Guest Post: What’s the Problem with Out-of-Court Settlements for Foreign Bribery? A Reply to Stephenson

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.

3 thoughts on “Guest Post: What’s the Problem with Out-of-Court Settlements for Foreign Bribery? A Reply to Stephenson

  1. Thanks very much for the lengthy, detailed reply. It will not surprise anybody when I say that I disagree with a great deal of the analysis in your post, but I’m glad we can have such a forthright debate about these important issues.

    There’s far too much in your post for me to attempt a full point-by-point reply in this comment. (Perhaps I might engage more fully in a future post, depending on how these debates unfold, here and in other forums.) But let me just take up one or two issues where I think some clarification of my own views, and some gentle pushback against your post, seems warranted.

    Let me start with a terminological quibble: When you use the term “out-of-court settlements,” I think you really mean “pre-indictment diversionary agreements,” such as deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs). I’m working on the assumption that you do not mean to include, in the category of “out-of-court settlements,” post-indictment guilty pleas–even though these are generally considered to be “out-of-court settlements” in most contexts. But perhaps you do mean to include guilty pleas in the scope of your critique? Some clarification here would be helpful.

    Now, let me address what you say is a “fundamental critique” (or one of them) of the use of DPAs/NPAs: the claim that they create a “two-tier justice system,” because corporations accused of criminal conduct can settle the case pre-indictment (through a DPA/NPA), while an individual defendant (including, presumably, the individual white-collar defendants, such as the corporate employees responsible for the criminal corporate conduct) cannot. I think that argument is (mostly) wrongheaded and based on the conflation/confusion of a melange of different issues and concerns (some of which are legitimate, some of which I don’t really buy). Let me see if I can walk through the reasons I don’t find the “two-tier justice” critique compelling:

    * First, as a factual/legal matter, it’s not really true (at least not in the United States). Prosecutors may, and sometimes do, use pre-indictment diversionary agreements with individual criminal defendants. But I concede it’s much, much more common in the context of corporate criminal defendants.

    * Continuing on that theme, though, even if it’s true that right now DPAs/NPAs are used more with corporate defendants than individual defendants, and even if it’s true that this difference is intrinsically problematic (a claim I’ll contest in a moment), why should the solution be to restrict the use of DPAs/NPAs for corporate defendants rather than to expand their use for individual defendants? Indeed, the latter approach was exactly what Judge Sullivan called for in his decision in Saena Tech (discussed in Danielle’s post here:

    * Now, though, suppose we do continue to have a system where DPAs/NPAs are used frequently for corporate defendants, but rarely for individual defendants. Could that “two tier” system be justified? Yes, it could. First of all, keep in mind that both corporations and individuals can and usually do resolve criminal cases through guilty pleas, which generally receive minimal judicial scrutiny. So if there’s a differential treatment for corporate defendants and individual defendants, it’s the fact that corporations find it easier to settle their criminal complaints against them before rather than after indictment. Is there a reason for allowing that? Yes, if one believes that the collateral consequences of a corporate criminal indictment (or conviction, even if via guilty plea) are excessive. We can have a reasonable debate over whether those collateral consequences are significant enough to justify a diversionary pre-indictment agreement, but I do think those collateral consequences are significant and shouldn’t be discounted–especially in a system, like that in the United States, where corporate criminal liability is quite expansive, and does not require knowledge or direction (or even negligence) by senior management.

    * I also think it’s important here not to conflate the questions of whether _corporations_ should be allowed to resolve criminal matters via DPA/NPA from the question whether _individual corporate executives_ should be prosecuted (and the relative resources that enforcers should allocate to these different cases). Your post, to my mind, tends at certain points to elide these issues, suggesting somehow that the existence of the DPA/NPA mechanism allows individual corporate executives to get off scot-free. I agree there have been relatively few individual FCPA prosecutions (though I’m more conflicted on whether that’s actually a problem). But that’s quite a separate issue from whether/when/how DPAs/NPAs should be used to resolve prosecutions against the corporations themselves. (You do suggest, based on some data reported by Professor Koehler, that use of DPA/NPAs correlates with fewer individual prosecutions. But there’s no basis for treating that relationship as one of causation: use of DPAs/NPAs has indeed been rising, partly because the US has been going after big corporations; individual FCPA prosecutions were never very frequent, and in the pre-2004 era, the DOJ tended only to go after relatively simple cases.)

    * I should clarify one important point of agreement: I agree that white collar crime is not prosecuted aggressively enough, and the sanctions (for both individuals and corporations) are not steep enough to create sufficient deterrence. I’d like to see tougher laws and substantially more resources allocated to enforcing those laws. But, as I said in one of my earlier posts, I think focusing on the DPA/NPA mechanism as the reason for the inadequate prosecution of foreign bribery cases is aiming at the wrong target. In fact, I’d like to give prosecutors more flexibility.

