koehler - facade of fcpa enforcement

Electronic copy available at: http://ssrn.com/abstract=1705517

THE FACADE OF FCPA ENFORCEMENT

MIKE KOEHLER*

The rise in Foreign Corrupt Practices Act (“FCPA”) enforcementactions has been well documented. Against the backdrop of aggressiveenforcement and the resulting multi-million dollar fines and penaltiesis the undeniable fact that, in most instances, there is no judicialscrutiny of the FCPA enforcement theories. The end result is that theFCPA often means what the enforcement agencies say it means. Be-cause of the “carrots” and “sticks” relevant to resolving a governmentenforcement action, FCPA defendants are nudged to accept resolutionvehicles notwithstanding the enforcement agencies’ untested and dubi-ous enforcement theories or the existence of valid and legitimatedefenses. The end result is often the facade of FCPA enforcement.

This article discusses various pillars that contribute to the facade ofFCPA enforcement and highlights that the FCPA, during its decade ofresurgence, is being enforced like no other law. This article does notargue, or even suggest, that every FCPA enforcement action is unwar-ranted or that no company or individual has ever violated the FCPA.Rather, this article demonstrates that a significant majority of recentFCPA enforcement actions are a facade—including those that allegeclear instances of corporate bribery—yet are resolved without FCPAanti-bribery charges.

The facade of FCPA enforcement matters. Even though the resolu-tion vehicles typically used to resolve an FCPA enforcement action arenot subject to judicial scrutiny and the vehicles do not necessarilyreflect the triumph of the enforcement agencies’ theories, in theabsence of substantive FCPA case law, these privately negotiated resolu-tion vehicles have come to represent de facto FCPA case law. The facadeof FCPA enforcement also breeds inefficient overcompliance by risk-averse business actors fearful of enterprise–threatening liability be-cause of the enforcement agencies’ untested and dubious theories.Because the factors that contribute to the facade are being modeled by

* Mike Koehler is an Assistant Professor of Business Law at Butler University. ProfessorKoehler runs the FCPA Professor Blog (http://fcpaprofessor.blogspot.com), and his FCPAexpertise and views are informed by a decade of legal practice experience at an international lawfirm during which he conducted FCPA investigations around the world, negotiated resolutions toFCPA enforcement actions with government enforcement agencies, and advised clients on FCPAcompliance and risk assessment.© 2010, Mike Koehler.

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Electronic copy available at: http://ssrn.com/abstract=1705517

other nations when enforcing their own bribery laws, the facade ofFCPA enforcement is a global issue affecting a broad segment of themarketplace.

Identifying and acknowledging the existence of a problem is anecessary first step to crafting solutions. This article exposes the facadeof FCPA enforcement, argues that addressing the facade and subject-ing FCPA enforcement actions to greater judicial scrutiny is in thepublic interest, and encourages more FCPA defendants to challengethe enforcement agencies and further expose the facade of FCPAenforcement.

TABLE OF CONTENTS

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909II. THE FCPA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 911

A. Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 911B. Anti-bribery Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 913

1. “Anything of Value” . . . . . . . . . . . . . . . . . . . . . . . . 9142. “Foreign Official” . . . . . . . . . . . . . . . . . . . . . . . . . . 9163. “Obtain or Retain Business”. . . . . . . . . . . . . . . . . . 917

C. Books and Records and Internal Control Provisions. . . . . . . 921III. FCPA ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 923

A. Relevance of “Carrots” and “Sticks” . . . . . . . . . . . . . . . . . . 9241. Principles of Prosecution . . . . . . . . . . . . . . . . . . . . 9252. Sentencing Guidelines . . . . . . . . . . . . . . . . . . . . . . 9263. SEC Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 927

B. Prevalence of Resolution Vehicles Subject to Little or NoJudicial Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9291. NPAs and DPAs . . . . . . . . . . . . . . . . . . . . . . . . . . . 9332. Pleas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9393. SEC Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . 942

C. FCPA Resolution Vehicles Do Not Necessarily Reflect aSuperior Legal Position. . . . . . . . . . . . . . . . . . . . . . . . . . . 9461. Lessons from SEC v. BofA . . . . . . . . . . . . . . . . . . . . 9462. The Enforcement Agencies are Vulnerable in

Contested Actions . . . . . . . . . . . . . . . . . . . . . . . . . 955IV. THE FACADE OF FCPA ENFORCEMENT. . . . . . . . . . . . . . . . . . . . 959

A. First Pillar: Bare-Bones, Uninformative Facts, and LegalConclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960

B. Second Pillar: What is the Legal Support?. . . . . . . . . . . . . . 9631. The “Foreign Officials” All Around Us? . . . . . . . . . 9642. Just How Was that Business Obtained or

Retained? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 971

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3. Strict Liability for Books and Records andInternal Controls Violations? . . . . . . . . . . . . . . . . . 976

4. Disgorge What? . . . . . . . . . . . . . . . . . . . . . . . . . . . 981C. Third Pillar: Same Facts, Different Results . . . . . . . . . . . . . 984D. Fourth Pillar: Bribery, Yet No Bribery . . . . . . . . . . . . . . . . . 990

V. WHY THE FACADE OF FCPA ENFORCEMENT MATTERS. . . . . . . . . 997A. The Absurdity of FCPA “Case Law” . . . . . . . . . . . . . . . . . . 998B. The Breeding of Overcompliance . . . . . . . . . . . . . . . . . . . . 1001C. Modeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1005

VI. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1009

I. INTRODUCTION

The rise in Foreign Corrupt Practices Act (“FCPA”) enforcement hasbeen well-documented, as have the aggressive enforcement positions ofthe Department of Justice (“DOJ”) and the Securities and ExchangeCommission (“SEC”)—the two government agencies responsible forenforcing the statute.1

Ordinarily, aggressive government enforcement of a statute based onuntested and dubious legal theories invites judicial scrutiny in a trans-parent, adversarial proceeding. Such judicial scrutiny is particularlyappropriate when enforcement theories result in multi-million dollarcorporate fines and penalties, as is often the case in FCPA enforcementactions.

However, judicial scrutiny is virtually non-existent in the FCPAcontext given the frequency with which FCPA enforcement actions areresolved through DOJ non-prosecution agreements (“NPAs”), de-ferred prosecution agreements (“DPAs”), pleas, or SEC settlements.Each of these resolution vehicles is the result of private negotiationsbetween the enforcement agencies and the alleged wrongdoer in thecontext of the enforcement agencies dangling substantial “carrots” forcooperating and agreeing to its version of the facts and interpretationof the law. At the same time, the alleged wrongdoer is cognizant of theenforcement agencies’ substantial “sticks” should it disagree with theenforcement agencies.

Thus, in many instances, the FCPA means simply what the DOJ and

1. See, e.g., Philip Urofsky & Danforth Newcomb, Recent Trends and Patterns in FCPA Enforce-ment, SHEARMAN & STERLING LLP (Oct. 1, 2009), http://www.shearman.com/files/upload/LT-100209-FCPA-Digest-Recent-Trends-and-Patterns-in-FCPA-Enforcement.pdf (noting that the SECand DOJ “continue to adopt aggressive and potentially controversial interpretations of the FCPAin their respective enforcement actions against individuals and corporations”).


