Authors: Peter Schweizer
Corporations and executives, of course, were eager to know how they could comply. A large corporation with thousands of employees around the world needed to have an effective compliance program. But Breuer explained that setting up a compliance system was not a defense. “We can’t engage in some sort of formalistic solution from a script that says if you check the following six boxes you’re guaranteed this outcome,” he said.
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So how
could
companies comply with the law and avoid the possibility of jail? As Professor Amy Westbrook noted, they had no guidance from the government.
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“The FCPA is enforced like no other law,” wrote another legal scholar. “The FCPA simply means what the DOJ and SEC says it means and ‘FCPA law’ largely develops through privately-negotiated agreements, subject to little or no judicial scrutiny.”
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One partner at the power law firm Gibson, Dunn & Crutcher summarized the uncertainty: “In this environment, you need to anticipate that the [government] is going to pursue any legal theory that it feels is remotely supportable. To some extent, you have to expect the unexpected.”
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The Holder regime didn’t just target firms, it named names. As Lanny Breuer put it, “One cornerstone of our FCPA enforcement policy: the aggressive prosecution of individuals.”
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The prosecution of specific executives went up dramatically, putting directors, officers, and even shareholders at risk “even if they did not have actual knowledge of the corrupt nature of the payments.”
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Little surprise that “executives reportedly spend sleepless nights wondering if their company will be the next target of an FCPA enforcement action.”
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Even more troubling is how the Justice Department selectively enforced the law, evidence that Jackson’s warnings in 1940 were prophetic. Enforcement and penalties have been random. The Justice Department approach “penalizes similar bad actors with mismatched severity,” said one legal expert.
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When asked by a congressional committee to explain how they chose which companies to go after, Assistant Attorney General Ronald Welch wouldn’t provide a direct answer, but rather, referred to general principles of prosecution.
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The DOJ admitted in an FCPA guideline that it had “declined to prosecute both individuals and corporate entities” in several dozen instances without explaining exactly why.
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One lawyer, writing in the
Northwestern Journal of International Law and Business
, put it bluntly: FCPA enforcement, he asserted, “has been largely inconsistent with traditional ‘rule of law’ values that emphasize the need to clearly define prohibited behavior, treat similar cases similarly, and apply a separation of powers structure.”
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What with the Justice Department’s aggressive and selective investigations and prosecutions, ambiguities in the law itself, and criminal investigations for small gifts of wine or cameras, the law has created real fear in the executive suite, which is what any extortion scheme is supposed to do: “throw fear.” Even the
suspicion
that you have violated the law can be expensive. It can drive down a company’s stock price, and class-action attorneys can file additional civil suits alleging executive “misconduct” whether the underlying charge is proven or not.
The question is: why? We have already seen why the Obama enforcers might not have prosecuted many bankers, and criminal prosecutors have laid off bundler Jon Corzine. They needed their campaign cash. But why, instead, prosecute so many transnational firms in such arbitrary ways?
The answer may not be hard to find. Panicked corporations and executives lawyered up—precisely what the extortionist had hoped for. Many corporations and executives turned to Holder’s and Breuer’s old law firm, Covington & Burling. The firm expanded its practice accordingly. Steven Fagell, who had migrated to the Justice Department from Covington to serve as counselor to Breuer, returned in 2010 to Covington, where he became the “co-chair of the global anti-corruption practice group.”
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Jim Garland, who had made a similar migration to serve as Holder’s counselor, also returned to Covington to work on anticorruption and white-collar criminal defense issues. As Holder and Breuer pursue their aggressive and widespread strategy of investigation and possible prosecution, Covington is doing a roaring business representing the very firms in the Justice Department’s crosshairs. The firm openly brags on its website that in 2010 it “successfully obtained two FCPA Opinion Releases from the U.S. Department of Justice” for its corporate clients, giving them guidance on particular issues. The firm also notes that it has performed “anti-corruption risk assessments for more than 30 global enterprises” and also represented an executive for KBR (Halliburton’s subsidiary), which was under investigation into alleged bribery. Covington also has an enormous practice helping corporations doing business in China avoid bribery charges.
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Other government lawyers who had helped ramp up enforcement of FCPA have left public service to join other firms. Mark Mendelsohn left the Justice Department and headed to a New York law firm to defend corporations from FCPA charges. On its website the firm brags that Mendelsohn “was responsible for overseeing all investigations and prosecutions under the FCPA” and that his “background and experience will be an enormous asset to our clients, which are facing increased scrutiny.” Mendelsohn is believed to be making $2.5 million a year in his new job.
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And the money to be made isn’t just in defending corporations under investigation. Many large companies, concerned about the law, voluntarily approach the Justice Department when they uncover possible violations, to ask for guidance. This is a business opportunity for well-connected law firms.
