New DOJ Policy on Foreign Business Bribery

On the eve of the fortieth anniversary of the Foreign Corrupt Practices Act, the Justice Department has unveiled a policy that strongly encourages businesses to self-report any violations to the government on their own.

Those that do can presume that the government won’t prosecute them criminally as long as they fix the problem timely and cooperate fully. That’s probably good for shareholders and boards of directors, among others, but less so for managers, executives, or foot soldiers who get thrown under the bus.

The new policy was announced last week at a conference on the FCPA. It’s been added to the official policy manual for federal prosecutors. It takes most parts of the government’s recent pilot program and makes them permanent.

What does it mean to self-report voluntarily, cooperate fully, and remediate timely? It means a company must report a violation promptly and before the government gets wind of it. Also, it must share everything it knows about anything and anyone involved. Then it must create a sound compliance program based on its size and resources. And it must return all the money or property that’s subject to restitution, forfeiture, or disgorgement.

The government may still prosecute if aggravating factors make the business more culpable. That may happen, for example, if executive management was involved, or the conduct was widespread, or the company made a lot of money from it, or it’s happened before.

But even then, if the business has voluntarily self-reported, fully cooperated, and timely remediated, the government will recommend a criminal fine that’s at least 50% lower than it otherwise might be (unless the business is a repeat offender). Also, if the business has created an effective compliance program, the government likely won’t require the appointment of an outside monitor.

Finally, if a business doesn’t self-report but later cooperates and remediates fully, the government will recommend a fine that’s at least 25% lower than it otherwise might be.

To Have the Quid But Not the Quo

As you may know, the U.S. Supreme Court ended its term this year by reversing the bribery conviction of Virginia’s former governor, Bob McDonnell.

Suppose the governor of your state met a local businessman while campaigning for office, and the two cultivated a relationship.

What would it take for your governor to be guilty of corruption?

In Mr. McDonnell’s case, the businessman was the chief executive of a Virginia company that sold a nutritional supplement, and he wanted the federal Food and Drug Administration to approve the supplement as an anti-inflammatory drug. But that required the company to obtain independent research studies supporting its health benefits.

To get there, the executive wanted the state’s universities to study the supplement, and he thought the governor could help with that, so he plied him with gifts and money. He loaned him $70,000, bought him a Rolex, lent him a Ferrari for a weekend, bought his wife $20,000 worth of designer clothes, and gave him $10,000 as a gift for his daughter’s wedding. Overall, it added up to $175,000.

In return, the governor set up a couple meetings for him, hosted a couple events for his company, and contacted other officials about the supplement.

For example, the governor arranged for the executive to meet the state’s health secretary, and he emailed the secretary articles about the company. He later set up a second meeting between the executive and one of the secretary’s aides. But neither the secretary nor his aide felt pressured to do anything more than have a meeting, and the secretary straightforwardly declined to help initiate the research studies.

Similarly, the governor hosted a couple events to which he invited both the executive and some researchers from the state universities. At one event, he asked the researchers for their thoughts on the supplement: whether there was any reason to explore its scientific validity, and whether it could be good for jobs and the economy. But when the executive asked him whether he’d support funding for the research, he demurred that he had limited decision-making power in that area. At another event, the governor made no mention of the company, the supplement, or the executive.

Was that enough?

To convict him, the government had to prove that he committed or agreed to commit an “official act” in exchange for the loans and gifts. It alleged that he did so by arranging meetings, hosting events, and contacting other officials to promote the supplement.

At trial, the court sided with the government, instructing the jury that “official acts” could include those that an official customarily performed, especially if they were “in furtherance of longer-term goals” or “in a series of steps to exercise influence or achieve an end.”

The governor, instead, had wanted to instruct the jury along the lines that merely arranging meetings, hosting events, or making calls were not official acts unless he intended to influence a specific decision that was actually pending before the government, like passing a law, issuing a license, awarding a contract, or implementing a regulation.

The Supreme Court agreed with him unanimously.

It may be a mouthful, but the Court defined “official act” as an action or decision on a concrete, focused question, matter, or proceeding that involves a formal exercise of governmental power that’s similar in nature to a civil lawsuit, legislative hearing, or administrative determination.

