticated observers should have regarding the general topic.” But I take it that you do not in fact endorse that strong version of the thesis.
As for the Lemos & Minzer article you discuss in the post linked at the bottom of your last comment: Yes, I’m familiar with it, and it’s a good paper (though I’m not sure I agree with all of it). Importantly, though, Lemos & Minzer emphasize that the incentives of salaried federal prosecutors to get big monetary recoveries is NOT financial, but is reputational, etc. I think that’s plausible, as I emphasize at the end of the original post. But that’s a very different argument from the revenue-raising argument. I’m not sure how much it explains prosecutorial behavior in the FCPA context, but that’s a debate worth having. My objection is not to that line of argument, but to the crude “FCPA as ATM” or “FCPA enforcement to make up budget shortfalls” claims that one sees far too often in these discussions.
The statements I referenced / linked to in the original post were to highlight that it is a common held perception, I most certainly do not endorse every statement / link I have on my website. When I said top 3, I used that term loosely, and indeed the other link I included in the string lists about 4 or 5 other practical reasons for the general increase in FCPA enforcement (which is sort of an odd thing to say given that FCPA enforcement has generally decreased since 2010, but that is an issue for another day I suppose).
Great, that’s helpful. One of the things I like about the blog format is the ability to work through these issues constructively, even if disagreement remains. Of course your inclusion of links/comments to demonstrate that the “FCPA cash cow” perception is common does not imply your full endorsement of that perception, and insofar as I misinterpreted your personal position, I’m happy to stand corrected.
I think that we do agree that the crude version of the FCPA cash cow story is out there. It also seems that we agree that the crude version is wrong (or at least grossly exaggerated). Finally, it seems like we would both agree that a more sophisticated version of the argument, in which government enforcers might have (excessive) incentives to focus on large monetary awards, might be plausible.
Insofar as we do differ, I think it would be along the following lines: (1) On the argument that the desire to raise revenue is one of the SEC/DOJ’s motives, I think my position is almost certainly not, while your position seems to be that it’s likely one of the factors in the mix; (2) On the more sophisticated version of the argument, where prosecutors have incentives to get big dollar settlement, I’m open to persuasion but still agnostic, while you seem more convinced.
If that’s indeed where we stand, terrific — this exchange has been helpfully clarifying.
Chapter 6 of my book is titled “Reasons for the Increase in FCPA Enforcement”
🙂
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You miss the history of regulatory enforcement as a source of government revenue; a history that goes back to the Customs rules and regulations of the 19th Century.
I wouldn’t be surprised if I missed something — it happens all the time — but I confess I don’t quite follow your argument here. Two main responses:
First, it’s true that, in the early part of U.S. history (especially before the income tax), the federal government relied substantially on customs duties and a variety of fees as a source of revenue. But I’m not aware of any history of relying on criminal fines as an important source of federal revenue. (There was relatively little federal corporate criminal law in the 19th century. There wasn’t even a DOJ until 1870, and no SEC until 1934.) Perhaps it’s true that, as you say, the federal government relied on “regulatory enforcement as a source of government revenue,” but I’d like a little more detail on what sort of “regulatory enforcement” you mean.
Second, even if it’s true that at some point in its history the U.S. viewed criminal fines (or similar) as an important source of government revenue (and prosecutors had incentives to use their power for revenue-raising purposes), I’m not sure why that’s ultimately relevant to the arguments I made in the post. My argument was not that it could NEVER be the case that a jurisdiction might use its power to impose fines to raise revenue, and as a result might over-enforce or abusively enforce certain laws. For example, the DOJ’s report on Ferguson, MO, suggests that this was very much what has been going on there at the local level. My point was that right now, there is essentially no evidence that this phenomenon is occurring in the U.S. federal government–whatever may or may not have been going on in the 19th century.
In our exchange above, Professor Koehler and I had somewhat different interpretations of some remarks by William Jacobson, former DOJ Assistant Chief of the FCPA unit. I’ve been in touch with Mr. Jacobson, who asked me to post the following comment clarifying his views:
“I don’t think there is a profit motive at DOJ. I do think that the huge dollar amounts of some of the fines help justify dedicating more resources to the FCPA enforcement effort. I also think that the huge dollar amounts drive headlines and headlines also drive FCPA enforcement to a certain degree. We are all human and like seeing our names and our cases in the headlines. In my opinion, however, the biggest driver of FCPA enforcement, is the belief that corruption hurts the world in very real ways. FCPA prosecutors believe that and it is that belief that provides the vast majority of their motivation. Your point about FCPA fines not going to DOJ’s budget is spot on and a quick visit to the Fraud Section’s offices on 14th Street prove this conclusively; there may not be less attractive government offices and this is coming from a guy who started his career at the Bronx DA’s Office.”
(For those of you who are Annie Hall fans, I like to think of this as my Marshall McLuhan moment (https://www.youtube.com/watch?v=9wWUc8BZgWE).)
I don’t have an interpretation of Mr. Jacobson’s previous comment. It speaks for itself. “The government sees a profitable program here and it goes to ride the horse until it can’t anymore.”