It was reported this week that one of the US Department of Justice’s largest ever prosecutions under the FCPA has collapsed during trial.  It was formally dropped on 21 February 2012 at the DOJ’s request.  The prosecution first hit the headlines over two years ago in January 2010 when the DOJ charged 22 individuals with agreeing to pay bribes to an FBI agent posing as a buyer of security equipment for Gabon.  However, two six month long trials in the case produced unsatisfactory results.  It is reported that juries could not reach a verdict with respect to seven defendants; two were acquitted by a jury and another was acquitted by a judge although three others pleaded guilty earlier on.

The prosecutors made a court filing in which they stated “the government has carefully considered (1) the outcomes of the first two trials…(2) the impact of certain evidentiary and other legal rulings in the first few trials and the implications of those rulings for future trials…and (3) the substantial governmental resources, as well as judicial, defence and jury resources, that would be necessary to proceed with another four or more trials…in light of all the foregoing, the government respectfully submits that continued prosecution of this case is not warranted under the circumstances”.

In a separate but well-timed move the US Chamber of Commerce has published its own strong objections to the way in which the FCPA is being enforced and its effect on corporate America in terms of both the added expense of compliance and also its ability to win business overseas.  On 21st February 2012 the US Chamber of Commerce and 36 other business organisations and professional associations across America sent a joint letter to Lanny Breuer, the Assistant Attorney General at the DOJ, and Robert Khuzami, the Director of Enforcement at the US Securities and Exchange Commission, requesting guidance to “address several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA.

The signatories to the letter claim to represent more than 3 million businesses and organisations.

The letter is 10 pages long and too detailed to do justice to in this blog post but you can read it here.

In summary, the issues which the senders of the letter have asked for guidance include:

  • Definitions of “foreign official” and “instrumentality” under the FCPA

The letter states that “without a clear understanding of the parameters of “instrumentality” and “foreign official”, companies have no way of knowing whether the FCPA applies to a particular transaction or business relationship, particularly in countries like China where most, if not all, companies are at least partially owned or controlled by the state.  The result of these circumstances has been a chilling effect on legitimate business activity (as companies perceive a real risk of prosecution even in scenarios involving only the most remote and attenuated connection to foreign governments) and a costly misallocation of compliance resources…”

By comparison Section 6 of the Bribery Act deals with bribery of a foreign public official section 6(5) defines foreign public official as meaning an individual who (a) holds a legislative, administrative or judicial position of any kind, whether appointed or elected of a country or territory outside the United Kingdom; (b) exercises a public function (1) for or on behalf of a country or territory outside the United Kingdom or (2) for any public agency or public enterprise of that country or territory or (c) is an official or agent of a public international organisation.

Although the definition in the UK law is reasonably clear, there is bound to be debate when this section and definition first comes before the courts, whenever that is, whether it is one year or ten years from now.

  • Consideration of compliance programs in enforcement decisions

The letter continues that under the current FCPA enforcement regime the business community lacks confidence that the DOJ and the SEC will give sufficient consideration to potential defendant companies’ strong, pre-existing compliance programs when making enforcement decisions.  Although the DOJ and the SEC recommend that prosecutors should consider a company’s compliance program when making enforcement decisions, the letter suggests that the guidance given is presented in a manner which is so general that it provides little concrete aid to companies attempting to implement or enhance compliance programs.  It goes on to suggest that the guidance should establish standards that businesses may adopt and incorporate as part of their compliance programs, and identify the specific components that the DOJ and the SEC consider to be essential to a robust FCPA compliance program.

By comparison, of course, under UK law the British government issued a 40 page Guidance on 30 March 2011 pursuant to section 9 of the Bribery Act.  Even though that guidance is not prescriptive, it does offer some considerable assistance to corporations which are trying to comply with the Bribery Act.

The letter also suggests that the DOJ and the SEC should describe in the guidance how they would factor companies’ voluntary disclosures of FCPA violations by their employees into enforcement decisions.

  • Parent-subsidiary liability

The letter continues that the FCPA itself does not set out circumstances when a parent company may be held liable for a foreign subsidiary’s violations of the anti-bribery provisions of the FCPA.  It points out that the approach taken by the DOJ and by the SEC are not identical.  It continues

“in the absence of any judicial guidance on the contours and the limits, if any, of this potential parent-company liability, it remains a source of significant concern for US companies with foreign subsidiaries.  Accordingly, we respectfully request that the forthcoming guidance clarify and confirm that both the Department and the SEC consider parent-company liability under the FCPA’s anti-bribery provisions to extend only to circumstances in which the parent actually authorised, directed or controlled the improper activity of its subsidiary…”