The trial court’s instructions, however, permitted the jury to convict the governor for nothing more than setting up meetings, hosting events, and making calls. These were the types of things he’d done a thousand times before to help other constituents or promote business in the state. But according to the record, he hadn’t exercised governmental power to actually initiate the research studies or pressure anyone to do so.

Because the jury may have convicted him for conduct that was not unlawful, the Court reversed and remanded the case for further proceedings.

Public Corruption Meets Semantic Magic

Okay, so there’s a crime called extortion, and there’s also one called conspiracy to commit extortion, but here’s the question.

Can the government convict you of both extorting people and conspiring with those same people to extort themselves?

In a divided opinion this month, the U.S. Supreme Court said yes.

The case involved a police officer who participated in a kickback scheme with an auto-repair shop. When the officer would arrive at the scene of a car accident, he’d persuade people to tow their cars to the repair shop, and the owners would pay him $150 to $300 each time.

The scheme worked like a charm. It revived the repair shop’s fortunes, and it grew to enlist as many as sixty other officers in the police department.

It ended, however, when the officer, the owners, and nine other cops were indicted for extortion under a federal racketeering statute known as the Hobbs Act. The statute defines extortion to include the obtaining of property from another with his consent but under color of official right. In a prior case, the Supreme Court had described this type of extortion as roughly equivalent to taking a bribe, which seemed to fit the bill here. Everyone ended up pleading guilty except the officer.

But curiously, the government charged the officer with both extortion and conspiring with the shop owners to commit extortion, even though the owners were the ones paying up. It’s unclear why the government decided to pursue this theory of conspiracy rather than one in which the officer conspired with other officers to take bribes. At trial, the officer argued that he couldn’t be guilty of a conspiracy to commit extortion unless he conspired against someone outside the alleged conspiracy. He asked for a jury instruction to that effect, but the court denied his motion and refused his instruction. A jury convicted him on all counts.

On appeal, the officer didn’t challenge his conviction for extortion, but he argued that he couldn’t be guilty of the conspiracy count because the crime didn’t involve taking property from anyone outside the conspiracy itself.

But a razor-thin majority of the Court said yes, he could, thus giving federal prosecutors another way to charge bribery cases involving state or local officials.

A Postscript to Last Week’s Open Letter

Following up on last week’s post, readers should understand the timeline of events that brought the misconduct to light. Here are the highlights.

  1. In January 2013, a defendant in a murder case filed a motion to get some important information from the prosecution. The trial court found good cause for the motion and granted it, but the district attorney’s office did not comply with the order.
  2. In January 2014, the defense filed three additional motions, alleging that the district attorney’s office was participating in a large-scale operation by the sheriff’s department to purposely violate the constitutional rights of defendants who were awaiting trial in the Orange County jail system.
  3. In February and March 2014, the trial court ordered evidentiary hearings to get to the bottom of these allegations. That is when the district attorney’s office began a campaign to retaliate against the judge.
  4. In August 2014, the judge issued his first decision in the matter. He found that law enforcement had committed due-process violations negligently but not maliciously, and he didn’t disqualify the district attorney’s office from the case.
  5. In December 2014, the judge reopened the hearings because the defense presented evidence that at least two senior sheriff’s deputies had lied during the initial hearings.
  6. In March 2015, the judge issued his second decision in the matter. He found that the two deputies had willfully lied or withheld material evidence during the first set of hearings, and he disqualified the district attorney’s office from the case because of what now appeared to be serious due-process violations:
  • “It is now apparent that the discovery situation in this case is far worse than the court previously realized. In fact, a wealth of potentially relevant discovery material … remained secret, despite numerous specific discovery orders issued by this court.”
  • “After a period of what can at best be described as benign neglect concerning the actions of his law-enforcement partners, the District Attorney cannot or will not in this case comply with the discovery orders of this court.”
  • “In this case, the District Attorney’s conflict of interest is not imaginary. It apparently stems from his loyalty to his law-enforcement partners at the expense of his other constitutional and statutory obligations.”