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SEC say it means. Accordingly, “FCPA law” has developed throughprivately-negotiated agreements, and not as in other areas of law,through transparent, adversarial proceedings in which a judge or jury,weighing the evidence and the parties’ conflicting arguments, rendersan impartial decision. It is this feature of the FCPA that distinguishesFCPA enforcement from nearly every other area of law. This feature istroubling enough in isolation. Even more troubling is that the enforce-ment agencies, in the absence of meaningful, substantive FCPA caselaw, urge those subject to the FCPA to view these privately-negotiatedagreements as de facto case law and to conform conduct to the foggylegal signposts in these privately-negotiated agreements.

The end result is a facade of FCPA enforcement and, this articleexplores various pillars that contribute to the facade of FCPA enforce-ment. This article does not argue, or even suggest, that every FCPAenforcement action is unwarranted or that no company or individualhas ever violated the FCPA. Rather, this article demonstrates that asignificant majority of recent FCPA enforcement actions are a facadeand argues that addressing the facade and subjecting FCPA enforce-ment actions to judicial scrutiny is in the public interest and of vitalimportance to those subject to the FCPA as well as the broadermarketplace.

Section I of the article begins by providing a brief overview of theFCPA.

Section II of the article provides an overview of FCPA enforcementand demonstrates that FCPA enforcement actions are typically resolvedthrough NPAs, DPAs, pleas, and SEC settlements. A common thread inall of these resolution vehicles is the absence or practical absence ofjudicial scrutiny. This section also explores the motivations of settlingparties pursuant to these resolution vehicles and demonstrates thatsettlement does not necessarily reflect the triumph of one party’s legalposition, but rather it reflects a risk-based decision primarily groundedin issues other than facts or the law.

Section III of the article highlights four pillars that contribute to thefacade of FCPA enforcement. The first pillar highlights the frequencywith which FCPA enforcement actions are resolved based on uninforma-tive, bare-bones statements of facts or allegations or conclusory legalstatements. The second pillar highlights the increasing trend of FCPAenforcement actions that are resolved based on untested and dubiouslegal theories, as well as enforcement theories seemingly in directconflict with FCPA’s statutory provisions. The third pillar highlights theopaque nature of FCPA enforcement and how similar enforcementactions, based on the government’s own allegations, are resolved with


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materially different charges and penalties. The fourth and most alarm-ing pillar highlights how seemingly clear-cut instances of corporatebribery, per the government’s own allegations, are resolved withoutFCPA anti-bribery charges. These enforcement actions suggest, con-trary to rule of law principles, that certain companies in certainindustries are essentially immune from FCPA anti-bribery charges.

Section IV of the article demonstrates why the facade of FCPAenforcement matters and why judicial scrutiny of FCPA enforcementactions is in the public interest and of vital importance to those subjectto the FCPA as well as the broader marketplace.

A goal of this article is to encourage more FCPA defendants, notwith-standing the “carrots” and “sticks” present, to challenge the enforce-ment agencies in an FCPA enforcement action and further expose thefacade of FCPA enforcement. Exposing and addressing the facade ofFCPA enforcement is a global issue given the reach of the FCPA andbecause other nations are increasingly modeling enforcement of theirown anti-bribery laws on U.S. enforcement methods and theories.

II. THE FCPA

An understanding of the FCPA is critical to understanding thevarious pillars that contribute to the facade of FCPA enforcement andwhy judicial scrutiny of FCPA enforcement actions is warranted and inthe public interest. This section provides a general overview of theFCPA, yet it provides only essential information relevant to this article.

A. Origin

The FCPA is commonly described as an outgrowth of the Watergatescandal.2 While such a reference is relevant to the FCPA’s origins,describing the FCPA as a singular outgrowth of Watergate misses thehistorical fact that Congress was actively investigating allegations ofoverseas bribery and corruption separate and apart from the Watergatescandal.3

2. See, e.g., Carolyn Lindsey, More Than You Bargained For: Successor Liability Under the U.S.Foreign Corrupt Practices Act, 35 OHIO N.U. L. REV. 959, 961 (2009) (“The FCPA arose out of theWatergate scandal in the 1970s. While investigating contributions to Richard Nixon’s re-electioncampaign, Congress discovered that over 400 U.S. companies had paid bribes in excess of $300million through offshore slush funds in order to win contracts overseas.”).

3. See Andrew Brady Spalding, Unwitting Sanctions: Understanding Anti-Bribery Legislationas Economic Sanctions Against Emerging Markets 7–10 (Apr. 22, 2010) (Working Paper Series,Univ. of Mumbai, Bombay), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_


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Allegations of U.S. companies making or offering bribe payments toforeign government officials to secure foreign government contractsbecame the focus of congressional hearings in the mid-1970s. Duringthe summer and fall of 1975, the U.S. House of Representatives heldhearings on “The Activities of American Multinational CorporationsAbroad.”4 The Chairman of the hearings noted that “[d]uring the lastfew weeks, charges that American corporations have maintained secretfunds for the payment of gratuities to foreign government and politicalofficials have been made and substantiated . . . .”5

A primary focus of these hearings was the Lockheed Corporationscandal of the early 1970s, which was a key event “alert[ing] Congressto the need for legislation prohibiting overseas payments.”6 In fact,during the same general time frame as the above U.S. House hearings,the U.S. Senate also held hearings on “Lockheed Bribery.”7

Broadly speaking, the conduct of Lockheed and other U.S. compa-nies concerned Congress because at the time, “[s]uch payments toforeign officials [were] not a violation of American law . . . ” notwith-standing the fact that other U.S. laws, such as the tax and securitiesdisclosure laws, were perhaps indirectly implicated by such conduct.

Two and a half years of Congressional hearings, a Presidentialchange, and various iterations of what would become the FCPA ensued,culminating in President Carter signing the “Foreign Corrupt Practicesand Investment Disclosure Bill” into law on December 20, 1977.8

President Carter’s signing statement states, in part:

id�1429207 (arguing that “scholars to date have only partially understood the historical eventsthat precipitated the introduction and passage” of the FCPA).

4. See The Activities of American Multinational Corporations Abroad: Hearings Before the Subcomm. onInt’l Econ. Policy of the Comm. on Int’l Relations, 94th Cong. 1 (1975).

5. Id. at 1 (statement of Rep. Robert N.C. Nix, Chairman, Subcomm. on Int’l Econ. Policy).6. Id. at 8–9. Broadly speaking, the Lockheed scandal involved disclosures by the company

that “it had paid several multi-million dollar bribes to various developed and developingcountries, particularly the Netherlands, Japan, and Italy” to assist in securing foreign governmentcontracts. Id. at 9. These payments drew the ire of Congress given that, during the time period thepayments were made, Lockheed was the recipient of a $250 million federal loan guaranteedesigned to keep the company out of bankruptcy.

7. See Lockheed Bribery: Hearings Concerning Payments to Foreign Agents and Foreign Gov’t Officials bythe Lockheed Aircraft Corp., and the Emergency Loan Guar. Act Before the Senate Comm. on Banking, Hous.,and Urban Affairs, 94th Cong. 1–61 (1975).

8. See Jimmy Carter, Foreign Corrupt Practices and Investment Disclosure Bill; Statement onSigning S. 305 into Law, 2 Pub. Papers 2157 (Dec. 20, 1977), available at http://www.presidency.ucsb.edu/ws/index.php?pid�7036.