Under the UK Bribery Act, by comparison, the issue of the liability of a parent for its subsidiary is addressed in the Guidance at paragraph 36 “…likewise, having a UK subsidiary will not, in itself, mean that a parent company is carrying on a business in the UK, since a subsidiary may act independently of its parent or other group companies…”

Under paragraph 42 of the same Guidance, it states that, in describing the liability for associated parties under the Bribery Act

“…so, for example, a bribe on behalf of a subsidiary by one of its employees or agents will not automatically involve liability on the part of its parent company, or any other subsidiaries of the parent company, if it cannot be shown the employee or agent intended to obtain or retain business or a business advantage for the parent company or other subsidiaries.  This is so even though the parent company or subsidiaries may benefit indirectly from the bribe.  By the same token, liability for a parent company could arise where a subsidiary is the “person” which pays a bribe which it intends for result in the parent company obtaining or retaining business or vice versa…”

  • Successor liability

Under the FCPA, a company may be held liable for the actions of a company that it acquires or merges with, even if those actions took place prior to the acquisition or merger and were entirely unknown to the acquiring company.  While a company in certain circumstances may mitigate its risk by conducting due diligence prior to an acquisition or merger (or, in certain circumstances, immediately following the transaction), such due diligence is only a factor that the DOJ or the SEC may consider when deciding whether to exercise their discretion not to prosecute or file claims.  The letter continues to say that the

 “threat of successor liability even if a thorough investigation is undertaken prior to a transaction has had a significant chilling effect on mergers and acquisitions, and therefore clearer parameters for successor liability under the FCPA are needed…”

It points out that although the DOJ addressed this topic in Opinion Release 08-02, the Department’s guidance required the company in question to conduct due diligence on a scale equivalent to a massive internal investigation in order to avoid prosecution for any FCPA violations committed by the acquired company prior to the transaction.  The letter concludes on this topic that the sweeping expectations set out in Opinion Release 08-02 are unrealistic and unduly punitive and merit thorough reconsideration.

In relation to the Bribery Act, by comparison, the UK Guidance offers no comment in relation to due diligence on mergers and acquisitions.  Cautious purchasers will ask their lawyers to establish that there are “adequate procedures” in place at the target company prior to its acquisition and will demand suitable warranties and indemnities.  In practice if the purchasing company later discovers that offences have taken place at the acquired company, the SFO will look much more favourably on the purchaser if it approaches the SFO to discuss circumstances as quickly as possible.  This can be done confidentially and the SFO will offer guidance very quickly.

  • De minimis gifts and hospitality

The DOJ has stated that it does not prosecute conduct involving de minimis gifts and hospitality to foreign officials although it states that in fact such gifts and hospitality remain subject to prosecution at the whim of the government.

The letter points out that compliance officers of corporations are routinely called upon to address questions relating how much can be spent on a meal; how many meals in a year may an official be invited to attend and similar issues.  The letter concludes that in the absence of any guidelines from the government regarding the threshold below which it ordinarily would not bring such cases has resulted in a serious misallocation of compliance resources to detect and address potential breaches that should fall below any reasonable threshold.

By comparison, the UK Guidance under the Bribery Act gives many examples of and “case studies” for gifts and hospitality.  Again, whilst they are not wholly prescriptive, they do give a good indication of the reasonable approach that UK prosecutors will take in considering such circumstances.

Indeed, the letter concludes on this topic “As you know, the UK Ministry of Justice already has provided such Guidance regarding the application of the UK Bribery Act” and it cites from the UK guidance and concludes “similar concrete examples in your forthcoming Guidance would be extremely useful to the business community”.

  • Mens rea standard for corporate criminal liability

Although the FCPA expressly limits an individual’s liability for violations of the anti-bribery provisions to situations in which the individual has committed those violations “wilfully”, it does not contain any similar language with regard to corporate criminal liability.  The letter continues “this inconsistency in the statutory language appears to expose companies to criminal penalties for violations of the FCPA even if there is no identifiable person of authority who knew that the conduct was lawful or even wrong…”

By contrast of course the corporate liability offence in the UK Bribery Act, in Section 7, is a strict liability offence so no knowledge of any person of authority in the company is required.  The UK legislative intention by making it a strict liability offence was to put a very heavy burden on the organisation to put in place adequate procedures in order to protect itself from the risk of committing an offence under Section 7, in other words failing to prevent bribery.  The strict liability offence also addressed the considerable difficulties in securing convictions of corporate defendants on the “controlling mind” theory in the UK.

The letter concludes by requesting that the formal guidance which the DOJ and SEC are to issue in 2012 should have the same force as other policies of the DOJ and the SEC and that to ensure uniform policy it should be issued by or adopted by both agencies.

We will blog further on this subject should either of the agencies respond to the letter publicly or indeed when the guidance which has been promised by them in 2012 is issued.