An Open Letter to the District Attorney of Orange County

Mr. Rackauckas: Just what is going on in your office, sir?

I’m not talking about the fight that broke out in a county courthouse three weeks ago between one of your investigators and a defense attorney. Never mind that if a defense attorney did this to a cop, he’d be arrested so fast his head would spin. (Full disclosure: I met this lawyer two weeks ago at a bar association event and had lunch with him on Monday. Although he’s told me his side of the story, he wasn’t trying to sell anything, and I wasn’t looking to buy, either.) But that’s not the issue here.

I’m not even talking about the jailhouse snitch scandal that led to the fight and that has roiled your office—and my county—for two years now since it’s come to light. Plenty of ink has already been spilled about it, including in a letter to the U.S. Attorney General last November by a coalition of legal authorities, who called on the Justice Department to investigate the scandal. But that’s not it, either.

No, I’m wondering about your office’s response to the scandal, and specifically, the way it has retaliated, systematically, against the trial judge who ordered the hearings that brought the misconduct to light.

I couldn’t believe it at first.

More than once after the scandal broke, I had attended events at which some of your senior deputies expressed both regret and resistance over the news. By turns, what I heard from them was that, yes, some mistakes were made, and we understand your concern, but please don’t blow it out of proportion, give us the benefit of the doubt, and by the way, we’re already doing better and will continue to do better.

Then I learned that, in December, a supervising judge of the superior court had to take your office to task for repeatedly using a procedural tool to disqualify the trial judge from 94% of the murder cases that he’s been assigned to since he began scrutinizing your misconduct. That’s 46 out of 49 murder cases, sir. Your office never did that before, and this to a judge who’s among the more experienced, independent, and respected on the felony trial panel. (Full disclosure: I have a white-collar case pending before this judge.)

The supervising judge found that your office had violated the separation of powers under the state and federal constitutions, and he rightly called it an attempt to punish, silence, and intimidate the trial judge as well as send a signal to the rest of the bench. It’s a national story, and the Orange County Bar Association has taken a stand against it.

I’m wondering if you think this demonstrates good faith by an office whose mission is to “enhance public safety and welfare and create a sense of security in the community through the vigorous enforcement of [the] laws in a just, honest, efficient, and ethical manner.”

Sometimes, the right thing to do is take your lumps and stand down, but instead, your office has chosen to appeal the supervising judge’s order, taking the position that you did not direct your deputies to retaliate against the trial judge.

But either you directed them, sir, or you are not sufficiently in command of your office.

Which is it?

Something Wicked This Way Comes

I recently watched the documentary, Making A Murderer, and if you haven’t yet, you should. No, it’s not an indictment of all law enforcement. It’s an object lesson in why we should be deeply skeptical of power and the people who lord it over our lives. And how easy it can be for them to get you, too, especially once they’ve called you a murderer.

So go ahead and watch it if you haven’t already, and watch it again if you have. Then form your own opinion. Mine is that something stinks to high heaven, and there’s probable cause to believe that the real criminals are getting away with it. Here’s a little bit of the why.

It was 2005, and Steven Avery had filed a lawsuit.

His lawsuit had named the former county sheriff and district attorney as defendants, and those men had reason to be worried.

Some of their lead deputies had royally stepped in it by the way they had handled Avery’s 1985 rape case, which is why Avery had sued them in the first place.

The deputies had purposely withheld material evidence in the rape case when they knew or should’ve known that another suspect, Gregory Allen, was the real rapist. They suppressed that evidence even after new DNA testing pointed to an unknown third party. They hid that evidence even as they watched Avery desperately plead his case on appeal.

Then, in 2003, Avery was exonerated when advancements in DNA testing were able to conclusively identify Allen as the rapist. So Avery was cleared, and he filed a $36 million lawsuit for the eighteen years he spent in prison at the hands of their misconduct. That was $1 million for each year in prison plus $18 million in deterrent, punitive damages.

His lawsuit was getting traction in the second half of 2005, and the defendants had reason to be worried. Some of their deputies had already been deposed on September 22, October 11, October 13, and October 26, and those depositions had not gone well. The evidence was embarrassing to all involved, and it was leading upstream.

