Guest Post: The Impending Reckoning on the U.S. Government’s Expansive Theory of Extraterritorial FCPA Liability

Today’s guest post is from Roxie Larin, a lawyer who previously served as Senior Legal Counsel for HSBC Holdings and is now an independent researcher and consultant on corruption, compliance, and white collar crime issues.

The U.S. Foreign Corrupt Practices Act (FCPA) is a powerful tool that the U.S. government has wielded to combat overseas bribery—not just bribery committed by U.S. citizens or firms, but also bribery committed by foreign nationals outside of U.S. territory. (The FCPA also applies to any individual, including a non-U.S. person or firm, who participates in an FCPA violation while in the United States, but this territorial jurisdiction is standard and noncontroversial.) The FCPA, unlike many other U.S. statutes, does not require a nexus of the alleged crime to the United States so long as certain other criteria are satisfied. For one thing, the statute applies to companies, including foreign companies, that issue securities in the U.S. In addition, the FCPA covers non-U.S. individuals or companies that act as an employee, officer, director, or agent of an entity that is itself covered by the FCPA (either a U.S. domestic concern or a foreign issuer of U.S. securities), even if all of the relevant conduct takes place outside U.S. territory.

In pursuing FCPA cases against non-U.S. entities for FCPA violations committed wholly outside U.S. territory, the agencies that enforce the FCPA—the Department of Justice (DOJ) and Securities and Exchange Commission (SEC)—have pushed the boundaries of this latter jurisdictional provision. They have done so in part by stretching to its limits (and perhaps beyond) what it means to act as an “agent” of a U.S. firm or issuer. (The FCPA provisions covering foreign “officers” and “employees” of issuers and domestic concerns are more straightforward, but also more rarely invoked. It’s rare for the government to have evidence implicating a corporate officer, and the employee designation doesn’t help unless the government is either able to dispense with notions of corporate separateness, given that foreign nationals are typically employed by a company organized under the laws of their local jurisdiction.) Until recently, the government’s expansive agency-based theories of extraterritorial jurisdiction had neither been tested nor fully articulated beyond a few generic paragraphs in the government’s FCPA Resource Guide. In many cases, foreign companies affiliated with an issuer or domestic concern have settled with the U.S. government before trial, presumably conceding jurisdiction on the theory that the foreign company acted as an agent of the issuer or domestic concern. (This concession may be in part because a guilty plea by a foreign affiliate is often a condition for leniency towards the U.S. company.) Hence, the government has not had to prove its jurisdiction over these foreign defendants.

But there was bound to be a reckoning over the U.S. government’s untested theories of extraterritorial FCPA jurisdiction, and the SEC and DOJ’s expansive theories are increasingly being tested in court cases brought against individuals who, sensibly, are more prone to litigating their freedom than companies are their capital. And it turns out that the U.S. government’s expansive conception of “agency” may be difficult to sustain in cases where the foreign national defendant—the supposed “agent” of the U.S. firm or issuer—is a low- or mid-level employee of a foreign affiliate, and even more difficult to sustain so where the domestic concern is only an affiliate and not the parent company. Continue reading

The Continuing Controversy Over the Destination of the Petrobras Penalties: The Coronavirus Crisis Has Ended One Debate, But May Start Another

As most readers of this blog are likely aware, the Brazilian state-owned oil company Petrobras has been at the center of a massive bribery scandal in Brazil, and the main focus of Brazil’s so-called Car Wash (Lava Jato) Operation. That Operation uncovered evidence that between 2006 and 2014, corporations paid kickbacks to senior Petrobras officials for inflated contracts, and the Petrobras officials funneled a substantial portion of those illicit proceeds to the political parties in the government’s coalition. These revelations lead to legal actions not only in Brazil, but also in the United States. Because Petrobras issued securities in the U.S., and because U.S. law imposes criminal liability on a corporation for the conduct of the corporation’s employees, Petrobras was potentially liable under the U.S. Foreign Corrupt Practices Act (FCPA), because Petrobras officers had facilitated corruption abroad (that is, in Brazil). In September 2018,Petrobras signed a non-prosecution agreement (NPA) with the United States Department of Justice, according to which the company would pay over US$850 million in penalties. But, crucially, only 20% of that penalty would be paid to the United States; the remaining 80%, according to the terms of the NPA, was to be paid by Petrobras “to Brazil.”

This provision sparked great controversy and debate in Brazil over the destination of that money—a debate that seems to have been ended (for now) by the coronavirus crisis. The root of the problem is that under Brazilian law, Petrobras (the corporate entity) was considered victim of the bribery scheme, not a perpetrator. So, from a Brazilian perspective, it was hard to comprehend why the company should be obligated to pay for crimes that harmed it. Indeed, in many of the Car Wash cases resolved in Brazil, penalties recovered from other entities (such as the firms that paid kickbacks) were transferred to Petrobras. But under the NPA with U.S. authorities, Petrobras was required to pay over US$650 million to Brazil. What Brazilian entity or entities should get that money? And who should decide on the allocation?

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Guest Post: The Infeasibility of Evidence-Based Evaluation of Transnational Anti-Bribery Laws

Kevin Davis, the Beller Family Professor of Business Law at New York University School of Law, contributes today’s guest post, based on his recent working paper.

Academics and policymakers enthusiastically endorse “evidence-based” policymaking, for obvious reasons. (After all, what is the alternative? Faith? Popularity contests?) But while evidence—including quantitative evidence—is often helpful, we must be mindful of the limits on what empirical analysis can tell us about important topics. Take the regulation of transnational bribery. Scholars and policymakers would like to know if the current regime—laws like the U.S. Foreign Corrupt Practices Act (FCPA) and U.K. Bribery Act, and international instruments like the OECD Anti-Bribery Convention—has “worked.” That is, have these instruments reduced bribery by the firms that they cover? And did those laws have additional, possibly undesirable collateral consequences, for example reducing investment in countries perceived to be corrupt?

The most sophisticated efforts to answer these questions (see, for example, here and here and here) essentially rely on what social scientists call “natural experiments.” First, the intervention (the law or policy change) of interest, which (in a borrowing from medical terminology) researchers call the “treatment.” Next, one must identify the population of interest—say, firms or countries—and an outcome of interest (such as the frequency of bribery or the level of investment). Then, the researcher identifies the subset of those entities that are affected by the intervention (for example, the firms that fall under the jurisdiction of the new anti-bribery law); this is the “treatment group.” The researcher also identifies another subset of entities—the “control group”—that appears otherwise similar to the treatment group, but did not receive the treatment (for example, a group of firms that are outside the jurisdiction of the new law). The big difference between a “controlled experiment” and a “natural experiment” is that in a controlled experiment the researcher can randomly choose which members of the population receive the treatment (for example by randomly selecting some patients to get a new drug and giving the other patients a placebo), but in a natural experiment, the assignment of the treatment is done not by the researcher, but by some “natural” process in the world. In trying to figure out the effect of an anti-corruption law, it generally is not feasible to conduct a controlled experiment: researchers can’t decide that these firms but not those firms, selected at random, will fall under the jurisdiction of an anti-bribery law. So the best that researchers can do is to rely on natural experiments and try to account as best they can for possible differences between the control group and the treatment group by including additional control variables in a multivariate regression.

Unfortunately, when it comes to studying the effects of transnational anti-bribery laws, these sorts of studies face several fundamental challenges, which are all too often overlooked or understated. Continue reading

How Much Should We Worry That Trump’s Top Economist Is “Looking Into” Weakening the FCPA?