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I share Congress’ belief that bribery is ethically repugnant andcompetitively unnecessary. Corrupt practices between corpora-tions and public officials overseas undermine the integrity andstability of governments and harm our relations with othercountries. Recent revelations of widespread overseas briberyhave eroded public confidence in our basic institutions.9

As routinely described, FCPA enforcement was largely (yet not en-tirely) non-existent from 1977 until circa 2002.10 The FCPA wasamended in 1988 and 1998 and the below summary provides a generaloverview of the post-1998 FCPA statute (i.e. the statute “on the books”when the FCPA was resurrected from near legal extinction and theversion of the statute relevant to the current facade of FCPA enforce-ment).

B. Anti-bribery Provisions

The FCPA is part of the Securities Exchange Act of 193411 and it hastwo main provisions: the anti-bribery provisions and the books andrecords and internal control provisions. The anti-bribery provisionsgenerally prohibit:

U.S. companies (whether public or private) and its personnel;U.S. citizens; foreign companies with shares listed on a U.S.stock exchange or otherwise required to file reports with theSEC; or any person while in U.S. territory from:

(i) corruptly paying, offering to pay, promising to pay,or authorizing the payment of money, a gift, or any-thing of value; (ii) to a foreign official; (iii) in order toobtain or retain business.12

While routinely described as a law applicable only to U.S. companies

9. Id.10. See, e.g., Dionne Searcey, U.S. Cracks Down on Corporate Bribes, WALL ST. J., May 26, 2009, at

A1, available at http://online.wsj.com/article/SB124329477230952689.html (noting that FCPAenforcement was “largely dormant for decades”); SHEARMAN & STERLING LLP, FCPA Digest: Casesand Review Releases Relating to Bribes to Foreign Officials under the Foreign Corrupt Practices Act of 1977(Oct. 1, 2009), http://www.shearman.com/files/upload/fcpa_digest.pdf (chronological listingof FCPA enforcement actions).

11. See 15 U.S.C. §§ 78m(b), 78dd-1, 78dd-2, 78dd-3 (2006).12. Id.


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and citizens,13 the FCPA, as written and as enforced, can also apply toforeign companies and foreign citizens.14 In fact, the largest ever FCPAenforcement action (in terms of fines and penalties) is the 2008 actionagainst Siemens Aktiengesellschaft (“Siemens”), a German corporationwith shares traded on a U.S. exchange since 2001.15

As described above, the FCPA’s anti-bribery provisions have threecore elements: “anything of value” to a “foreign official” in order to“obtain or retain business.” These core elements are briefly describedbelow.

1. “Anything of Value”

The term “anything of value” is not defined in the FCPA, nor is thestatute’s legislative history illuminating. FCPA enforcement actionssuggest that the enforcement agencies perceive that there is no deminimis value associated with this element of an FCPA anti-briberyviolation,16 and recent FCPA enforcement actions allege facts concern-ing “things of value” across a wide spectrum. For instance, in the 2009enforcement action against Kellogg Brown & Root LLC and variousother Halliburton Company affiliates, “things of value” provided toNigerian “foreign officials” included cash-stuffed briefcases or cash-stuffed vehicles left in hotel parking lots.17 On the other end of thespectrum, the 2009 enforcement action against UTStarcom Inc. in-volved “things of value” provided to Chinese “foreign officials” includ-ing “executive training programs at U.S. universities” that were at-

13. See, e.g., Elizabeth Spahn, International Bribery: The Moral Imperialism Critiques, 18 MINN.J. INT’L L. 155, 157 (2009) (“The U.S. Foreign Corrupt Practices Act (FCPA) criminally prohibitsU.S. corporations from bribing officials of foreign governments in order to obtain business hasbeen in effect for thirty years.”).

14. See 15 U.S.C. §§ 78dd-1, 78dd-3 (2006).15. See, e.g., Press Release, DOJ, Siemens AG and Three Subsidiaries Plead Guilty to Foreign

Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines (Dec.15, 2008), available at http://www.fcpaenforcement.com/FILES/tbl_s31Publications/FileUp-load137/5527/SiemensDOJPressRelease.pdf; Press Release, SEC, SEC Charges Siemens AG forEngaging in Worldwide Bribery (Dec. 15, 2008), available at http://www.sec.gov/news/press/2008/2008-294.htm.

16. See, e.g., In re Dow Chemical Co., Exchange Act Release No. 55281, 2007 WL 460872 (Feb.13, 2007) (noting that although certain improper payments “were in small amounts – well under$100 per payment – the payments were numerous and frequent”).

17. See United States v. Kellogg Brown & Root LLC, Case No. H-09-071 (S.D. Tex. Feb. 06,2009), available at http://fcpaenforcement.com/documents/document_detail.asp?ID�

5714&PAGE�2(follow DOJ Criminal Information hyperlink) (criminal available at informationat paragraph 20).


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tended by the “foreign officials” and paid for by the company eventhough the programs did “not specifically relate[] to [the company’s]products or business.”18

The most aggressive interpretation of the “anything of value” ele-ment would seem to be the 2004 FCPA enforcement action againstpharmaceutical company Schering-Plough Corporation (“Schering-Plough”).19 In that action, the SEC alleged that Schering-Ploughviolated the FCPA when its wholly-owned Polish subsidiary (“S-P Po-land”) improperly recorded a bona fide charitable donation to a Polishfoundation where the founder/president of the foundation was alsothe director of a government health fund (the “Director”) that pro-vided money to hospitals throughout Poland for the purchase ofpharmaceutical products. Although the SEC and Schering-Ploughultimately resolved the matter without any meaningful judicial scrutinybased only on violations of the FCPA’s books and records and internalcontrol provisions, the enforcement action is commonly viewed asbroadening the “anything of value” element of an FCPA anti-briberyviolation.20 The SEC’s tacit interpretation of the “anything of value”element in the Schering-Plough matter is significant because there wasno allegation or indication that any tangible monetary benefit accruedto the Director, an individual deemed by the SEC to be a “foreignofficial” under the FCPA. Rather, the SEC brought the enforcementaction on the basis of its apparent conclusion that S-P Poland’s bonafide charitable donations constituted a “thing of value” to the “foreignofficial” because the donations were subjectively valued by the official

18. Complaint at para. 16, SEC v. UTStarcom, Inc., No. CV 09-6094 (N.D. Cal.), available athttp://www.sec.gov/litigation/complaints/2009/comp21357.pdf (filed Dec. 31, 2009).

19. See SEC v. Schering-Plough Corp., Litigation Release No. 18740, 82 SEC Docket 3732(June 9, 2004); In re Schering-Plough Corp., Exchange Act Release No. 49,838, 82 SEC Docket3644 (June 9, 2004).

