In my last couple of posts, I’ve responded to—and criticized—the joint letter that several of my favorite anticorruption NGOs (Corruption Watch, Transparency International, Global Witness, and the UNCAC Coalition) sent to the OECD last month, urging the adoption of “global standards for corporate settlements based on best practice.” My first post took issue with the claim (further developed in a Corruption Watch report) that the current approach (mainly in the U.S.) to corporate settlements in foreign bribery cases was inconsistent with adequate enforcement, while my next post questioned the need for global guidelines. But both of my prior posts could fairly be criticized for (among other things) being too abstract, and for not responding to the specific list of 14 “best practices” identified in the NGOs’ joint letter.
I take that criticism to heart, so in this post—at the risk of overkill on this one letter, but in the hopes of spurring further constructive dialogue on this important topic—I’ll offer a point-by-point reaction to each of the 14 principles listed in the joint letter. Here goes:
“1. Settlements should be one tool in a broader enforcement strategy in which prosecution also plays an important role, and should be executed on a proper legislative basis.”
This is actually two separate principles.
- The idea that settlements should only be “one tool,” and that prosecution should also “play” an important role, is either obvious or wrong, depending on what exactly what the letter means. If the idea is that enforcement authorities must be willing to prosecute cases—that they shouldn’t just give up if they can’t get a settlement—then the claim is correct but obvious. Unless they were very good bluffers, enforcers wouldn’t get very far in their settlement negotiations if they didn’t retain the credible threat to prosecute if settlement negotiations fell through. But I don’t think that’s what the letter means. I think the idea is that if all (or the vast majority) of foreign anti-bribery cases are resolved through settlements, then something is wrong—the implicit claim is that we should be seeing some cases tried to a verdict. That’s just wrong. What matters, for both deterrence and retribution, is the (expected) penalty for violating the law, not whether that penalty is imposed via trial or settlement. Prosecution (in the sense of litigating a case to judgment) is hugely costly for the government as well as the defendant, and the outcome is highly uncertain. Indeed, if the parties are risk-averse and sufficiently rational (and care mainly about the outcome of the case, rather than producing new law), then all cases should settle, and we should be happy about this. Now, whether the government is settling the cases in the right way, and being sufficiently demanding in its negotiations, is a separate issue, and one where reasonable people can disagree. But the absence of prosecutions is not in and of itself a problem. If Country X settles 100% of its cases, but concludes 10 foreign bribery cases a year with average penalties of $10 million, and Country Y settles two cases per year and prosecutes two cases per year (winning one and losing one), imposing average penalties of $1 million, it’s a bit daft to suggest that Country Y is doing a better job of enforcing its foreign anti-bribery laws than Country X, on any dimension.
- The second principle contained in the above-quoted statement, that settlements should have a proper basis in the law, seems fine by me, though insofar as the wording could be read as implying that such settlements require affirmative and specific statutory authorization, I think that’s not quite right, as in some countries, under settled general domestic law, national prosecutorial authorities have the discretion to engage in such settlements.
“2. Settlements should only be used where a company has genuinely self-reported, and cooperated fully.”
I’m certainly in agreement that companies should be punished more harshly when they fail to report wrongdoing, and when they fail to cooperate with an investigation. And so far as I know, every jurisdiction that engages in serious enforcement of anti-bribery laws takes something like this position. But the above statement has two significant flaws.
- First, the statement (like much of the discussion in the joint letter and elsewhere) equates settlements with leniency. But that’s not right. One could fully endorse (as I do) the claim that companies that self-disclose and cooperate should be entitled to more leniency. But this does not imply that, for a company that has not self-disclosed (or not cooperated), then the prosecutors should litigate to trial. That would be perverse. It would imply, for example, that the U.S should not try to reach a settlement with Wal-Mart regarding bribes allegedly paid in Mexico, because Wal-Mart did not self-disclose. It would imply that the U.S. and German authorities acted inappropriately in reaching a $1.6 billion settlement with Siemens, because Siemens did not self-disclose. But the advantages of settlement don’t evaporate when the company has been a bad actor. Rather, the relevant penalty scheme (whether statutory or a matter of practice) should impose much weightier sanctions on companies that don’t self-disclose and cooperate, so that the results of settlement negotiations with such companies will be heavier penalties.