As regular GAB readers have likely figured out, I’m not terribly good at providing timely “hot take” reactions to news items—I’m too slow and get too distracted with other things, and by the time I weigh in on some recent development that caught my eye, I’m usually a couple of news cycles behind. So it will be with this post. But I did want to say a bit about the mini-controversy over comments a couple weeks back from Larry Kudlow, the Director of the White House National Economic Council, about the Trump Administration’s views on the Foreign Corrupt Practices Act (FCPA). For those who might have missed the reports, here’s the basic gist:

A forthcoming book about the Trump Administration includes the story (which had already been reported multiple times) that back in 2017, President Trump had vigorously complained to then-Secretary of State Rex Tillerson that the FCPA put U.S. companies at an unfair disadvantage and ought to be scrapped or drastically altered. (Tillerson, to his credit, pushed back, and no action was ultimately taken.) Several pre-release commentaries on the book focused on this anecdote (see here and here), and a couple weeks back a reporter asked Kudlow about it. Kudlow responded, “We are looking at [the FCPA], and we have heard some complaints from our companies…. I don’t want to say anything definitive policy-wise, but we are looking at it.” When pressed for details, Kudlow said, “I don’t want to say anything definitive policy-wise…. Let me wait until we get a better package [of reforms].”

Kudlow’s comments triggered a great deal of critical reaction, including statements supporting the FCPA from civil society organizations like Transparency International and the Coalition for Integrity. These statements were forceful but measured, mainly emphasizing the benefits of the FCPA. Some other media reactions were more impassioned, playing up the narrative that the Trump Administration was planning to push for the legalization of (foreign) bribery (see here and here). That latter strain in the commentary, in turn, provoked pushback from other analysts, who saw Kudlow’s remarks (and perhaps also the President’s own statements and actions in this area) as no big deal (see here and here).

My own take is somewhere in the middle. On the one hand, we shouldn’t exaggerate the significance of Kudlow’s remarks. But neither should we dismiss them as meaningless or harmless. Continue reading

In Pressuring Ukraine To Open Criminal Investigations, Trump’s Associates May Have Committed Many Crimes. But Violating the Foreign Corrupt Practices Act Probably Wasn’t One of Them.

Right now, the biggest corruption story in the U.S., and probably the world, concerns efforts by President Trump and his associates, both inside and outside the U.S. government, threaten to withhold U.S. military aid from Ukraine in order to pressure the Ukrainian government into opening investigations that would help Trump politically. It’s clear at this point, except perhaps to the most rabid partisans, that there was indeed a “quid pro quo,” and the discussion has now turned to the question whether, with respect to President Trump specifically, he should be impeached for his conduct related to this episode (the issue that Rick focused on in yesterday’s post), and, with respect to whether Trump, his private lawyer Rudy Giuliani, or anyone else committed any crimes.

On that second question, commentators have suggested a whole range of criminal laws that some or all of the parties involved might have broken, including:

  • The section of the campaign finance laws that prohibits the “solicit[ation” from a foreign national of a “contribution or donation” to an election campaign of any “thing of value”;
  • The federal anti-bribery statute’s prohibition on any federal public official “directly or indirectly, corruptly demand[ing or] seek[ing] … anything of value personally or for any other person or entity, in return for being influenced in the performance of any official act”;
  • The anti-extortion provision of the Hobbs Act, which prohibits “the obtaining of property for another … under color of official right” (as well as the attempt or conspiracy to do so);
  • The wire fraud statute, which prohibits the devising of any “scheme or artifice to defraud” that involves use of any interstate (or international) wire communication (such as a phone call), where the term “scheme or artifice to defraud” is specifically defined elsewhere in the statute as including a scheme “to deprive another of the intangible right of honest services.” (This may seem a bit opaque to readers unfamiliar with this corner of U.S. law, but in a nutshell, so-called “honest services fraud” is a theory that when a public official, or some other person in a position of trust, engages in a corrupt scheme to, say, solicit bribes, that individual defrauds her principals by depriving them of her honest services. For an explanation of how this could apply to Trump in the Ukraine case, see here.)
  • In the case of Mr. Giuliani and other parties who do not work for the U.S. government, the Logan Act, which prohibits private citizens from corresponding with any foreign government or foreign government official “with the intent to influence the measures or conduct of any foreign government …. in relation to any disputes or controversies with the United States.”
  • Various provisions of Ukrainian law.

In addition to all of these possibilities, which strike me as at least facially plausible given the evidence that has come to light so far, some commentators have suggested that President Trump’s associates, such as Mr. Giuliani, may have violated the Foreign Corrupt Practices Act (FCPA) (see here and here). This argument hasn’t gotten much traction, in my view for good reason. Even for someone like me, who generally has a more expansive view of the FCPA than do some other commentators, it’s hard to see how the evidence we have so far would suggest a plausible FCPA violation. There are two main reasons for this: Continue reading

New Podcast Episode, Featuring Kevin Davis

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this episode, I interview Professor Kevin Davis, of the New York University Law School, about his new book, Between Impunity and Imperialism: The Regulation of Transnational Bribery (OUP 2019). As the book’s provocative title suggests, Professor Davis has a mixed assessment of the current legal framework on the regulation of transnational corruption (a framework dominated by rules set by the OECD countries, especially the United States), recognizing the progress that has been made in ending impunity, but at the same time highlighting the costs and limitations of the current system, especially from the perspective of developing countries. In addition to our general discussion of his critique–including the reasons for his use of the term “legal imperialism”–we also discuss a number of more specific legal questions, including individual vs. corporate liability for corruption, the nullification of contracts tainted by bribery, the asset recovery framework, and victim compensation more generally.

You can find this episode, along with links to previous podcast episodes, at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

We Need An Extraterritorial Law To Hold Companies Responsible For Clean Global Supply Chains.

Six years ago, the deadliest garment industry accident in modern history killed more than 1,100 people and injured 2,500 in an apparel manufacturing facility, Rana Plaza, in Bangladesh. Perhaps the worst part is that the tragedy was entirely preventable, and the result of corrupt practices by the politically well-connected owner. The Rana Plaza building violated codes, with the four upper floors having been constructed illegally without permits. The foundation was substandard, and despite safety warnings that led shop owners and a bank branch on lower floors to immediately close, owners of the garment factories on the upper floors instructed employees to work the next day to keep up with customer demand. The customers that the garment factory was trying to satisfy? Mango, Primark, Walmart, the Dutch retailer C & A, Benetton, and Cato Fashions, among other recognizable global brands. And yet none of the US brands accepted responsibility for the problems in their supply chains that enabled this disaster (unlike non-US brands that contributed millions of dollars into a victim support fund).

Years later, not much has changed. Despite some recent encouraging developments, the current legal regime still does not do enough to hold international companies responsible for health and safety violations by their suppliers, and two-thirds of corporations continue to turn a blind eye to supply chain corruption. Such corruption can lower production costs and increase profits by enabling suppliers to engage in a wide range of insidious practices, including cutting critical corners on labor, health and safety. And when an accident does happen, companies can walk away free of any liability for the practices of their subcontractors, as in Rana Plaza. The beneficiaries of these corrupt practices are not only the owners of the supply factories, but also the multinational purchasers and their consumers in rich countries, who get cheaper goods at the expense of the health and safety of disadvantaged workers in low-cost manufacturing hubs.

This is ethically unacceptable.  And because we cannot expect companies to engage in responsible sourcing on their own volition, the right response is more expansive liability on companies that do not take sufficient steps to ensure clean supply chains. While the ideal solution might be some sort of broad international legal regime, that isn’t going to be feasible anytime soon, meaning that countries like the United States should act unilaterally and create a bill focused on bringing about clean supply chains.

The law I advocate here would have the following features:

Continue reading

What Was the Holdup on the Walmart FCPA Settlement? Some Wild Guesses

Most Foreign Corrupt Practices Act (FCPA) cases don’t attract much attention outside of a relatively small circle of lawyers, compliance specialists, anticorruption activists, and other FCPA nerds. But every once in a while a case comes along that gets a bit more attention from the mainstream media, or at least from the general business press. The Walmart case is one such example. The greater attention to that case is probably due to some combination of the Pulitzer Prize winning New York Times reporting on bribes allegedly paid by Walmart’s Mexican subsidiaries—allegations that helped get this case rolling—as well as the fact that the retail giant is more of a household name than, say, Alcatel or Och-Ziff.

As most readers of this blog (a group in which I imagine FCPA nerds are overrepresented) are likely aware, the Walmart case finally settled in late June, with the total monetary penalties coming to about $283 million. I already did a bunch of blog posts on the Walmart case while it was in process—including, perhaps most relevant now, a piece two years ago reflecting on what lessons we might learn if the case settled for somewhere in the neighborhood of about $300 million, which several news outlets had declared was about to happen. And since the announcement of the settlement this past June 20, there’s been no shortage of commentary on the case in the FCPA blogosphere (see, for example, here, here, here, and here). So I don’t have too much to add to the discussion.

I did, however, want to address one relatively small but intriguing puzzle. As I just mentioned, back in May 2017, news outlets reported that the Walmart case was on the verge of settling, for somewhere in the vicinity of $300 million. Over two years later, in June 2019, the Walmart case settled… for an amount very close to $300 million. So, what was the holdup? If the parties had basically worked out the amount that Walmart was going to have to pay back in May 2017, why did it take another two years to finalize the settlement? Neither side has an obvious incentive to delay: Walmart would like to put this behind it and stop paying its expensive lawyers, and the DOJ and SEC’s respective FCPA units have limited staff and a ton to do, and would also like to get the case over and done with. It’s possible that the delay was due to haggling over the exact penalty amount, or that Walmart thought maybe it could get a better deal from the Trump Administration and so decided to hold out, or perhaps there was some last-minute development that one side or the other thought might justify substantial shift in the settlement amount, even if in the end it didn’t. But I would guess (and it really is just a guess) that the two-year delay was due to one or both of the following two factors: Continue reading

“Ghost Money”: Assessing the Risks of State-Sponsored Bribery

Back in 2014, the New York Times reported that the Central Intelligence Agency had been paying the office of then-President of Afghanistan Hamid Karzai tens of millions of dollars in cash for more than a decade. Afghan officials termed these payments “ghost money,” a convenient term that I adopt here—though some might simply call it bribery. This case was hardly unique. Indeed, the practice of engaging in state-sponsored bribery in the interests of national security appears to be a longstanding and global one: Over last half-century or more, the CIA has reportedly made cash payments to heads of state from Angola to Zaire in exchange for favors.

U.S. officials have defended this controversial practice. One former CIA operations officer even went so far as to say that state-sponsored bribery serves a productive role in the anticorruption fight: where the CIA is asked “to monitor the level of corruption in a place like Afghanistan,” “it only makes sense that U.S. operatives would have to talk to, and if necessary, bribe those involved in the corruption to find out what is going on.”

Yet even if one sets aside the question of whether ghost money itself presents the same normative concerns as regular bribery by private parties (an issue previously discussed on this blog), ghost money raises more problems than it solves for the anticorruption fight. In particular, the U.S. practice of making ghost money payments in places like Afghanistan likely has three significant adverse collateral consequences: Continue reading

Why the WTO Should Tackle Border Corruption

When a state systematically fails to suppress bribery in its customs service, should that be an actionable violation of international trade law? More broadly, to what extent do anticorruption provisions have a place in the law of the World Trade Organization? In a 2014 post on this blog, Colette van der Ven squarely addressed these questions and concluded that the answer is no: the WTO, in her view, is not well suited to handling complaints of corruption.

I disagree with Colette’s well-reasoned analysis. While she is right to point out substantial challenges to grappling with anticorruption through the WTO, these challenges are surmountable—and the importance of a WTO remedy counsels in favor of surmounting them. Continue reading