GAB is delighted to welcome back Susan Hawley, policy director of Corruption Watch, for further discussion and debate regarding the proposal to create global standards for out-of-court settlements in foreign bribery cases:

Matthew Stephenson has devoted three successive blog posts (see here, here, and here) to critiquing the position that we outlined in our report, Out of Court, Out of Mind, calling for global standards for corporate settlements on corruption cases. NGOs, including we at Corruption Watch, along with Transparency International, Global Witness, and the UNCAC Coalition, outlined this position in a letter to the OECD. I am delighted that our report and the joint letter has triggered such interest and discussion. This is a hugely important debate: it cuts to the heart of how countries enforce their anticorruption laws and what constitutes effective enforcement.

We wrote our letter to the OECD and released our report precisely to stimulate this kind of debate at a time when:

• a number of countries are looking at whether to introduce Deferred Prosecution Agreements (DPAs) and/or Non-Prosecution Agreements (NPAs) specifically to improve their track record of dealing with overseas corruption and
• many countries in Europe appear to be choosing to resolve the few enforcement actions that they are taking through out-of-court settlements.

This post offers a riposte to Professor Stephenson’s criticisms of our case for global standard for corporate settlements in these cases. The fact that Professor Stephenson devoted three blog posts to the subject shows how meaty it is, and it won’t be possible in a single reply post to go into all of his criticisms, but this post replies to some of the most essential points.

On the US context

First things first. There is no doubt that the US has taken by far the most enforcement actions against foreign corruption of any country. We fully recognize that in Out of Court Out of Mind on a number of occasions. That the US has used corporate settlements, such as DPAs and NPAs, over the past decade to significantly increase the number of enforcement actions it brings is the key reason that other countries are considering this approach. An impressive enforcement record, however, cannot place an enforcement strategy beyond scrutiny.

One of the things we set out to do in our report is lay out a growing body of US academic literature and legal commentary, including contributions from judges and former prosecutors (and definitely not your usual band of corporate defense lawyers), making serious criticisms of DPAs as a means of resolving corporate criminality. Professor Stephenson characterizes our argument as being: some people have criticized Practice X, therefore Practice X is bad. I think that does an injustice to our argument. Our argument is: here are some serious critiques by experts and participants in the system – what are the lessons to be learned and how can settlements be used more effectively as a result? The US Department of Justice is learning those lessons, as the Yates Memo shows.

One of the fundamental critiques of settlements for corporate criminality that we cite (and which Professor Stephenson ignores) is that their use effectively creates a two-tier justice system. Companies may pay a penalty in an out-of-court process to avoid prosecution in a manner that is not available to any other players in the justice system. Instilling public confidence that corporations, and crucially, their senior executives, will be justly dealt with when they commit wrongdoing cannot be dismissed merely as “emotionally-laden punitive rhetoric.” It cuts to the heart of the integrity of our justice systems. White collar crime is already, in many jurisdictions, the poor relation of the enforcement system – rarely investigated and even more rarely prosecuted. The decision to deal with white collar crime by companies essentially outside of the justice system raises real questions about equality before the law and whether this approach ultimately decriminalizes such conduct.

And there is a deeper issue here about the rule of law in the fight against corruption. When rich countries choose to use out-of-court mechanisms to deal with serious criminality such as corporate bribery it sets a tone that courts are, frankly, a bit of a waste of time. In countries where the rule of law is strong, maybe that message is not so problematic. In countries where it is weak and where there is general impunity for the corrupt, that message is potentially devastating. If rich countries deal with their corrupt companies by means of out-of-court mechanisms, on what grounds should poorer countries not use such mechanisms to cut immunity deals with former corrupt dictators, such as we have seen in the Abacha case? Courts may be inefficient, infuriating, and uncertain, and there is certainly an important debate to be had about how they can be adapted to deal better with white collar crime and corruption, but they are also the bedrock of the rule of law.

Finally, the US context is in many ways unique. Few countries have the extensive corporate liability laws of the US. What works in the US is not easily translatable into other contexts. The danger is that where the US approach is set up as the gold standard of enforcement, there is the potential for other countries to see out-of-court settlements as a lazy route to quick enforcement results. Interestingly, Professor Stephenson cites Sarah Krys’ post on France as an example of an argument where settlements should be used more frequently. Her fascinating post actually ends by stating that in order to incentivize companies to self-report one needs to “set up a real threat of conviction at trial”, in addition to offering leniency for companies that self-report and increasing enforcement resources. The truth is that in many jurisdictions, unless the real stick of prosecution is deployed along with a real threat of detection, the juicy carrot of a settlement or leniency for self-reporting is unlikely to prove that tempting.

On deterrence

The other question we raised is whether the use of DPAs really has a deterrent effect. There is frustratingly little evidence on recidivism rates and the long-term impact of enforcement actions for FCPA cases. We would really like to work with anyone who can help develop a method for measuring the effectiveness of enforcement outcomes, evaluating whether they lead to real change by companies following a DPA, and how that would compare with change that might come about from a conviction.