20. See, e.g., WILMER CUTLER PICKERING HALL AND DORR LLP, Foreign Corrupt Practices Act Update,Schering-Plough Settles FCPA Case with SEC for Payments to Charity Headed by Government Official 1 (Jun.30, 2004), http://www.wilmerhale.com/files/Publication/360d4f59-6068-4068-9d65-a30270e5069b/Presentation/PublicationAttachment/0be55739-9c98-4d1f-a886-dac5f2f26044/FCPA%2006-30-04.pdf (noting that “[t]he case is significant in suggesting that payments to a bona fidecharity could violate the FCPA if made to influence the actions of a government official” andpointing out that “[a]lthough the SEC did not state that these payments were bribes within themeaning of the FCPA, in charging FCPA accounting violations for these payments, the SECstrongly signaled that it believes that charitable donations could violate the FCPA if made at thedirection of a government employee to induce official action”). In other words, if the companyimproperly recorded a bona fide charitable contribution not involving (even indirectly) a foreignofficial, it is unlikely the SEC would have charged FCPA books and records and internal controlviolations.


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and provided him with an intangible benefit of enhanced self-worth orprestige. In other words, the perception of the recipient and thesubjective valuation of the thing conveyed may be a key factor in theenforcement agencies’ analysis of whether “anything of value” has beengiven to a “foreign official.”

2. “Foreign Official”

No FCPA element contributes more to the facade of enforcementand no element is more urgently in need of judicial scrutiny than theFCPA’s “foreign official” element. In fact, this key FCPA element hasnever been interpreted by a court. In many cases, the end result is that“foreign official” element simply means what the enforcement agenciessay it means.

The FCPA defines “foreign official” as “any officer or employee of aforeign government or any department, agency, or instrumentalitythereof, or of a public international organization, or any person actingin an official capacity for or on behalf of any such government ordepartment, agency, or instrumentality, or for or on behalf of any suchpublic international organization.”21

There is no dispute that foreign government leaders, other foreignheads of state, and employees of foreign government agencies such asforeign equivalents of the U.S. Treasury Department, U.S. State Depart-ment, etcetera, are “foreign officials” under the FCPA.22

However, many recent FCPA enforcement actions have absolutelynothing to do with such government officials. Rather, the alleged

21. 15 U.S.C. §§ 78dd-1(f)(1)(A), 78dd-2(h)(2)(A), 78dd-3(f)(2)(A) (2006).22. See S. REP. NO. 95-114, at 1–3 (1977) (noting, in connection with the history of the bill,

that “[d]uring the 94th Congress, the Committee on Banking, Housing, and Urban Affairs heldextensive hearings on the matter of improper payments to foreign government officials byAmerican corporations;” noting, in connection with a summary of the bill, that “[the bill] makes ita crime for U.S. companies to bribe a foreign government official for the specified corruptpurposes . . . . Taken together, the accounting requirements and criminal prohibitions of Title Ishould effectively deter corporate bribery of foreign government officials”) (emphasis added). Seealso H.R. REP. NO. 95-640, at 4 (1977) (noting, in connection with the need for the legislation, that“[m]ore than 400 corporations have admitted making questionable or illegal payments. Thecompanies, most of them voluntarily, have reported paying out well in excess of $300 million incorporate funds to foreign government officials, politicians, and political parties.”) (emphasisadded). See also H.R. REP. NO. 95-831, at 12 (1977) (consolidating similar, but not identical, Houseand Senate bills and noting that “[b]y incorporating provisions from both bills, the confereesclarified the scope of the prohibition by requiring that the purpose of the payment must be toinfluence any act or decision of a foreign official (including a decision not to act) or to inducesuch official to use his influence to affect a government act or decision . . . .”) (emphasis added).


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“foreign official” in many recent FCPA enforcement actions is anemployee of an alleged foreign state-owned or state-controlled enter-prise (“SOE”). The enforcement agencies deem such individuals (re-gardless of rank or title23 and regardless of how such individuals may beclassified under local foreign law24) as “foreign officials” under thetheory that their employers (often times a company with publiclytraded stock and other attributes of private business) are “instrumentali-ties” of a foreign government. Numerous FCPA commentators haveprovided various reasons why FCPA enforcement has increased inrecent years yet few attribute the increase to the enforcement agenciesuntested and misguided interpretation of the FCPA’s key “foreignofficial” element. This interpretation is at the core of a significantnumber of recent FCPA enforcement actions as profiled in Section IIIof this article.

3. “Obtain or Retain Business”

The third general element of an FCPA anti-bribery violation is“obtain or retain business.”25 In other words, the “thing of value”corruptly offered or paid to the “foreign official” must be for thepurposes of:

influencing an act or decision of the foreign official; inducingthe foreign official to do or omit to do an action in violation ofhis lawful duty or inducing the foreign official to use hisinfluence with a foreign government or instrumentality toaffect or influence any act of decision of such government or

23. DOJ, Foreign Corrupt Practices Act Antibribery Provisions 3, available at http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf (last visited Aug. 12, 2010) (“TheFCPA applies to payments to any public official, regardless of rank or position.”) (emphasisadded).

24. See DOJ, Opinion Procedure Release 94-01 (May 13, 1994), available at http://www.justice.gov/criminal/fraud/fcpa/opinion/1994/9401.pdf (opining that a general directorof a state-owned enterprise being transformed into a joint stock company is a “foreign official”under the FCPA despite a foreign law opinion that the individual would not be regarded as eithera government employee or a public official in the foreign country). Pursuant to 15 U.S.C.§ 78dd-1(e), parties may submit contemplated actions or business activity to the DOJ and obtain aDOJ opinion whether the contemplated action or business activity violates the FCPA. However,the DOJ’s opinion has no precedential value, and its opinion that the contemplated conduct is inconformance with the FCPA is entitled only to a rebuttable presumption should an FCPAenforcement action be brought as a result of the conduct. See 28 C.F.R § 80.1-16 (2010); 28 C.F.R.§ 80.10 (2010).

25. 18 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a) (2006).


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instrumentality; or securing an improper advantage in order toassist [the payer in] obtaining or retaining business for or with,or directing business to, any person.26

In contrast to the “foreign official” element and many other FCPAelements and issues, this substantive FCPA element has been subjectedto limited judicial scrutiny. However, as discussed below, the FifthCircuit’s equivocal holding in U.S. v. Kay is far from a stamp of approvalof the enforcement agencies’ aggressive interpretation of this element.Yet, aggressive interpretation of this element continues post-Kay and itis a significant driver in a number of recent FCPA enforcement actionsas profiled in Section III of this article.

Prior to Kay, the scope of the “obtain or retain business” element wasin flux and subject to much debate. Kay was a case of first impressionand presented the issue of whether payments to “foreign officials” toavoid paying custom duties and to lower sales taxes could satisfy theFCPA’s “obtain or retain business” element.27 The issue presented wasin contrast to a typical FCPA scenario in which a company allegedlymakes improper payments to a “foreign official” to secure a foreigngovernment contract.28

Kay

In 2001, David Kay and Douglas Murphy (the “DEFENDANTS”), thepresident and vice president of Houston-based American Rice, Inc.(“ARI”), were criminally indicted.29 The indictment charged FCPAanti-bribery violations and alleged that the DEFENDANTS made im-proper payments to Haitian “foreign officials” for the purpose ofreducing customs duties and sales taxes owed by ARI to the Haitiangovernment.30

The indictment, while specific as to other items, merely tracked theFCPA’s “obtain or retain business” language and did not specificallyallege how the alleged payments assisted ARI in obtaining or retainingbusiness in Haiti or what business was obtained or retained.31 “In other

26. Id.27. See United States v. Kay, 359 F.3d 738, 740 (5th Cir. 2004).28. See, e.g., United Indus. Corp., Exchange Act Release No. 60005 (May 29, 2009), available at

http://www.sec.gov/litigation/admin/2009/34-60005.pdf (enforcement action concerning pay-ments to Egyptian Air Force (“EAF”) officials to build a military aircraft depot for the EAF).