The sheriff’s and district attorney’s own depositions were scheduled for November 10 and November 15, respectively, and the county’s insurance company had taken the position that it would deny any coverage because the case involved intentional misconduct.

That meant the defendants faced the prospect of a massive personal judgment if they were found liable, along with other civil and criminal consequences.

Then, on November 3, a woman went missing.

And the rest you can judge for yourself.

May the chickens come home to roost.

The SEC Wants You to Self-Report

At a conference in November, the SEC’s Director of Enforcement, Andrew Ceresney, announced that, from now on, you must self-report violations of the Foreign Corrupt Practices Act if you want the Enforcement Division to recommend a non-prosecution or deferred-prosecution agreement. Even then, Mr. Ceresney warned, you may not get an NPA or DPA, but the Division won’t even consider it if you fail to self-report. To self-report, in other words, is now a necessary, threshold condition to negotiating an NPA or DPA.

On the heels of that announcement, last month, one company that had self-reported its FCPA violations was able to resolve civil and criminal charges on relatively favorable terms.

First, the company settled the civil SEC investigation that commenced after it reported that two of its subsidiaries were making improper payments to foreign officials to win business. The improper payments included non-business-related travel, gifts, and entertainment that totaled $1.5 million over five years. To settle the case, the company agreed to cease and desist from further violations and to surrender $14 million in profits.

Next, the company settled the parallel, criminal investigation by entering into an NPA with the Justice Department. The three-year NPA requires the company to pay $15 million in fines, improve its compliance program, and report on its progress to the government.

Finally, one of the company’s employees earned a three-year DPA of his own based on his substantial cooperation during the SEC investigation. It was the Commission’s first DPA with an individual in an FCPA case.

To be clear, self-reporting has long been a factor in the Commission’s framework for evaluating cooperation by people or businesses. Generally, the SEC will credit your cooperation based on how much you helped, how important the case was, how culpable you were personally, and how much of a threat you continue to pose.

But going forward, self-reporting appears to carry significantly more weight with the agency, at least in FCPA cases.


When They Bribe On Your Behalf

If you compete for business overseas or across the border, take note of these best practices for using third-party brokers, vendors, or consultants to help you. You may not know what they’re up to over there, but that can land you in some hot water.

As we’ve written before, the threat of prosecution under the Foreign Corrupt Practices Act is real, and the reality is you or your business may be liable for a consultant’s corrupt practices even if you didn’t know about them. While these authors speak to automotive companies in particular, they offer sound advice for any transnational business, large or small.

So watch out for the following signs, among others, that your consultant is greasing someone’s palm to win you business.

  • It charges excessive commissions
  • It offers unreasonably large discounts
  • It describes its consulting services in vague terms
  • It is related or closely tied to government officials
  • It requests payments to offshore bank accounts

And if you spot these red flags, or even if you don’t, you should proactively take the following steps, among others, to minimize the risk of misunderstandings.

  • Investigate the third party and its principals
  • Conduct background checks of its personnel as necessary
  • Require the party to conduct FCPA training and to certify that it’s been done
  • Work with counsel to assess your potential risks and design compliance programs

We’re Not Gonna Take It, Anymore!

You may want to tell your boss to take your job and shove it, but if you’re thinking of logging on one last time to wreak some havoc or raid the company’s trade secrets then think again.

Over the summer, a federal court of appeals interpreted California law in a way that makes it a crime for you to access your employer’s computer systems and take, copy, or use the data without permission. Although the federal court’s interpretation doesn’t bind the state’s courts, it may influence them until the state’s supreme court says otherwise.

The appeal was brought by six defendants after their convictions for racketeering and illegal wiretapping. The defendants were convicted of running, working for, or doing business with a private-investigations agency that provided illegal services. The agency bribed local police officers to access confidential law-enforcement databases, and it bribed phone-company employees to illegally wiretap people and record their calls. The government called it a criminal enterprise under the Racketeer Influenced and Corrupt Organizations (“RICO”) statute, and the jury agreed. See 18 U.S.C. §§ 1961-68.

