Although 41 countries have signed onto the OECD Anti-Bribery Convention, the United States remains the most active enforcer—by a lot. Two salient facts about the U.S. strategy for enforcing its Foreign Corrupt Practices Act (FCPA) are often noted: Sanctions against corporations are more common than cases targeting individuals, and most of these corporate cases are resolved by settlements—often pre-indictment diversionary agreements known as deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs). Both of these facts are sometimes exaggerated a bit: According to the OECD’s most recent composite data (for enforcement actions from 1999-2014), the U.S. imposed sanctions on 58 individuals (compared to 92 corporations or other legal persons), and of those 92 legal persons sanctioned, 57 reached a settlement via a DPA or NPA (meaning that 35 of them were sanctioned through a post-indictment plea agreement or—much more rarely—a trial). Still, it’s true that the U.S. enforcement strategy makes extensive use of pre-indictment settlements with corporate defendants, and that fact has attracted its share of criticism.
While most of that criticism (at least in the FCPA context) has come from the corporate defense bar and others opposed to aggressive FCPA enforcement, the use of DPAs/NPAs has been questioned by anticorruption advocates as well. Recently, the UK-based anticorruption NGO Corruption Watch (CW) published a report entitled “Out of Court, Out of Mind: Do Deferred Prosecution Agreements and Corporate Settlements Fail To Deter Overseas Corruption”; shortly thereafter, CW, along with several other leading NGOs (Global Witness, Transparency International, and the UNCAC Coalition) sent a letter to the OECD expressing “concern that the increasing use of corporate settlements in the way they are currently implemented as the primary means for resolving foreign bribery cases may not offer ‘effective, proportionate and disuasive’ sanctions as required under the Convention,” and “urg[ing] the OECD Working Group on Bribery to develop as a matter of priority global standards for corporate settlements based on best practice.” Last week, here on GAB, CW’s policy director Susan Hawley provide a succinct summary of the case for greater skepticism of the practice of resolving foreign bribery cases through DPAs/NPAs, and the need for some sort of global standard.
I disagree. While I have the utmost respect for Corruption Watch and the other NGOs that sent the joint letter to the OECD, and I sympathize with many of their concerns, I find most of the criticisms of the DPA/NPA mechanism, particularly as deployed by U.S. authorities in FCPA cases, wide of the mark. I also remain unconvinced that there is a pressing need for “global standards” for corporate settlement practices, and indeed I think that pushing for such standards may raise a host of problems. These issues—whether DPAs/NPAs are sufficiently effective sanctions, and whether we need common global standards regulating their use—are quite different, so I will address them separately. In this post, I will respond to the main criticisms of the U.S. practice of using DPAs/NPAs to resolve FCPA cases, focusing on the concerns emphasized in the CW report. In my next post, I will turn to the question whether the OECD, the UN Convention Against Corruption, or some other international agreement or body ought to try to establish global standards regulating the use of corporate settlements.
So, what’s wrong with the analysis in the CW critique of corporate settlements? Lots of things—so many that it’s hard to know where to begin. But before turning to my criticisms, it’s worth starting out by re-stating some of the main reasons why it might make sense to resolve some anti-bribery cases via corporate settlements:
- First, a settlement allows the government (and, of course, the defendant) to avoid the cost of a trial, as well as the potential uncertainty about the outcome. This is especially important in contexts where the government’s enforcement resources are limited.
- Second, the prospect of negotiating a more favorable settlement with the government gives corporations a stronger incentive to self-report violations and to cooperate with the investigation. While a similar result might be achieved through sentencing guidelines that take self-reporting and cooperation into account, the flexibility associated with settlement negotiations may be more attractive.
- Third, while the above advantages would apply whether a settlement is reached post-indictment (as in a traditional plea bargain) or pre-indictment (as in a DPA/NPA), the latter sort of settlement has additional potential benefits for corporate defendants—namely, the avoidance of the potentially significant adverse consequences of an indictment. These consequences might include (automatic) debarment from public contracting, or more general reputational harm associated with a criminal indictment. Why might it be attractive, from the government’s perspective, to create a mechanism that allows a corporate defendant to avoid these consequences? Three main reasons: (1) corporations’ desire to avoid indictment gives the government leverage in settlement negotiations; (2) for similar reasons, the desire to avoid indictment may strengthen corporations’ incentive to self-report and cooperate; (3) the adverse consequences of indictment (especially of draconian sanctions like debarment) may fall substantially on customers, innocent employees, and other third parties.