29. See Kay, 359 F.3d at 740.30. See id.31. See id.


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words, the indictment recite[d] no facts that could demonstrate anactual or intended cause-and-effect nexus between reduced taxes andobtaining identified business or retaining identified business opportu-nities.”32

The trial court granted Defendants’ motion to dismiss the indict-ment and held, as a matter of law based on the FCPA’s legislativehistory, that the alleged payments were not payments made to “obtainor retain business” and thus did not fall within the scope of the FCPA’santi-bribery provisions.33 The DOJ appealed the decision and one issueon appeal was whether payments to “foreign officials” to obtain favor-able tax and customs treatment can come within the scope of theFCPA’s anti-bribery provisions.34

The Fifth Circuit, like the trial court, concluded that the FCPA’s“obtain or retain business” element was ambiguous and it thus analyzedthe FCPA’s legislative history.35 The Fifth Circuit focused specificallyon the U.S. Senate’s 1977 sponsored bill and the SEC report on whichthe Senate’s proposal was based.36 According to the court, the SECreport “exhibited concern about a wide range of questionable pay-ments [including those at issue in Kay] that were resulting in millionsof dollars being recorded falsely in corporate books and records.”37

Although the Fifth Circuit recognized that the Senate’s proposal didnot expressly cover payments that seek to influence the administrationof tax laws or seek a favorable tax treatment, the Senate, in the words ofthe court, “was mindful of bribes that influence legislative or regulatoryactions, and those that maintain established business opportunities.”38

In short, the Fifth Circuit was convinced that Congress intended toprohibit a range of payments wider than those that only directlyinfluence the acquisition or retention of government contracts orsimilar arrangements.39 The Fifth Circuit held that making payments toa “foreign official” to lower taxes and custom duties in a foreigncountry can provide an unfair advantage to the payer over competitorsand thereby assist the payer in obtaining and retaining business.40 The

32. Id. at 741.33. See id. at 741–42.34. See id. at 742.35. See id. at 743–44.36. See id. at 746–50.37. Id. at 748.38. Id.39. Id. at 749.40. See id. at 755–56.


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court concluded that there was “little difference” between these type ofpayments and traditional FCPA violations in which a company makespayments to a “foreign official” to influence or induce the official toaward a government contract.41

However, the Kay court empathically stated that not all such pay-ments to a “foreign official” outside the context of directly securing aforeign government contract violate the FCPA; it merely held that suchpayments “could” violate the FCPA.42 According to the court, the keyquestion of whether Defendants’ alleged payments constituted anFCPA violation depended on whether the payments were intended tolower ARI’s costs of doing business in Haiti enough to assist ARI inobtaining or retaining business in Haiti. The court then listed severalhypothetical examples of how a reduction in custom and tax liabilitiescould assist a company in obtaining or retaining business in a foreigncountry.43 On the other hand, the court also recognized that “there arebound to be circumstances” in which a custom or tax reduction merelyincreases the profitability of an existing profitable company and thus,presumably, does not assist the payer in obtaining or retaining busi-ness.44 The court specifically stated:

[I]f the government is correct that anytime operating costs arereduced the beneficiary of such advantage is assisted in gettingor keeping business, the FCPA’s language that expresses thenecessary element of assisting in obtaining or retaining busi-ness would be unnecessary, and thus surplusage – a conclusionthat we are forbidden to reach.45

Thus, contrary to popular misperception, Kay does not hold that allpayments to a “foreign official” for the purpose of avoiding customsduties and sales taxes in a foreign country fall within the FCPA’s scope.Rather, the decision merely holds that Congress intended for the FCPAto apply broadly to payments intended to assist the payer, directly orindirectly, in obtaining or retaining business and that payments to a“foreign official” to reduce custom and tax liabilities can, underappropriate circumstances, fall within the statute. Given the above-described facts and circumstances the Kay court found relevant, it is a

41. See id. at 749.42. Id. at 755–56. (emphasis in original).43. See id. at 759–60.44. Id. at 760.45. Id.


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highly fact-dependant analysis whether a payment to a “foreign official”satisfies the “obtain or retain business” element outside of the contextof an actual specific contract.

Despite the equivocal nature of the Kay holding, the decision clearlyenergized the enforcement agencies and post-Kay there has been anexplosion in FCPA enforcement actions where the alleged improperpayments involve customs duties and tax payments or are otherwisealleged to have assisted the payer in securing foreign governmentlicenses, permits, and certifications which assisted the payer in gener-ally doing business in a foreign country.

These enforcement actions are profiled in Section III of this article.Because none of these actions have been challenged, it remains anopen question whether the payments at issue in these cases, if subjectedto judicial scrutiny: (i) would satisfy the FCPA’s “obtain or retainbusiness” element; or (ii) were too attenuated to obtaining or retainingbusiness (such as merely increasing the profitability of an existingprofitable business) and thus, per the Kay holding, not a violation ofthis key FCPA anti-bribery element.

In any event, the Kay series of decisions clearly show that whensubjected to judicial scrutiny: (1) a key FCPA element was found to bevague and ambiguous; (2) the enforcement agencies’ interpretation ofa key FCPA element resulted in conflicting judicial decisions; and (3)the enforcement agencies’ aggressive interpretation of a key FCPAelement was explicitly rejected by a circuit court.46

C. Books and Records and Internal Control Provisions

The FCPA also contains books and records and internal controlprovisions.47 In contrast to the anti-bribery provisions, the books andrecords and internal control provisions only apply to an entity whichhas “a class of securities” registered pursuant to the securities laws or an

46. Defendants did appeal their FCPA conviction to the U.S. Supreme Court. See Petition forA Writ of Certiorari, Kay v. United States, 2008 WL 1721979 (Apr. 9, 2008) (No. 07-1281). Thequestions presented in Defendants’ Petition for A Writ of Certiorari are both general in natureand do not directly address the Fifth Circuit’s interpretation of the “obtain or retain business”element. See id. at *2. Further, the Government, in its Opposition Brief , urged the Court not togrant Defendants’ petition because Defendants did not challenge the sufficiency of the criminalindictment until after the jury returned its verdict. See Brief for the United States in Opposition toa Petition for A Writ of Certiorari, Kay v. United States, 2008 WL 2900027 (Jul. 25, 2008) (No.07-1281). The Supreme Court, without explanation, denied Defendants’ Cert Petition. Kay v.United States, 129 S. Ct. 42 (2008).

47. 15 U.S.C. § 78m(b)(2)(A)-(B) (2006).