The Department of Justice requires many companies to hire a “monitor” to make sure they are complying with the ambiguous FCPA law. Usually the choice is someone who—yes, you guessed it—previously worked at either the Justice Department or the SEC. The fees for this kind of work can be enormous—up to $10 million a year or more. When the chemical firm Innospec pled guilty in March 2010 to technical violations of the law, Judge Ellen Segal Huvelle was furious at the high “monitoring fees” the firm was forced to pay. “It’s an outrage that people get $50 million to be a monitor,” she said in her Washington, D.C., courtroom. “It’s a boondoggle.”
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Attorney General Jackson had warned that prosecutors could pick the man and then find a technical violation to selectively target him. That appears to be precisely what the Justice Department and the SEC have been doing with the antibribery law. As two lawyers put it in the
Securities Regulation Law Journal
, the DOJ creates a circumstance where “vague standards and policies hinder compliance and make enforcement inconsistent.” This creates conditions for abuse.
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The department doesn’t choose to enforce the law broadly. Instead, it focuses on certain “targeted industries,” to whom it sends “sweep letters,” asking firms to come clean. The government makes it clear that investigators will go easier on these targeted firms if they turn in competitors. Hank Walther, the former assistant chief of the Foreign Corrupt Practices Act Unit at Justice, left in January 2012 (in order to work for the power firm Jones Day on antibribery compliance). He explained in an interview: “One of the purposes of DOJ’s use of industry-wide investigations is to encourage each company to be the first one in the door to admit its own wrongdoing, then to tell DOJ everything it knows about its competitors who are also engaged in similar forms of wrongdoing. . . . Companies that are in the government’s crosshairs are expected to disclose their own wrongdoing, then cooperate and provide information about their competitors.”
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As one legal scholar notes, however, these industrywide investigations can turn into “boundless enforcement agency fishing expeditions, the cost of which [is] borne by the companies subject to the sweeps.”
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How are the industries targeted? Justice Department and SEC officials won’t say. But it is interesting to note that the Holder regime’s first “sweep” letter went to the oil and gas industry just days after the midterm elections in November 2010.
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(In the elections held just days earlier, the oil and gas sector had given almost four times more money to the opposition party than it had given to the president’s party.
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Was that a factor?)
Hedge funds were also targeted after the 2010 elections. According to the
Wall Street Journal
, the SEC was launching a “sweep” of the hedge fund industry for possible FCPA violations. Federal investigators were apparently interested in whether hedge funds in the United States had provided “excessive entertainment or travel expenses” for employees of foreign government pension funds or government investment funds.
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Curiously, the hedge fund industry during the 2010 election had begun a dramatic about-face.
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In 2008 the industry had given over $13.2 million to Democrats and less than $6.6 million to the GOP. But in 2010, an off-year election, hedge fund firms donated $6 million to Republicans and $5.6 million to Democrats. Hedge fund managers continued their race to the right in 2012, giving $11.8 million to Republicans and only $3.8 million to Democrats.
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Were these two events related? Possibly. In October 2010, President Obama had told an audience bluntly, “We are going to punish our enemies and we’re gonna reward our friends who stand with us on issues that are important to us.”
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Other targeted industries included pharmaceuticals, tobacco, and arms manufacturers. (Each of these industries tended to favor Republicans over Democrats in 2010.) Why were these sectors selected? Politics? Legal strategy? A little of both?
I am not necessarily arguing that partisanship is paramount. Money may matter even more. Compare the FCPA cases with the Justice Department’s treatment of Wall Street firms—which may be populated by Republican voters but have produced (as we have seen) plenty of donations for the Obama campaigns. Remember that prosecutors looked into the affairs of MF Global, which lost $1.6 billion of its investors’ money and improperly mingled client funds with the company’s own capital, yet in the end brought no criminal charges. Moreover, after executive Jon Corzine testified before Congress that the mingling was unintended by him, the government indicated that criminal charges could not be brought absent any intent to commit fraud. But this standard should be held for foreign corruption as well: if an executive has no knowledge of or intention to bribe, the government should not pursue that individual. Yet for the Obama Justice Department, foreign corrupt practices apparently require neither intent nor knowledge.
A troubling pattern emerged in 2012 during the heated presidential election. The Justice Department chose to pursue investigations and possible criminal indictments against a group of individuals who were heavily involved in supporting Mitt Romney in the general election. These antibribery charges focused on the records portion of the law, whether it was faulty record-keeping about donations to charities or actions by companies affiliated with the target firm, whose executives clearly did not have knowledge of wrongdoing. It should raise serious questions about Robert Jackson’s warnings about identifying the person first and then looking for a technical violation of the law. Consider the targets: