Even “Tough on Corruption” Proponents Should Worry about “Zero Tolerance” Rules

“Zero tolerance for corruption,” as Professor Stephenson suggested in a 2014 post, is an expression that can be construed in several different ways: from a general attitude that corruption should be considered “a high priority,” to an uncompromising policy mandating that “all feasible measures to minimize corruption must always be used.” In this post I will discuss another common, narrower understanding of “zero tolerance for corruption,” according to which corruption – at least in certain contexts – must always be addressed with a mandatory predetermined harsh sanction. A clear example of such a “zero tolerance” rule is the Colombian and Peruvian law demanding the instant termination of “any public contract tainted by corruption.” Another illustrative example is the EU’s directive mandating debarment from public contracting of any company convicted of offenses of corruption, fraud, or money laundering.

Granted, the potential deterrent value of mandatory harsh sanctions for corruption is substantial. A company aware that any conviction for corruption will inevitably incur severe penalties is more likely to be dissuaded from violating the law. Nevertheless, the costs of this “take no prisoners” approach to anticorruption may be much higher than the actual benefit. Thus, as Rick Messick recently showed, the law mandating termination of corruption-tainted public contracts has proven to have disastrous ramifications for the infrastructure in Peru and Colombia. As it turns out, not only has the nondiscretionary cancellation of corruption-tainted public contracts halted the advancement of existing infrastructure projects, but it has also deterred investors and developers from taking any part in such projects, for fear that they will be cancelled due to “the tiniest of infractions by anyone associated with the project.” Similarly, debarment is nothing less than “a death-sentence” for companies whose main business involves public contracts, and its mandatory imposition for even a relatively minor offense may be so draconian as to be counterproductive.

This kind of cost-benefit reasoning, though compelling to some, would not convince many proponents of an unequivocally “tough on corruption” stance. Many anticorruption hardliners believe in maximizing deterrence notwithstanding any associated costs. From this point of view, the end of deterring corruption justifies all necessary means. Yet even for those who take this view, it turns out that “zero tolerance” may not be the ideal approach. Supporters of “zero tolerance” rules assume that adoption of mandatory sanctions for corruption would guarantee that actors in the anticorruption system – judges, prosecutors, and legislators – will adhere to the “zero tolerance” ideal, and that such rules would be sustainable. But these decisionmakers in the anticorruption system may evade the application of “zero tolerance” rules where doing so would lead to sanctions perceived (rightly or wrongly) as patently absurd or unjust. In other words, a “zero tolerance” rule on the books does not guarantee that a “zero tolerance” policy would actually be implemented. Consider the various ways that actors in the anticorruption system may avoid triggering the mandatory sanctions for corruption:

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Colombia’s Harsh Criminal Penalties for Corruption Are an Illusion. Here’s How To Fix That.

Whenever a new corruption scandal comes to light, many politicians instinctively react with strong punitive rhetoric, and this rhetoric often translates into action, usually in the form of amendments to criminal codes that make penalties for corruption offenses harsher. Latin America supplies plenty of examples of this (see here, here, here, and here.) Yet despite this emphasis on punishment, many corrupt politicians avoid justice altogether, and in the rare cases where they are found guilty, many end up doing only short stints in comfortable detention centers. Consider, for example, Colombia, which has unusually good public data on corruption convictions and sentences thanks to the work by the Anticorruption Observatory of the Secretary for Transparency. According to this data, between 2008 and 2017, criminal courts in Colombia have convicted 2,178 individual defendants for corruption (51.2% for bribery, 23% for embezzlement, and the remainder for other corruption-related offenses), but only about one-quarter of these convicted defendants actually went to prison. Approximately half of these defendants received suspended sentences, while another quarter were sentenced to house arrest. And of those who did go to prison, the time served was only about 22 months on average, much lower than the penalties on the books for corruption offenses. No wonder many Colombians believe the criminal justice system is too lenient.

The reason that actual Colombian sentences end up being so light, despite the penalties on the books being so heavy, is that Colombian law includes a set of provisions that allow for a variety of sentence reductions if certain conditions are met. For example, a defendant who accepts guilt can receive a 50% reduction in his prison term. Inmates may also reduce their prison term through work, with very generous terms: An inmate reduces his sentence by one day for every two days of ordinary work (8 hours of work per day), or for every four hours of work as a teacher. An inmate can also reduce his sentence through in-prison education, with  six hours of study translating into one day of sentence reduction. Furthermore, once an inmate has served 60% of his sentence, he can petition for release for good behavior. 