- Second, the articulated principle says that settlements should be used ONLY were a company has self-reported AND cooperated FULLY. That is, the principle is framed in all-or-nothing terms, rather than as a sliding scale, where greater cooperation results in greater leniency. That may seem attractive, but think for a moment about what it does to firms’ incentives. Suppose a firm, like Siemens or Wal-Mart, fails to self-disclose, but the government begins an investigation anyway. Under the joint letter’s proposed principle, such a firm would have little incentive to cooperate with the investigation, because its failure to self-disclose has already disqualified it from a negotiated settlement. Because subsequent good behavior can’t make up for the original misstep, there’s little incentive to do anything other than fight tooth and nail the rest of the way. (Of course, there might be if the penalty scheme itself offered leniency based on cooperation, which underscores my previous point, but even here the company would have a strong incentive to litigate to final judgment.)
“3. Judicial oversight which includes proper scrutiny of the evidence should be required.”
This is one of the points on which there’s a big difference between US practice—where there’s some nominal judicial oversight but it’s generally pretty minimal, at least in FCPA cases—and the new UK law, which calls for a greater role for the judge. Here, I don’t have particularly strong views, except that—as I stressed in my last post—how we feel about this depends a lot on our relative confidence in prosecutors and judges. I do think there’s a tendency in this area to drastically overestimate the capacity of most judges to evaluate the evidence supporting a settlement. Remember, there’s not a full trial (that’s the whole point), and much of the evidence will be based on disclosures by the corporation and avowals by the prosecutors. The bargaining takes place in the shadow of potential litigation, after all. The one thing that judges should really watch out for is collusion between the prosecutors and the firm; they might also be attentive to abusive behavior by prosecutors with too much leverage. But the idea that a judge should second-guess the settlement based on a cursory review of the evidence, without the benefit of the full panoply of trial procedures, strikes me as problematic. In any event, this seems to me not something that should be elevated to a universal principle, but rather a context-specific decision that might work out differently in different countries.
“4. Settlements should only be used where a company is prepared to admit wrongdoing. Settlements, including their detailed terms, should be submitted to public hearing and should be accessible to the public, as well as the relevant facts admitted, including identification of officials who received the bribes, company employees involved in the wrongdoing, and detailed justification for why a settlement is suitable for the case.”
Again, we’ve got a bunch of separate ideas packed into one item, so let me try to pull them apart and consider them separately:
- First, on the idea that settlements (in foreign bribery cases) should be used only where a company is prepared to admit wrongdoing is one that I can basically get behind—I’m also troubled by the SEC’s former practice of allowing companies to settle while neither admitting nor denying wrongdoing—but to the best of my knowledge, this is already a feature of foreign bribery settlements (at least in the US, and every other jurisdiction that currently enforces at all actively).
- Second, the idea that the detailed terms of the settlement should be public also makes sense to me (though I suppose that there are some cases where I might make exceptions).
- Third, there’s the claim that settlements “should be submitted to public hearing.” I have no idea what this means. If it’s just another way of saying that the terms of the settlement should be public, fine. If it means there should be some sort of quasi-judicial public hearing on the terms of the settlement—perhaps in conjunction with the judicial oversight referenced by the previous item—then this strikes me as a very bad idea. Logistically, this seems like a potential nightmare. Who would be entitled to participate? What would the rules of evidence be? Would there be some ruling on the settlement? And can we please keep in mind that the whole point of a negotiated settlement is to avoid a trial? The incentive that firms have to make certain admissions and to cooperate is the assurance that they can cut a deal with the prosecutors, avoiding both the costs and uncertainties of litigation. The more we make the approval of the settlement like a mini-trial, the more we undermine the process of negotiated settlement, with all its attendant advantages—for the government as well as the defendants.
- Fourth, there’s the claim that the settlement document should identify in detail the individuals involved—both the company employees who paid the bribes and the government officials who took the bribes. Here, I’m actually very much in sympathy with the argument. But I do have a concern, noted in another post from a few weeks back, about naming individuals when there are concerns about inaccuracy. (This, I gather from Rick’s comment on that post, is one of the reasons the U.S. government generally abstains from naming un-indicted co-conspirators.) And I suppose there might be special circumstances in which foreign policy or national security considerations militate against full public disclosure of all the individuals involved. But I do think, at least as a default rule, that more detail in the settlement documents about the culpable individuals would be desirable.
- Fifth, there’s the call for a detailed justification of why a settlement is suitable. Here again, we see what I think is a cultural anti-settlement bias built into the letter. Why is a negotiated settlement something that requires special justification? It seems to me that, since the rational resolution of most legal disputes is a settlement, if anything the opposite presumption ought to apply: We should hope and expect that the government will settle almost every foreign bribery case, not demand a special explanation for what should be a common practice. I hate to keep repeating myself, but this idea that “prosecution = toughness” and “settlement = weakness” reminds me as nothing so much as the idea that “war = toughness” and “diplomacy = weakness.” The track record of that latter attitude hasn’t been so good, has it?
“5. Settlements should require companies to strengthen and monitor compliance programmes and to report publicly on how they have met the terms of the settlement.”
Yet again, two proposals in one.
- On the first, I agree that settlements should encourage companies to strengthen their compliance programs. That’s part of the idea of imposing these heavy fines. But I interpret the recommendation as the claim that every corporate settlement should include either a corporate monitor, or specific government-mandated changes to the firm’s compliance program. I agree that in many cases monitors are appropriate, as are specific changes to firms’ internal programs. But it seems like overkill to insist that these be included in every settlement. In many cases, firms will have a better understanding of how to improve internal compliance, so giving them incentives to do well (by hitting them with penalties if they screw up again) may be a more efficient way to improve genuine compliance than for the government to try to micromanage the internal reforms. Just to be clear, that will sometimes be true, but not always – there are absolutely situations in which the settlement should contain more specific terms and conditions. But there’s no good reason, so far as I know, to mandate this in every case.
- On the point that companies should report publicly on how they have met the terms of the settlement—again, it all depends on what exactly this means. If the idea is that companies should be required (by a provision of the settlement) to issue some report, sometime after the conclusion of the settlement or in the settlement document itself, the measures they’ve taken to improve compliance, then I think I could get behind that. But if the idea is that, when a corporate monitor is hired, all the company’s communications with the monitor should be publicly disclosed, I think we start to run into legitimate concerns about how the absence of confidentiality could impede full and frank discussions of internal corporate matters. I’m not necessarily opposed to greater transparency, but there are hard issues here, and nothing in any of the documents cited by the joint letter really addresses those issues in sufficient detail for this to be fairly characterized as a “best practice.”
“6. Settlements should be used to leverage full disclosure of wrongdoing within a company.”
This is largely repetitive with elements of point #4 above, and my responses are similar, so I won’t restate them here.
“7. Prosecution of individuals should be the standard practice and settlements must preclude companies from paying directly or indirectly for fines and legal fees of individuals implicated in the case.”
I don’t want to belabor this point, because I’ve already written about it in previous posts (see especially here). Suffice it to say that prosecution of individuals, while certainly desirable under many circumstances, has its downsides. In any event, I’m not sure what “standard practice” means here.
“8. Settlements must provide effective, proportionate and dissuasive penalties.”
Sure, no argument here. I’m very sympathetic to the (admittedly unproven) view that current sanctions in foreign bribery cases are too small. But as a statement of “best practices,” this is basically a vacuous restatement of a principle that all OECD Convention signatories have already endorsed, at least on paper.
“9. Settlements should require companies to provide total cooperation with authorities and agencies in other jurisdictions.”
I like the idea, but perhaps we should pause here to recognize—though I know it may not be politic to say it out loud—that not all other jurisdictions are entirely trustworthy. If a U.S. company settles a case of bribery of government officials in a dictatorship like, say, Equatorial Guinea, I’m not so sure the U.S. should insist, in all cases, that that the company should fully cooperate with the enforcement authorities in that country. There’s also the question of who gets to judge whether the company’s subsequent cooperation has been sufficiently “total.” Subject to those important qualifications, I do think it would be a good idea to encourage more international cooperation and comprehensive settlements.
“10. Compensation to victims, based on the full harm caused by the corruption, must be an inherent part of a settlement.”
Sigh–not this again. I’ve written on this before (see here and here), so this is another point I don’t want to belabor. Sometimes, it makes total sense for a settlement to provide for some sort of recompense for victims of corruption in foreign bribery cases. But sometimes it doesn’t—especially where identifying individual victims is extremely hard (because the harms are so diffuse) or where the alleged representatives of the victims (often the “victim country”) is not exactly trustworthy. I’m happy to listen to detailed proposals for how to get better victim compensation in at least some cases—and I’m open to (though a bit skeptical of) proposals like that advanced by Professor Andy Spalding on this blog and elsewhere. But we’re not yet to the point where these mostly untested proposals could be described as international best practice.
“11. Countries and as far as possible all persons who would be affected by the settlement should be notified of the intention to enter into a settlement, given a right to representation at settlement hearings and informed of how to make representations about compensation.”
This seems largely repetitive with aspects of point #4, so I won’t go over my responses again, except to say that I have the increasing sense that nobody involved in drafting the NGO joint letter has ever actually participated in settlement negotiations in foreign bribery cases, or consulted with anybody who has.
“12. Settlements must not preclude further legal actions in other jurisdictions that are not parties to the settlement, subject to applicability of the non bis in idem principle (double jeopardy). Authorities should make all relevant evidence available to their counterparts in other relevant jurisdictions.”
OK, this one baffled me:
- First off, a settlement by Country X with Firm Y simply cannot, as a matter of law, preclude legal action by Country Z against Firm Y (unless by operation of Country Z’s own law). So unless someone explains to me otherwise, I’m going to treat the first clause as a banal restatement of the legal status quo.
- Then the second clause—about the double jeopardy principle—seems to endorse, without explanation, the controversial idea that settling an anti-bribery enforcement action with one country should preclude subsequent enforcement actions in other countries for the same conduct. (This result is achieve, however, not by the terms settlement agreement, but by the fact of settlement itself.) Not only does this seem to contradict the first clause, but as others have argued on this blog and elsewhere, from the perspective of more rigorous enforcement (including by other jurisdictions, as envisioned by the joint letter’s point #9), international double jeopardy is a bad idea!
- As for the bit about making all relevant evidence available to counterparts in other jurisdictions, this is essentially a repeat of point #9, so my response there is relevant here.
“13. Settlements must not be influenced by factors that fall outside the case such as Article 5 considerations, or be used to protect companies from debarment.”
I’ve addressed the debarment concern elsewhere (see especially here) so I won’t repeat myself, except to say that I would have thought that avoiding unnecessary collateral consequences to innocent third parties is generally a good idea, and adequate deterrence can be achieved by other means. I’m not sure what “Article 5 considerations” are (it’s not explained elsewhere in the letter), so I’ll let that one go.
“14. Settlements should not typically be used where a company has had a previous corruption-related enforcement or regulatory action taken against it.”
Though this point is different from the point raised in item #2, my response is generally similar. The letter yet again wrongly conflates settlement with leniency, and neglects the possibility that the posture recommended would give companies that already have one strike against them no incentive to negotiate—they’d be just as well off fighting tooth and nail to the end. The principle should be that the government ought to insist on much harsher terms for repeat offenders, not that the government should refuse to negotiate.
I realize that this has been an absurdly long blog post. But these issues are important, and I’ll confess I’m getting a bit frustrated with how some in the NGO community characterize the role and function of settlements in anti-bribery enforcement, and the lack of careful analysis of incentive effects. There’s too much quasi-jingoistic rhetoric about punishment, and not enough careful analysis of incentives and consequences.
For the legally challenged, like myself and presumably many others of this blog’s readers, this is a great lesson in the value of specific professional expertise in coming up with sensible policy proposals. Your obvious frustration with the apparent lack of attention to relevant detail, and, worse, basic misunderstandings of legal instruments, of those that are at the forefront of NGO anti-corruption work is understandable. I must admit that to the extent that you are correct that ” nobody involved in drafting the NGO joint letter has ever actually participated in settlement negotiations in foreign bribery cases, or consulted with anybody who has” your analysis is disheartening.
However true the legal arguments about effectiveness and implications of the specific proposals may be, I would intuit that even the best anticorruption players are going to continue zealous advocacy for more punishment as long as they believe “the (admittedly unproven) view that current sanctions in foreign bribery cases are too small”. I would expect that this is what ultimately fuels the dislike for settlements. I’ve read your post discussing some of the available evidence of the merits of this view, and am amazed by the dearth of evidence. Assuming my gut feeling is correct, I would have hoped for the anticorruption world having produced a lot stronger evidence base for (or against) this view by now. Like you, I am very sympathetic to the view itself. My somewhat pessimistic outlook of the world finds it difficult to imagine anything other than that big corporate power gets off very lightly when caught, if caught at all. However, I also believe strong evidence does matter and do not understand why there isn’t more research effort into substantiating such core assumptions.