To its credit, the CW report acknowledges most of these points. But, oddly, the report doesn’t really answer most of them. Indeed, the report consistently relies not on any kind of sustained analysis, but rather on quotes from (or sometimes generalized references to) critics of corporate settlements (often in very different, non-FCPA contexts). Frankly, it’s quite frustrating to read, as the report’s argumentative strategy (over and over) is to imply the (fallacious) syllogism: “Here’s Practice X. Some people have criticized Practice X (often in another context). So Practice X is a bad idea.” But let me see if I can distill what I take to be the report’s main substantive critique of the use of DPA/NPAs, focusing in particular on the claim that these mechanisms generally fail to achieve “effective, proportionate, and dissuasive” sanctions in foreign bribery cases.
Let me start with the oft-repeated claim, emphasized in the CW report, that corporations will treat the fines they must pay to settle FCPA cases as a “cost of doing business,” and therefore won’t deter. I see this argument all the time. Maybe someone could reconstruct a version of it that’s sort of sensible. But the usual version of the argument–at least when framed as a criticism of settlements–has always struck me as kind of silly, for the following reasons:
- First, and most obviously, firms care about their costs of doing business! They care about them a lot. Firms are making an economic calculation when they decide how much to invest in their compliance and anti-bribery prevention programs, and those calculations will take into account the likely consequences of failing to prevent significant violations. So, fines hit companies’ bottom lines… and that’s good! And by the way, although rigorous quantitative evaluations are hard to come by, the overwhelming consensus of folks who work in this area seems to be that the surge in FCPA enforcement actions has led to massive increases in corporate investment in anti-bribery compliance—exactly what we should want to happen. (The CW report discusses several other areas, including financial fraud and product defects, where there’s troubling evidence that corporate settlements haven’t always effectively deterred or prevented recidivism, but nothing specific to the FCPA context.)
- Second, it may well be that current corporate fines are too low to achieve sufficient deterrence. I’m very sympathetic to that concern. But if that’s the case, the problem is not the fact that these cases are settling (and certainly not that they’re settling pre-indictment rather than post-indictment); the problem is that they’re settling for too little. And that may be a function not of prosecutors being overly generous, but of the underlying law not providing for sufficiently high penalties. So, if that’s the problem, the anticorruption community should be calling on the US (and the other OECD Convention signatories) to jack up the statutory penalties for violations, not to curtail or more aggressively regulate the use of diversionary settlements. Criticizing settlement practices for the (allegedly) inadequate size of the penalties is shooting at the wrong target.
- Third, it’s perhaps worth noting that many corporate settlements do not only impose monetary sanctions, but also require the firm to retain a corporate monitor for a certain period, to assess the company’s compliance practices and report back to the government about the company’s compliance with the terms of the settlement. This fact receives nary a mention in the CW report.
Now, the CW report also makes a couple of more specific claims that corporate settlements undermine deterrence because they (A) have become a substitute for individual prosecutions, and (B) allow companies to avoid debarment. A few responses:
- With respect to the prosecution of individuals, I’m sympathetic to the idea that it might be a good idea to bring more enforcement actions against individuals, especially high-level decision-makers, and I’m also sympathetic to the idea that the US should insist on the identification of responsible individuals when negotiating corporate settlements (which is exactly what the Yates Memo calls for). But I’m not convinced that there’s a huge problem in the FCPA context with the dearth of individual prosecutions. Here again, the CW report deploys a lot of quotes decrying the absence of individual prosecutions, but the overwhelming majority of these are from other, arguably very different contexts.
- In the FCPA context, a great many of the cases involve relatively low-level decision-makers (even when they are nominally “executives”). It’s not at all clear that devoting substantial government resources to their prosecution makes a lot of sense. Really, the question is whether the more effective way to prevent bribery at these lower levels is to increase the (relatively small) probability that a violation will lead to a criminal prosecution of the responsible individual, or to increase the corporation’s incentive to invest in internal compliance and prevention measures. I really don’t know the answer, and I’m open to being persuaded that the former is more important—but at the moment, I tend to think the latter approach is likely to be more effective. In any event, the CW report doesn’t really make a sustained argument on this point; rather, it relies on emotion-laden punitive rhetoric, largely taken from non-FCPA contexts.
- Furthermore, as I’ve noted elsewhere, a substantial increase in targeting of individuals in the FCPA context could have significant adverse consequences for enforcement strategy, mainly because it could lead the courts and/or Congress to narrow the substantive scope of the FCPA, relative to the legal positions currently advanced by the US government. This concern is not mentioned in the CW report.
- As for debarment, I’ve written about that issue previously, so I won’t belabor the point here, except to emphasize that (1) debarment is not meant to be a deterrent sanction (at least in the US), (2) debarment has significant collateral costs, and (3) any additional deterrent effect associated with debarment could be achieved through increased fines.
The CW report advances a few other criticisms of the use of NPAs/DPAs as well, but these also seem wide of the mark:
- At one point, the report discusses the concern that, up until 2013, the SEC sometimes allowed companies to settle without admitting or denying wrongdoing. But, as the report acknowledges, this practice ended in 2013, and in any event (as the report also acknowledges elsewhere), the practice in FCPA cases has consistently been to require acknowledgement of wrongdoing.
- The report flags a concern about the tax treatment of corporate fines. But the issue doesn’t have to do with settlements per se (nor FCPA cases specifically).
- Infuriatingly, the CW report trots out the old red herring that the money recovered in FCPA settlements isn’t “returned” to the “victims,” citing to the misleading statistics from the Stolen Asset Recovery Initiative’s “Left Out of the Bargain” report. Again, this is something I’ve discussed extensively in prior posts (see here and here), so I won’t belabor the point here—except to note that the report acknowledges that this issue “is not limited to DPAs,” and that mechanisms already exist in the U.S. legal system for alleged victims to seek restitution. The problem, if there is one, has nothing to do with the practice of pre-trial (or pre-indictment) settlement, but rather with the difficulty of identifying the specific individuals or entities harmed by a given act of foreign bribery.
Let me conclude by returning to a point that I noted at the outset: The U.S., relying mainly (though not exclusively) on pre-indictment corporate settlements, has an impressive track record of enforcing the FCPA; the number of entities by the U.S. sanctioned is more than the number of entities sanctioned by all other OECD Convention signatories combined, and more than five times larger than the second-most aggressive enforcer (Germany). The U.S. approach is far from perfect, and certainly deserves critical scrutiny. I, for one, would like to see an even more aggressive approach, with larger sanctions. But the U.S. practice of encouraging corporate settlements in FCPA cases has been largely effective. It’s enabled the U.S. enforcers to leverage their (unfortunately but inevitably) limited resources into substantial corporate penalties, which have in turn stimulated massive increases in the corporate resources devoted to anti-bribery compliance programs. Of all the things the OECD Convention has to worry about with respect to effective enforcement, use of DPAs/NPAs doesn’t really seem like it should be high on the list. It seems more than passing strange that, given the U.S. enforcement track record compared to just about every other country’s, organizations like CW are choosing to focus on the over-use of settlements, rather than on their under-use—which, as Sarah has persuasively argued in the context of France, is likely a much more significant obstacle to the imposition of effective, proportionate, and dissuasive sanctions.
Now, as I said earlier, the question whether the U.S. approach to the use of DPAs/NPAs is effective and appropriate is distinct from the question whether there should be global guidelines (adopted by the OECD or some other international body) on corporate settlements in anti-bribery cases. I’ll turn to that question in my next post.
To pick up on one of your critiques: I’m more than sympathetic to the idea of holding individuals and companies accountable, too. But it seems plausible that the combination of increased corporate indictments and implementation of the Yates Memo could push companies too far. Right now, companies must disclose all relevant facts about individuals involved in the alleged misconduct in order to receive cooperation credit, per the Yates Memo. Corporate defense attorneys have, unsurprisingly, noted the challenges this provision has posed to effective internal investigations, as employees have retained their own lawyers and invoked their Fifth Amendment rights. Nevertheless, the investigating lawyers place a premium on those comprehensive investigations because the cooperation credit is all that stands between an NPA/DPA and a plea. So under the current framework, comparatively lenient treatment of the company greatly facilitates individual prosecutions. If you take that credit away, you take away the disclosure incentive. I suppose CW and the others would say we need to change the framework but I’m unclear how.