Professor Stephenson asserts that the US enforcement of the FCPA is “largely effective” – but on what evidence does he base this assertion? Is the fact the companies are piling money into compliance proof of itself that corruption is being reduced? The recent Hogan Lovells survey on bribery and corruption risk found that 60% of US compliance officers think their companies are in “compliance crisis” and that 59% of US compliance officers think that many people in their organization do not know what their anticorruption and anti-bribery polices are. The Unaoil scandal suggests that plenty of money can be put into compliance and obtaining expensive certification without effectively preventing corruption.

Our main arguments as to why DPAs may not be as effective a deterrent as prosecution, are points that Professor Stephenson appears at least to acknowledge: lack of senior executives held to account and the inadequacy of financial penalties to offset the financial incentives of bribery (despite the US having the highest fines in the world). On individual accountability, Professor Stephenson ignores, however, the research we quote by Professor Mike Koehler that the use of DPAs in the FCPA context appears to correlate exactly with lack of individual prosecution. That is, most of the individual prosecutions there have been under the FCPA have been where a company was convicted. This cuts to a crucial issue – if settlements are based, as they are in most instances, on foreshortened investigations by law enforcement agencies that draw for large part on what companies chose to report to them, can they garner enough admissible evidence to prosecute individuals? Can they even garner enough evidence to ensure that the full extent of wrongdoing committed by a company has been captured? And by the way, we don’t believe that prosecuting individuals and imposing corporate penalties are an either/or here – both need to go hand in hand for effective deterrence.

On sufficient sanctions, is it really feasible for prosecutors in the US (or courts anywhere else for that matter) to impose fines that are 9.2 times higher than current US fines in the FCPA context (as the research by Karpoff, Lee and Martin suggests is needed)? Fines that high would certainly cause the collateral damage that Professor Stephenson says is an argument against debarment. They would certainly also deter companies from cooperating and result in more companies fighting tooth and nail to avoid such a sanction. Whether higher fines are the answer, or whether to leave convicted companies to the consequences of their actions through debarment is an important debate to be had. It is well recognized, however, that companies fear debarment more than any other consequence of wrongdoing and that few in reality ever face that consequence. A proportionate and effective debarment system, we think, has a real role to play in helping deter corruption.

On global standards

Our call for global standards should indeed be read as a call for best practice – which is something that the OECD has now been mandated to look at. Our call for standards actually arose much less from the question of whether the US approach is adequate or not. Instead, our call for standards derives from the European context, where out-of-court settlements are also the norm, just in much lower quantities and with enormous variation. The OECD has been scrutinizing the use of these settlements in its review reports on implementation of the OECD Anti-Bribery Convention and raising concerns about whether they provide adequate sanctions for over a decade now. Settlements may work if used prolifically and aggressively and impose sufficiently high sanctions, but they are particularly problematic where they are used half-heartedly in a context where there is very little enforcement at all.

There is no doubt that using some form of leniency to incentivize companies to come forward with wrongdoing has to be part of any enforcement strategy. (And it seems a bit perverse to argue that settlements cannot be equated with leniency in the context of stating that settlements are crucial for incentivizing companies to cooperate – even in the US, the DOJ requires companies that haven’t cooperated to plead guilty to charges rather than giving them a DPA). But it also has to be recognized that no amount of leniency is going to be attractive if you can get away with the crime. There is no way around the fact that enforcing anticorruption laws requires resources and political will and cannot be done on the cheap.

On victims

And a final word on victims and compensation. Professor Stephenson suggests that this is a red herring. But this is shaping up to be the most contentious part of settlements in the Conference of State Parties at the UN Convention Against Corruption and cannot so easily be dismissed. When rich countries enter into DPAs on foreign bribery, they essentially appropriate for themselves the right to the proceeds of crime (and DPAs are different from court actions here because there is no legal basis for victims to claim compensation under a DPA as there is in a court process – it is entirely up to the discretion of the prosecutor). To do so without any reference to the victims of that bribery is problematic.

We all recognize that identifying direct victims in corruption cases is difficult. But it is clear that since bribes are usually paid for by the national treasuries of affected countries, the real victims are the people of those countries. Compensation for the harm of corruption and finding ways to give voice to the victims of corruption is in our view critical to building the argument that corruption does real harm to real people’s lives. Until we find ways for representing that harm and giving voice to the victims of grand corruption, corruption will remain in practice a victimless crime.

Professor Stephenson argues that to return some of this money to the country where the bribery took place creates a host of perverse incentives: for rich countries to enforce less, for developing countries not to enforce at all, and for companies not to self-report. We think he overplays these potential incentives. Firstly, no one is suggesting that all settlement money be returned to affected countries – but that compensation is given. Secondly, developing countries rarely prosecute companies for paying bribes in their country for a host of reasons, not least among them the fear of deterring foreign investment, lack of capacity, and complicity in the crime. The idea that companies will not self-report because of fear of follow-on actions from affected countries is therefore overblown.

That doesn’t mean that compensation shouldn’t be dependent upon certain pre-conditions. Just returning money to corrupt jurisdictions is obviously undesirable. Making action by a developing country against the corrupt officials involved in the transaction a pre-condition for compensation and ensuring there are safeguards for compensation to be used transparently and accountably for the citizens of the affected country however – that could really help the fight against corruption.