Thanks for the kind words. A couple quick follow-on thoughts:
I recognize (and to some degree share) the instinct of many in the anticorruption advocacy community that sanctions for foreign bribery ought to be harsher. If there was one big message I would like to get across, abstracting away from my point-by-point response, it’s that it’s a mistake to mistake _settlement_ for _leniency_.
On the dearth of evidence on whether the current penalties for foreign bribery are too high, too low, or just right, I agree that this is frustrating. Ultimately, it’s really, really hard to get rigorous evidence on something like this. Even the best studies I’ve seen have to make some fairly heroic assumptions. I’m not really sure what to do about this, except to acknowledge the limits of our knowledge and try to make the best educated guesses we can.
Wal-Mart did voluntarily disclose in December 2011 – months before the April 2012 NY Times article.
Well, yes and no. Walmart apparently had the information on serious problems in Mexico since 2005 and sat on it (as the results of internal reviews) until 2011, when they found out that the NYT piece was in the works, and public disclosure of the reported violations in Mexico was inevitable. At that point, the company filed a quite limited, anodyne disclosure to DOJ and SEC, but with very little detail on the extent of the problems, and in its SEC filing (the first one that disclosed possible FCPA problems), it indicated that the issues were minor and were unlikely to have a material adverse impact on the company’s business. I gather that when the NYT story came out, people at DOJ and SEC were shocked (and furious), because the allegations went well beyond the isolated incidents that Walmart had suggested were the extent of the problem.
So yes, you’re right that Walmart did technically self-disclose. But that disclosure (A) was not particularly timely, (B) was (apparently — I don’t have direct access to inside information) limited and somewhat misleading, and (C) prompted by the realization that the NYT reporting made disclosure both inevitable and imminent.
I suppose the question this raises for the arguments advanced in the NGO Joint Letter is whether this sort of “self disclosure” that the letter writers have in mind. I suspect not.
Considering that a company does not generally have an obligation to disclose FCPA violations, your response is curious.
Moreover, even the NY Times has reported as follows.
Wal-Mart’s December 2011 FCPA disclosure was motivated by Wal-Mart’s desire to pro-actively understand its FCPA risk (notwithstanding whatever may have occurred within the company in 2005 upon learning of potentially problematic payments in Mexico). According to the article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action). According to the NY Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.
We’re getting into the weeds a bit here on Wal-Mart. Happy to pursue that at some point, but maybe it’s worth stepping back and considering the larger issue raised by the Joint Letter, and my response:
The Joint Letter argues that companies should not be able to settle FCPA cases unless they’ve self-disclosed. I expressed the concern that under that rule, if an investigation gets started without an adequate self-disclosure, then under the Joint Letter’s proposed all-or-nothing rule, the company’s incentives to cooperate with the investigation are greatly reduced. I threw out Wal-Mart as an example, and perhaps that wasn’t the best example to use given the ambiguities as to whether Wal-Mart’s disclosure would “count” under the Joint Letter’s proposed rule. But the point isn’t about Wal-Mart specifically. If you don’t like that example, fine — happy to chuck it and substitute another (or just stick with Siemens, the other case I mentioned). The point still stands.
Our exchange on Wal-Mart does, however, highlight another difficulty with the Joint Letter’s proposal: What, exactly, counts as an adequate self-disclosure under the Joint Letter’s proposed rule? I was working under the assumption that, from the perspective of the Joint Letter’s authors & supporters, Wal-Mart wouldn’t qualify, for the reasons I sketched in my response to your original comment. I take it your point is that Wal-Mart DID self-disclose, and so under the Joint Letter’s proposal WOULD be eligible to settle the investigation via DPA/NPA. I don’t really know which of us is correct, and that’s kind of the point here. Under a sliding scale approach, the government can consider things like the timeliness and extent of disclosure, the degree of cooperation,etc. Under the Joint Letter’s proposed approach, we have to make a preliminary binary decision about whether adequate self-disclosure occurred (although I suppose if we decide it did, we can then take into account things like timeliness and extent).
Actually, maybe this is a useful opportunity for clarification from the Joint Letter authors (if any of them are out there in reader-land): Under your second “best practice” principle, would Wal-Mart qualify for a DPA/NPA? Why or why not?
Glad to see you concede that Wal-Mart was not the best example, that was really my only point, that the facts surrounding Wal-Mart’s disclosure and its motivations in doing so have been swallowed by the narrative concerning Wal-Mart’s FCPA scrutiny.