    * Along those lines, as you say, this debate (at least in the foreign bribery context) isn’t really about the United States. It’s about countries like France and Australia, that have been largely ineffective in their attempts to secure meaningful sanctions in foreign bribery cases–in part because they do not have the tools available to negotiate settlements in the way that U.S. prosecutors can. In the context of foreign bribery prosecutions, the biggest opponents of authorizing such settlements are corporations (and the corporate defense bar), along with judges and magistrates (who likely care about their power and status, and who are instinctively conservative). Interventions like the Joint Letter you guys sent to the OECD provide aid & comfort to those who would preserve the non-enforcement status quo in those countries. I agree that there are legitimate concerns about the DPA/NPA process, and the US model might not be right for other countries (and could likely be improved in the US). But given the current situation, I continue to be puzzled why you’ve decided to focus your energies on advancing warmed-over Judge Rakoff-style critiques (which, by the way, are largely inapposite in the FCPA context, where very few people have claimed that the DOJ has been too soft on corporate defendants in these settlements), rather than lobbying aggressively FOR countries like France and Australia to give prosecutors more flexible tools, and to combine them with things like broader corporate criminal liability and tougher sanctions.

    • Taking your points from the bottom to the top:

      1. We strongly disagree that the main opponents of settlements are corporations and the defence bar, and that our letter to the OECD in essence would preserve the non-enforcement status quo in various OECD countries. The evidence on the first point is exactly the opposite. The corporate world, in our experience, would dearly like to see a roll out of DPAs as a quick and easy way to resolve foreign bribery. SNC Lavalin’s claims that the lack of DPAs in Canada puts them at a competitive disadvantage is an example of this. The defence bar in the UK has clearly been in favour of easy DPAs for companies and critical of the SFO for setting too high a bar to get one.

      We are hugely in agreement that we desperately need more enforcement in relation to foreign bribery but perhaps disagree about how to get it. Of course offering some form of leniency to companies that self-report early and promptly and plead guilty at an early stage must play a role. But the lack of prosecutions in say Australia and France is not just about a lack of a framework for settlements – it comes from a range of failures that stem from a real lack of political will. These failures include under-resourcing of police, lack of expertise to bring such cases, weak laws etc. If these other issues cannot be resolved, introducing a settlements framework isn’t going to lead to strong enforcement. The danger is it leads these countries to enter into a settlement here and there to increase its enforcement statistics. Is weak enforcement better than no enforcement? Yes – a little better. Will it deter bribery? It seems unlikely.

      2. You seem to have ignored our point (mainly Professor Koehler’s point) that there is causation between the lack of individual prosecutions and the use of DPAs/NPAs. It is precisely because under this mechanism prosecutors do not have to investigate to a full criminal standard that there is a lack of sufficient evidence on individual culpability. This is borne out in the UK’s first DPA where it has now emerged that the SFO only took an oral briefing on first witness accounts provided by Standard Bank rather than being provided with them in full. It claimed that it did not have sufficient evidence to prosecute individuals – but the question is did it even look properly for such evidence?

      3. On individuals – our argument is not that DPAs should be rolled out to individuals in the white collar crime context. That could easily exacerbate the problem of perceptions of a 2 tier system: one for white collar criminals who are usually the wealthier members of society, and another for ordinary criminals. What we understood Judge Sullivan to have been saying in his Saena Tech judgement, was that they should be used for those ordinary criminals who he says “might not be a banker or a business owner” but who show rehabilitative potential. Essentially, that means that to avoid the 2 tier system critique, you would need to roll DPAs out across the board for all criminals, including drug dealers. Whether that is politically realistic is another matter.

      4. On collateral consequences, you have also ignored the evidence we present from Markoff that the claims about collateral consequences have tended to be vastly over-exaggerated particularly by corporations and the defence bar. But there is also another issue here: if we are serious about deterrence, then the most egregious cases of corruption by companies should result, we would argue, in the kind of sanctions that may create collateral consequences. Otherwise, we are banking all our enforcement on an empty threat.

      5. And finally – yes we do meant only DPAs and NPAs in the US context. Whether there is a real and significant difference between a company pleading guilty in a plea bargain and a company getting a DPA in the US for foreign bribery is a very interesting question.

  2. Oh, by the way, you do make a nice point that my sympathy to much more severe FCPA penalties is in some tension with other of my arguments (for example, my criticisms of expanded debarment and my concerns about expanded enforcement actions by other jurisdictions and/or private parties). I agree that there’s a tension, and that tension might–MIGHT–counsel against such a large increase in potential FCPA penalties. But I’d make two points in response: (1) If we’re going to increase expected FCPA sanctions, doing so through increasing the size of the fines will in most cases be more effective and less socially harmful than doing it any other way, so even if we can’t increase fines super-dramatically, it’s still better to adjust expected penalties this way than to, say, make more profligate use of debarment; (2) Larger potential fines create more flexibility for prosecutors, enabling them to offer stronger inducements to do things like self-report and cooperate, even while increasing the expected penalty. That is, we can increase deterrence while preserving the incentive to self-disclose by (a) raising the expected fine on firms that self-disclose, but (b) raising the expected fine on firms that don’t self-disclose by an even larger amount.

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