The defendants lost most of their arguments on appeal, but one stuck.

The defendants argued that some of their convictions couldn’t stand because they were based on violations of a federal anti-hacking statute, and the defendants hadn’t hacked into any computers. See 18 U.S.C. § 1030.

That part was true. Three years ago, the same court that heard their appeal had construed section 1030 to punish unauthorized access to information (like hacking into a computer) but not unauthorized use of that information by someone who had authorized access. In that case, the court reversed the conviction of a man who raided his employer’s data in order to start a competing business. See United States v. Nosal, 676 F.3d 854 (9th Cir. 2012) (en banc). He may have been guilty of other charges, the court had held, but he couldn’t be guilty of violating section 1030. So here, too, the court reversed those convictions.

Other convictions, however, were based on violations of state law, and that was different. See Cal. Pen. Code § 502. The court held that section 502 doesn’t just punish people for hacking into or harming computers, networks, or data. It also punishes knowingly accessing such systems and then taking, copying, or using data without permission. See id. § 502(c)(2). So the focus is not just hacking but theft or misappropriation as well.

The court noted that California law was not settled on that point. Compare Chrisman v. City of L.A. (2007) 155 Cal. App. 4th 29, 34-37 (finding that section 502 was primarily an anti-hacking statute) with Gilbert v. City of Sunnyvale (2005) 130 Cal. App. 4th 1264, 1281 (interpreting section 502(c)(2) to restrict use and not just access) and People v. Hawkins (2002) 98 Cal. App. 4th 1428, 1440-43 (same).

But until the California Supreme Court decides otherwise, California prosecutors may well charge you criminally for misusing your computer access at work.

So don’t get it twisted, sister. But more on that next week.

Shades of Gray in Rare FCPA Trial

Three weeks ago, in the first criminal trial in three years for violation of America’s foreign bribery law, the Foreign Corrupt Practices Act, the defendant suddenly pleaded guilty to steeply reduced charges in the middle of trial. Although the conviction was immediately touted as a win by the government, you can decide for yourself.

The defendant, an American entrepreneur, was the co-founder and co-CEO of an oil-and-gas services company that operated in Colombia, and supposedly, to win a $45 million contract with the country’s largest oil company, he conspired with two other executives—his co-CEO and the firm’s general counsel—to funnel $333,500 in payments to an employee of the Colombian company. The company was a state-run company, however, which made the employee a “foreign official” for purposes of the FCPA, which prohibits the bribing of foreign officials to win business. See 15 U.S.C. §§ 78dd-1 et seq.

The defendant’s two co-conspirators had already pleaded guilty, and one had just testified against him at trial when a plea deal was reached. The other was slated to do so.

The matter originally came to the government when the company’s board of directors disclosed it voluntarily, but experts contend that the case was underwhelming from the start and that it settled after the testifying co-conspirator gave false testimony on the stand.

Meanwhile, other reports suggest that the defendant was, in fact, set up by the company’s board, which was dominated by Colombian nationals who bristled at his persistent efforts to clean up the company and fired him for it. According to these reports, the company only approached the Justice Department with its voluntary disclosure after the defendant threatened to sue the company for firing him and to reveal that its chairman, the former minister of commerce in Colombia, had demanded $1 million in exchange for actions he took on the company’s behalf while serving in government. According to the defendant, he refused this demand and was terminated within months.

Although the defendant had faced a maximum of twenty years in prison on all charges and was offered ten years before trial, the plea agreement called for a sentence between probation and one year in prison. It also dismissed five of the six counts that the government had brought against him.

At sentencing, the government argued for the year in prison, but the court went the other way, sentencing the defendant to probation instead. Along the way, it expressed frustration with the government’s handling of the case.

The government then publicly declined to prosecute the company itself for just the second time in the FCPA’s history. The purported basis for it was the company’s voluntary disclosure and its cooperation in prosecuting its former officers.

That may be well and good, but if the government just prosecuted an American for pissing off powerful foreign interests—while giving them a pass—then it scored a notch on its belt but left a bad taste in everyone’s mouth.

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