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entity otherwise “required to file reports” pursuant to the securitieslaws (collectively “Issuers”) as well as the entity’s employees and agents.48

As a practical matter,49 the books and records and internal controlprovisions apply only to publicly-held companies with shares traded ona U.S. exchange—a category which can include numerous foreigncompanies with shares traded on a U.S. exchange.50

The books and records provisions require Issuers to “make and keepbooks, records, and accounts, which, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of theissuer . . . .”51 The companion internal control provisions require Issu-ers to “devise and maintain a system of internal accounting controlssufficient to provide reasonable assurances that” among other things:(i) “transactions are executed in accordance with management’s gen-eral or specific authorization;” (ii) “transactions are recorded as neces-sary” to permit preparation of financial statements and “to maintainaccountability for assets;” and (iii) “access to assets is permitted only inaccordance with management’s general or specific authorization.”52

These provisions have general application and, despite being part ofthe FCPA, do not just apply to overseas business conduct. In fact, theSEC charges violations of these provisions on a routine basis, yetbecause the conduct at issue does not involve overseas business con-duct, these “non-FCPA FCPA” enforcement actions are not typicallyviewed as FCPA enforcement actions.53

48. Id.49. In rare instances, a company may still be “required to file periodic reports” pursuant to

the securities laws, yet not have publicly traded shares. See Non-Public Issuer Discloses Investigation,THE FCPA BLOG, http://www.fcpablog.com/blog/2010/1/10/non-public-issuer-discloses-investi-gation.html (Jan. 10, 2010, 10:08 AM) (noting that PBSJ Corporation, while not having anypublicly traded securities, is nevertheless required to file periodic reports with the SEC given theextent of its shareholders, mostly current and former employees).

50. See, e.g., Press Release, DOJ, U.S. Resolves Probe Against Oil Company that BribedIranian Official (Oct. 13, 2006), available at http://www.justice.gov/opa/pr/2006/October/06_crm_700.html (“Although Statoil is a foreign issuer, the Foreign Corrupt Practices Act appliesto foreign and domestic public companies alike, where the company’s stock trades on Americanexchanges . . . .”).

51. 15 U.S.C. § 78m(b)(2)(A) (2002).52. 15 U.S.C. § 78m(b)(2)(B) (2002).53. See, e.g., SEC Charges Assurant, Inc. With Improper Reinsurance Accounting, Litigation

Release No. 21388, Accounting and Auditing Enforcement Release No. 3109, 2010 WL 236814(Jan. 21, 2010) (charging Assurant, Inc. with violating, among other things, Section 13(b)(2)(A)and 13(b)(2)(B) of the Exchange Act (i.e. the FCPA’s books and records and internal controlprovisions) for improperly accounting for a $10 million recovery it obtained under a reinsurancepolicy in the aftermath of the 2004 Florida hurricane season). See also Paul Gerlach & George


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The FCPA specifically states that when an Issuer holds 50% or less ofthe “voting power with respect to a domestic or foreign firm,” the booksand records and internal control provisions “require only that the[I]ssuer proceed in good faith to use its influence, to the extentreasonable under the issuer’s circumstances, to cause such domestic orforeign firm to devise and maintain a system of internal accountingcontrols consistent” with the FCPA’s provisions.54 The FCPA furtherstates that an Issuer “which demonstrates good faith efforts to use suchinfluence shall be conclusively presumed to have complied with therequirements of” the FCPA’s books and records and internal controlprovisions.

As demonstrated in more detail in Section III of this article, theenforcement agencies seemingly ignore this FCPA statutory provisionin bringing numerous FCPA enforcement actions against parent com-panies based on the conduct of indirect, multiple-tier subsidiaries oraffiliates in the absence of any allegations that the parent had knowl-edge of or participated in the improper conduct and in the absence ofany bad faith allegations. These numerous FCPA enforcement actionswould seem to be in direct conflict with the FCPA’s statutory provisionsand contribute to the facade of FCPA enforcement.

Before discussing the pillars which contribute to the facade of FCPAenforcement, it is necessary to understand how the FCPA is enforcedand how FCPA enforcement actions are typically resolved in theabsence or practical absence of judicial scrutiny. Both these dynamicssignificantly contribute to the facade of FCPA enforcement and arediscussed in the next section.

III. FCPA ENFORCEMENT

The FCPA is both a civil statute and a criminal statute. Like othersecurities law violations (such as insider trading), the issue of intentand a prosecutor’s ability to satisfy the higher burden of proof requiredfor a criminal conviction (beyond a reasonable doubt) may determinewhether an FCPA violation is pursued with criminal charges or merelycivil charges. In terms of which enforcement agency (DOJ or SEC) will

Parizek, The SEC’s Enforcement of the Foreign Corrupt Practices Act (unpublished manuscript)(on file with author) (“[T]he SEC has brought hundreds of enforcement cases since adoption ofthe FCPA charging U.S. issuers with violations of the FCPA’s books and records and internalcontrol provisions where the underlying conduct or transactions occurred solely within the U.S.with no foreign connection.”).

54. 15 U.S.C. § 78m(b)(6) (2002).


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prosecute the charges, the SEC has civil enforcement authority only,and it may only regulate Issuers. Thus, “[t]he SEC is responsible forcivil enforcement of the anti-bribery provisions with respect to [I]ssu-ers” as well as civil enforcement of the books and records and internalcontrol provisions.55 The DOJ “is responsible for all criminal enforce-ment” of the statute (both the anti-bribery and books and records andinternal control provisions) and civil enforcement of the anti-briberyprovisions against non-Issuers subject to FCPA jurisdiction.56

Whether the DOJ, the SEC, or both agencies are involved in an FCPAenforcement action, the end result is usually the same—use of aresolution vehicle that is privately negotiated and subjected to little orno judicial scrutiny. In other words, in the majority of FCPA enforce-ment there is no independent analysis of whether factual evidenceexists to support the FCPA’s legal elements or whether valid andlegitimate defenses are relevant to the conduct charged. Employmentof the resolution vehicles typically used to resolve an FCPA enforce-ment action does not occur in a vacuum. Rather, the prevalence ofthese resolution vehicles is based on the “carrots” and “sticks” theenforcement agencies possess in white-collar enforcement actions,including FCPA enforcement actions.57

A. Relevance of “Carrots” and “Sticks”

The “carrots” and “sticks” relevant to FCPA enforcement actionsinclude the DOJ’s Principle of Federal Prosecution of Business Organi-zations (“Principles of Prosecution”), the U.S. Sentencing Guidelines(“Sentencing Guidelines”), and SEC resolution policy. As describedbelow, the application or potential application of these “carrots” and“sticks” in the FCPA context routinely nudge corporate defendants and

55. Id. For a more thorough description of the SEC’s enforcement of the FCPA, see PaulGerlach & George Parizek, The SEC’s Enforcement of the Foreign Corrupt Practices Act(unpublished manuscript) (on file with author) (describing how SEC FCPA investigations “tendto focus broadly on the overall integrity of the issuer’s financial statements and not simply on thenarrow issue of whether an FCPA prohibited payment was made” and noting that SEC investiga-tors will analyze, in addition to whether a bribe was authorized or paid, “who falsely recorded thebribe in the company’s books and records,” “who lied or otherwise hid the bribe from the outsideauditors,” “why did the issuer’s internal controls fail to identify the bribe,” “whether the briberesulted in false public disclosures by the issuer,” and “whether senior management knew orshould have known of the bribe or the related improper accounting”).

56. See DOJ, LAY PERSON’S GUIDE TO FCPA 2, available at http://www.justice.gov/criminal/fraud/fcpa/docs/lay-persons-guide.pdf (last visited Aug. 24, 2010).

57. “Carrots” and “sticks” is a popular idiom that refers to a policy of offering a combinationof rewards and punishment to induce behavior.


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individuals to resolve FCPA matters, regardless of the enforcementagencies’ legal theories, ambiguous facts, or the existence of valid andlegitimate defenses. The common thread in these concluding resolu-tion vehicles is the absence or practical absence of judicial scrutiny.Thus, FCPA enforcement actions do not necessarily reflect the triumphof one party’s legal position over the other, but rather reflect arisk-based decision primarily grounded in issues other than facts or thelaw.

1. Principles of Prosecution

The Principles of Prosecution are found in the U.S. Attorneys’Manual and set forth the factors prosecutors “should consider” indetermining whether to bring criminal charges against a businessorganization or negotiate a plea or other agreement (such as an NPAor DPA) with the organization to resolve potential criminal charges.58

Relevant factors include: “the corporation’s59 timely and voluntarydisclosure of wrongdoing and its willingness to cooperate in theinvestigation of its agents,” and the corporation’s willingness to “coop-erate with relevant government agencies.”60 The Principles of Prosecu-tion specifically state that “[c]ooperation is a potential mitigatingfactor, by which a corporation . . . can gain credit in a case thatotherwise is appropriate for indictment and prosecution.”61 Under thePrinciples of Prosecution, a corporation’s failure to cooperate “doesnot mean the corporation will be indicted;” rather it “simply means thatthe corporation will not be entitled to mitigating credit for thatcooperation”—a statement which appears, both in writing and inpractice, to be a distinction without a difference.62

Against this backdrop and these factors, corporate defendants rou-tinely agree to resolve FCPA matters. Simply stated, to challenge theDOJ’s theories, its interpretation of facts, or to raise valid and legiti-mate FCPA defenses is not to cooperate with the investigation—a keyfactor in DOJ’s ultimate decision of whether to seek a criminal indict-

58. See DOJ, U.S. Attorney’s Manual §9-28.000 (2008) [hereinafter Principles of FederalProsecution of Business Organizations], available at http://www.justice.gov/opa/documents/corp-charging-guidelines.pdf.

59. Although the Department of Justice Principles of Prosecution generally use the term“corporation,” the principles apply to “all types of business organizations, including partnerships,sole proprietorships, government entities, and unincorporated associations.” Id. at n.1.

60. Id. at 461. Id. at 7.62. Id. at 11.


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ment against the company.Given that voluntary disclosure63 to the DOJ is rewarded under the

Principles of Prosecution, many corporations opt to disclose evenambiguous conduct to the DOJ and agree to whatever settlement termsthe DOJ views proper (notwithstanding the salient fact that suchconduct may not even violate the FCPA).64 A key factor motivating thisrisk-based decision is that such a course of conduct is more efficientand certain compared to the DOJ independently finding out about theconduct (however slight the possibility) and harshly penalizing thecompany for failing to voluntarily disclose.

DOJ officials have expressed, on numerous occasions, the depart-ment’s strong desire to have companies voluntarily disclose conductthat could potentially implicate the FCPA. In a November 2009 speechbefore FCPA practitioners, Assistant Attorney General Lanny Breuer (aformer FCPA practitioner at a major law firm) “strongly urge[d] anycorporation that discovers an FCPA violation to seriously considermaking a voluntary disclosure and always to cooperate with the Depart-ment.”65 Among other things, Breuer assured the audience of theDOJ’s “commitment to meaningfully reward voluntary disclosures and[that] full and complete cooperation will continue to be honored inboth letter and spirit.”66

2. Sentencing Guidelines

The Principles of Prosecution are not the only “carrot” nudgingcorporate defendants to resolve FCPA matters. Even if an FCPA enforce-ment action is resolved through an NPA, DPA, or plea, the conduct atissue still must be “run through” the Sentencing Guidelines to arrive ata penalty range.

63. Generally speaking, voluntary disclosure means a company’s lawyer picks up the phoneand calls the DOJ to schedule a meeting during which the lawyer will disclose conduct that couldpotentially implicate the FCPA even though the enforcement agencies, in many cases, wouldnever find out about the conduct.

64. For an example of a company voluntarily disclosing ambiguous conduct to the DOJ thatmay not even violate the FCPA , see Voluntary Disclosures and the Role of FCPA Counsel, FCPAPROFESSOR BLOG (Dec. 1, 2009, 2:54 PM), http://fcpaprofessor.blogspot.com/2009/12/voluntary-disclosures-and-role-of-fcpa.html. As noted in this post, there are several, significant conflicts ofinterest FCPA counsel would seem to have in advising corporate clients on this voluntarydisclosure decision.

65. Another FCPA Speech, FCPA PROFESSOR BLOG (Nov. 18, 2009 12:09 PM), http://fcpaprofessor.blogspot.com/2009/11/another-fcpa-speech.html (discussing Breuer’s comments).

66. Id.


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Application of the Sentencing Guidelines will result in a lowercorporate fine if the corporation “reported the offense to appropriategovernmental authorities, fully cooperated in the investigation, andclearly demonstrated recognition and affirmative acceptance of respon-sibility for its criminal conduct.”67 In other words, challenging the DOJand putting it to its burden in an adversarial proceeding to establishfactual evidence that supports the FCPA’s legal elements is not “affirma-tive acceptance of responsibility,” and such a challenge will result in acorporation being treated more severely from a penalty perspective.

Given the application of the Principles of Prosecution and theSentencing Guidelines in the FCPA context, it is not surprising thatevery company subject to an FCPA inquiry during the facade ofenforcement era has opted to resolve such matters through an NPA,DPA, or plea regardless of the DOJ’s legal theories, ambiguous facts, orthe existence of valid and legitimate defenses. Simply put, challengingthe DOJ is too risky. In fact, no company has challenged the DOJ in anFCPA enforcement action in the last twenty years.68

3. SEC Policy

While less tasty than the DOJ’s “carrots,” and less sharp than theDOJ’s “sticks,” the SEC (an agency with merely civil enforcement powerand remedies) also possesses similar “carrots” and “sticks” relevant inthe FCPA context. During the facade of enforcement era, the SEC’s“Seaboard Report” has guided companies subject to an SEC FCPAinquiry.69 In this report, the SEC lists

some of the criteria [the SEC] will consider in determiningwhether, and how much, to credit self-policing, self-reporting,remediation and cooperation—from the extraordinary step oftaking no enforcement action to bringing reduced charges,seeking lighter sanctions, or including mitigating language in

67. See U.S. SENTENCING GUIDELINES MANUAL § 8C2.5(g) (2009).68. See A Gesture of Justice, http://www.fcpablog.com/blog/2010/2/10/a-gesture-of-justice.

html, THE FCPA BLOG (Feb. 9, 2010, 5:27 PM) [hereinafter Gesture] (“Not a single corporatedefendant, big or small, has fought Foreign Corrupt Practices Act charges in court for the past twodecades.”).

69. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934and Commission Statement on the Relationship of Cooperation to Agency Enforcement Deci-sions, Exchange Act Release No. 44969 2001 WL 1301408 (Oct. 23, 2001), available at http://www.sec.gov/litigation/investreport/34-44969.htm.