I’m glad you made the last point regarding the focus on U.S. over-use of settlements rather than other countries’ under-use of them. And I think the cause of the disparities lie much deeper than lack of enforcement – there can be entrenched procedural barriers, as Sarah described, but also legal-cultural differences with respect to plea agreements, settlements, cooperation with investigators, etc. I’m skeptical that global standards could do much to bring about uniformity across different countries with distinct civil and common law systems, but I do think that they could serve an important educational/informative function, making authorities aware of different approaches. I look forward to seeing your next post.
Pingback: The Case for Corporate Settlements | Anti Corruption Digest
Thought the best point in your nicely argued piece was the suggestion for those who don’t like the current settlement regime to raise the level of fines. A serious consideration of the issue would, I would hope, prompt a thorough study of the damages caused by bribery. That is an under-researched area which I find surprising given the attention to many topics of lesser import.
Pingback: Wednesday News Wall 06 April 2016 | Arconn Consult
Pingback: A Detailed Critique of the NGO Call for Global Standards for Corporate Settlements in Foreign Bribery Cases | Anti Corruption Digest
There was an interesting panel on the prosecution of corporations and corporate actors at Harvard Law School this week. Judge Jed Rakoff and the head of the DOJ’s Criminal Division, Leslie Caldwell both weighed in on the limitations of NPAs/DPAs and emphasized the need to prosecute individuals. As someone who believes reliance upon NPAs/DPAs is a positive – even necessary – enforcement strategy, I thought they made some good points. First, it is common for corporate executives to see regulatory fines as a cost of doing business. This observation isn’t necessarily an argument against settlements – rather, it suggests increasing the size of fines. But both panelists seem to question the deterrent value of economic penalties, in general. Admittedly, the most shocking example AAG Caldwell gives – Enron’s treatment of a billion-dollar settlement with the SEC as a cost of doing business – was in the days before the SEC required admissions and ultimately resulted in a DOJ indictment. A second interesting part of the discussion related to the collateral consequences of corporate indictments. The DOJ seems to be caught between a rock and hard place in terms of establishing a credible threat of prosecution/imposing penalties with sufficient deterrent effect and avoiding detrimental effects on the company’s labor force/larger economy. Judge Rakoff appears to think that, because the DOJ will always allow the corporation to survive, it is impossible to effectively deter future wrongdoing. Leslie Caldwell pushed back and attributed DOJ weakness to initial naivete in believing company statements about penalties’ wider impact.
The video of the event is available here: https://www.youtube.com/watch?v=MQ5xDn93ciY
I am encouraged to see your critique of CW’s report, which I thought took a one-dimensional approach to evaluating the effectiveness of NPA/DPAs. One of the points you highlight, the fact that corporations do in fact care about “the cost of doing business,” is even more salient in the context of the efforts companies take to self-report. As you stated, there is no question that the prospect of a favorable settlement strongly incentivizes companies to self-report and cooperate with the government. But corporate cooperation isn’t cheap. This is done at great expense.
The CW report skims over the cost to these companies—reputational damage, money fines, investment in corporate controls, etc.—but fails to mention the cost of voluntarily entering into an FCPA settlement negotiation.
I am reminded of the 2013 Ralph Lauren NPA in which the company took tremendous pains to self-report and cooperate with the government, but was denied a (likely deserved) non-public declination. The company had to pay $1.6 million in penalties and disgorgement, publicly accept responsibility, and had to agree to extensive changes to its already exemplary compliance program. Ralph Lauren invested a great deal of money investigating the wrongdoing and getting its house in order all BEFORE self-reporting.
Imagine you have a 30-year-old car with 100,000 miles on it, and you know you’re not going to pass the annual emissions test. So you invest thousands of dollars in parts and labor, attempting to fix it for the sole purpose of passing the emissions test. When you take the car in, it passes the emissions test—but then you’re slammed with additional fines and told you have to bring the car back every month—all because at some point the car wasn’t up to snuff. This is an obvious oversimplification of the issue, but the logic remains. The cost of owning a car is no laughing matter, and neither is the cost of doing business in FCPA cases.
Pingback: Lasting Legacies: Marcos’ Denial Feeds into a Culture of Corruption | Anti Corruption Digest
Pingback: What’s the Problem with Out-of-Court Settlements for Foreign Bribery? | Anti Corruption Digest