This excessive leniency needs to be addressed, not only in corruption cases but in all cases. Specifically, Colombia should adopt the following revisions to its criminal laws: Continue reading

Settling Foreign Bribery Cases: Suggested Guidelines

At the request of the OECD Secretary-General, a High Level Advisory Group produced a report in October 2017 on how the OECD could strengthen its work combating corruption and promoting integrity.  One recommendation was that the organization “create and publish model guidelines” for member states to follow when settling cases arising from the bribery of a foreign public official.  Noting concerns (discussed in many posts on this blog and elsewhere) that pretrial settlements can let defendants off too easy, the advisory group cautioned that the guidelines should be “consistent with the requirement for effective, proportionate and dissuasive sanctions under the OECD Anti-Bribery Convention.”

Earlier this year, Professor Tina Søreide of the Norwegian School of Economics and former Siemens General Counsel Peter Solmssen organized a multinational group of defense lawyers, prosecutors, academics, and civil society activists to suggest guidelines.  “Principles for the Implementation and Use of Non-Trial Resolutions of Foreign Bribery Cases” together with a set of explanatory notes were released last week.  The principles, the explanatory notes, and a letter transmitting the documents to the OECD are here.

Professor Søreide, Mr. Solmssen, and the others involved in developing the principles welcome reader comments.

What Chinese Cuisine and Deferred Prosecution Agreements Have in Common

As Kees noted Monday, the use of American-style deferred prosecution agreements (DPAs) to resolve corporate corruption cases short of trial is on the rise.  The United Kingdom, France, Argentina, and most recently Singapore now permit prosecutors to suspend or even drop altogether the prosecution of a firm for a corruption offense in return for the accused firm paying a fine, adopting measures to prevent future offenses, and cooperating with ongoing investigations.  Australia and Canada are on the verge of approving DPAs, and influential voices in India and Indonesia are urging their adoption too.

Apostles say DPAs allow governments to realize the benefits of a criminal conviction without the need for a lengthy, expensive, arduous trial against a well-funded corporate defendant where defeat is always a risk.  Former U.K. Attorney General Lord Peter Goldsmith told a New Delhi audience last October that once India begins using DPAS, companies would start coming forward and admit wrongdoing.  During the recent debate in Singapore one commentator observed that DPAs “provide an incentive to corporate entities to confront criminal conduct within their ranks,” and a group of Indonesian professors claim DPAs will be particularly valuable in their country.   In Indonesia, conviction of a corporation provides no assurance the defendant will not commit the same offense again while, they write, a DPA does.

DPA evangelists are about to learn what DPAs have in common with Chinese cuisine.  The first-time visitor to China soon discovers that Chinese food in China is unlike Chinese food at home.  Beef broccoli tastes much different outside China than in. Connoisseurs of DPAs will shortly find that what American prosecutors are able to cook up looks much different when prepared abroad.     Continue reading

The Role of Judicial Oversight in DPA Regimes: Rejecting a One-Size-Fits-All Approach

In late March 2018, the Canadian government released a backgrounder entitled Remediation Agreements and Orders to Address Corporate Crime that outlines the contours of a proposed Canadian deferred prosecution agreement (DPA) regime. DPAs—also appearing in slightly different forms such as non-prosecution agreements (NPAs) or leniency agreements—are pre-indictment diversionary settlements in which offenders (almost exclusively corporations) agree to make certain factual admissions, pay fines or other penalties, and in some cases assume other obligations (such as reforming internal compliance systems or retaining an external corporate monitor), and in return the government assures the corporation that it will drop the case after a period of time (ordinarily a few years) if the conditions specified in the agreement are met. Such agreements inhabit a middle ground between declinations (where the government declines to file any charges, but where companies still might forfeit money) and plea agreements (which require guilty pleas to criminal charges filed in court).

While Canada has been flirting with the idea of introducing DPAs for over ten years, several other countries have recently adopted, or are actively considering, deferred prosecution programs. France formally added DPAs (known in France as “public interest judicial agreements”) in December 2016, and entered into its first agreement, with HSBC Private Bank Suisse SA, in November 2017. In March 2018, Singapore’s Parliament installed a DPA framework by amending its Criminal Procedure Code. And debate is underway in the Australian parliament on a bill that would introduce a DPA regime for offenses committed by corporations.

The effect of DPAs in the fight against corruption, pro and con, has been previously debated on this blog. One critical design component of any DPA regime is the degree of judicial involvement. On one end of the spectrum is the United States, where courts merely serve as repositories for agreements at the end of negotiations and have no role in weighing the terms of any deal. On the other end of the spectrum is the United Kingdom, where a judge must agree that negotiations are “in the interests of justice” while they are underway, and a judge must declare that the final terms of any DPA are “fair, reasonable, and proportionate.” British courts also play an ongoing supervisory role post-approval, with the ability to approve amendments to settlement terms, terminate agreements upon a determined breach, and close the prosecution once the term of the DPA expires.

Under Canada’s proposed system of Remediation Agreements, each agreement would require final approval from a judge, who would certify that 1) the agreement is “in the public interest” and 2) the “terms of the agreement are fair, reasonable and proportionate.” While the test used by Canadian judges appears to parallel the U.K. model—including using some identical language—the up-or-down judicial approval would occur only once negotiations have been concluded. This stands in contrast to the U.K. model mandating direct judicial involvement over the course of the negotiation process.

The decision by the Canadian government to chart a middle course on judicial oversight is all the more notable given that an initial report released by the Canadian government following a several-month public consultation regarding the introduction of DPAs appeared to endorse the U.K. approach, noting that the majority of commenters who submitted views “favoured the U.K. model, which provides for strong judicial oversight throughout the DPA process.” Moreover, commentators have generally praised the U.K. model’s greater role for judicial oversight of settlements, especially judicial scrutiny of the parties charged (or not) in any given case, the evidence (or lack thereof), and the “fairness” (or not) of any proposed deal.

Despite these positions, one should not reflexively view the judicial oversight regime outlined in Canada’s latest report as a half-measure. Perhaps the U.K. model would be better for Canada, or for many of the other countries considering the adoption or reform of the DPA mechanism. But the superiority of the U.K. approach can’t be assumed, as more judicial involvement is not categorically better. Rather than a one-size-fits-all approach favoring heightened judicial oversight, there are several factors that countries might consider when deciding on the appropriate form and degree of judicial involvement in DPA regimes: Continue reading

Report on the OECD’s 6th Global Anti-Corruption and Integrity Forum

For the sixth year running the Organization for Economic and Cooperation is hosting a two-day conference on ethics and corruption.  This year’s theme is how corruption has eroded trust in government and is helping advance what Secretary General Gurria termed in his opening remarks the three destructive “isms” haunting the world today: populism, nationalism, and protectionism.

The organization’s members are 35 of the world’ s richest nations (all save Russia and the PRC), and despite extraordinary levels of wealth by any historical measure, and recent upbeat economic news, citizens across the 35 have soured on their governments.  Trust in government across the 35 is at a record low while cynicism and distrust in elected leaders is at an all-time high, and though the Secretary General put much of the blame for the current funk on the 2008 economic crisis and the still uneven and unbalanced recovery, corruption, he stressed, has done its part.  Revelations of wrong-doing at the highest levels of government coupled with the petty corruption that frustrates the delivery of basic government services has only deepened citizens’ suspicions in their government.  If OECD member states are to win back citizens’ confidence, and avoid those destructive “isms,” they cannot, he argued, ignore the corruption question.

For those unable to fund a trip to Paris or with a sponsor or client willing to foot the bill, the conference home page with the agenda is here.  Four things I found useful on day one: Continue reading

Protecting the Rights of Countries Victimized by Corruption: the Swiss Approach

One topic on the agenda at next week’s OECD Integrity Forum is “Settling Foreign Bribery Cases with Non-Trial Resolutions.”  As explained here, a principal reason for a session on settlements is the concern that developing countries are losing out on them.  When the bribe-taker is a developing country official and the bribe-payer employed by a transnational corporation, the case is most often resolved through a settlement in the country where the corporation is headquartered.  And the developing nation’s interests are often ignored.

A notorious example is the bribery of Nigerian officials by the American company Halliburton.  The company settled the case with U.S. authorities for $559 million; years later it settled with Nigeria for $35 million, just over six percent of what the U.S. extracted.  Yet which country suffered the most from the bribery?  And which one is more pressed for resources?

Countries with civil law legal systems offer a solution that common law nations would well advised to consider: allow the victim government to participate as a party to the criminal proceeding with the right to file a claim for damages and indeed to help in gathering evidence for the prosecution.  Swiss law provides one example employed by several countries which have been victimized by corruption.    Continue reading