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documents [the SEC] use[s] to announce and resolve enforce-ment actions.70

Relevant criteria include: “[d]id the company promptly, completelyand effectively disclose the existence of the misconduct to the public,to regulators and to self-regulators;” “[d]id the company cooperatecompletely with appropriate regulatory and law enforcement bodies;”and “[d]id the company identify possible violative conduct and evi-dence with sufficient precision to facilitate prompt enforcement ac-tions . . . .”71

SEC enforcement is likely to become even more focused on coopera-tion and even more reliant on resolution vehicles subject to little or nojudicial scrutiny. In January 2010, the SEC “announced a series ofmeasures to further strengthen its enforcement program by encourag-ing greater cooperation from individuals and companies in the agen-cy’s investigations and enforcement actions.”72 Described as “a poten-tial game-changer” by Robert Khuzami, the SEC’s Director of theDivision of Enforcement, the SEC announced that it was seeking “newcooperation tools” that are “regularly and successfully used by theJustice Department” that are not currently available to the SEC.73

These tools include:1. Cooperation Agreements: Formal written agreements in which

the Enforcement Division agrees to recommend to the Commis-sion that a cooperator receive credit for cooperating in investi-gations or related enforcement actions if the cooperator pro-vides substantial assistance such as full and truthful informationand testimony.

2. Deferred Prosecution Agreements: Formal written agreementsin which the Commission agrees to forego an enforcementaction against a cooperator if the individual or company agrees,among other things, to cooperate fully and truthfully and tocomply with express prohibitions and undertakings during aperiod of deferred prosecution.

3. Non-prosecution Agreements: Formal written agreements, en-tered into under limited and appropriate circumstances, in

70. Id.71. Id.72. Press Release, SEC, SEC Announces Initiative to Encourage Individuals and Companies

to Cooperate and Assist in Investigations (Jan. 13, 2010), available at http://www.sec.gov/news/press/2010/2010-6.htm.

73. Id.


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which the Commission agrees not to pursue an enforcementaction against a cooperator if the individual or company agrees,among other things, to cooperate fully and truthfully andcomply with express undertakings.74

These measures, applied to FCPA enforcement, will likely result in evenless judicial scrutiny of the SEC’s FCPA interpretations and legaltheories. In fact, the SEC’s Enforcement Manual states that “[a]nadmission or an agreement not to contest the relevant facts underlyingthe alleged offenses” is a key factor the SEC will consider in determin-ing whether a company should receive a deferred prosecution agree-ment.75

This SEC policy, like the DOJ’s Principles of Prosecution, oftencauses companies subject to SEC regulation to disclose ambiguousconduct to the SEC—including conduct that if subjected to judicialscrutiny may not even violate the FCPA—and to agree to whateversettlement terms the SEC views proper in the hopes of receiving lenienttreatment from the SEC and avoiding a long, protracted legal disputewith its principal regulator

The net effect of these DOJ and SEC “carrots” and “sticks” in theFCPA context is to nudge corporate defendants and individuals toresolve FCPA enforcement actions through the resolution vehiclesdiscussed in the next section. The common thread in these resolutionvehicles is the absence or practical absence of judicial scrutiny. Thus,the untested and dubious legal theories leading to these resolutionvehicles are never questioned or examined in any meaningful way.

B. Prevalence of Resolution Vehicles Subject to Little or No Judicial Scrutiny

The resolution vehicles typically used to settle FCPA enforcementactions include DOJ NPA’s, DPA’s and pleas, and SEC settled civilcomplaints and consent decrees which allow a corporate defendant tosettle the charges without “admitting or denying” the allegations. In thepast two decades, no corporation has publicly challenged either enforce-ment agency in an FCPA case; thus these resolutions vehicles have beenthe sole means by which corporate FCPA enforcement actions havebeen resolved during the current facade era of FCPA enforcement.76

Each of these resolution vehicles is generally described below.

74. Id.75. See OFFICE OF CHIEF COUNSEL, SEC, SEC ENFORCEMENT MANUAL 134 (2010).76. See Gesture, supra note 68 (“Not a single corporate defendant, big or small, has fought

Foreign Corrupt Practices Act charges in court for the past two decades.”).


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To assuage potential criticism of the thesis of this article, it must benoted that not all FCPA enforcement takes place outside of the judicialsystem. Although rare, jury trials of individual FCPA defendants haveoccurred and there were three such trials in 2009. That year was themost active trial period in the FCPA’s history and an impulsive reactionmight be to suggest that this alone undermines the notion that FCPAenforcement is a facade or that FCPA enforcement suffers from a lackof judicial scrutiny. However, as explained more fully below, the resultsin these trials were mixed – and none involved the pillars discussed inthis article – which contribute to the facade of FCPA enforcement.

William Jefferson

In June 2007, then Congressman William Jefferson was criminallyindicted on charges including substantive FCPA violations.77 As to theFCPA charges, the indictment alleged that Jefferson violated the FCPA“by offering, promising and making payments to a foreign official toadvance the various business endeavors in which he and his family hadfinancial interests.”78 According to the indictment, Jefferson was respon-sible for negotiating, offering, and delivering payments of bribes to“Nigerian Official A” and Jefferson’s infamous “cash in the freezer” wasallegedly intended as a bribe payment to the official.79 Unlike mostindividual FCPA defendants, Jefferson challenged the DOJ and exer-cised his constitutional right to a jury trial. In August 2009, Jeffersonwas found not guilty of substantive FCPA violations, yet convicted of avariety of other charges including a general conspiracy count.80 Thenature of the conspiracy remains unclear. The indictment chargedconspiracy to solicit bribes, to commit honest services wire fraud and toviolate the FCPA. The jury was instructed that to convict on theconspiracy charge it only needed to find Jefferson guilty on two out ofthe three counts, and in announcing the jury verdict, the court did not

77. See Press Release, DOJ, Congressman William Jefferson Indicted On Bribery, Racketeer-ing, Money Laundering, Obstruction of Justice, and Related Charges (June 4, 2007), available athttp://www.justice.gov/opa/pr/2007/June/07_crm_402.html.

78. Id.79. Id.80. See Press Release, DOJ, Former Congressman William J. Jefferson Convicted of Bribery,

Racketeering, Money Laundering and Other Related Charges (Aug. 5, 2009), available athttp://www.justice.gov/opa/pr/2009/August/09-crm-775.html.


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specify which counts the jury agreed upon.81 Notwithstanding thesalient fact that Jefferson was found not guilty of substantive FCPAcharges or the ambiguous nature of the jury’s conspiracy verdict, theDOJ maintains that Jefferson was found guilty of FCPA violations.82

Gerald and Patricia Green

In January 2008, Los Angeles area film executives Gerald and PatriciaGreen were criminally indicted “on allegations of making corruptpayments to a Thai government official in order to obtain lucrativecontracts to run an international film festival held annually in Bangkok”in violation of the FCPA.83 The official headed a government agency,the Tourism Authority of Thailand, and the indictment is supported byan FBI agent affidavit that describes, among other things, how theagent witnessed Mr. Green meeting with the official while in Thai-land.84 Despite a seemingly solid FCPA case based on the government’sallegations, the Greens challenged the DOJ and exercised their consti-tutional right to a jury trial. In September 2009, the Greens were foundguilty of, among other charges, substantive FCPA violations.85

Frederic Bourke

In October 2005, investor Frederic Bourke was criminally indicted inwhat is arguably the most complex and convoluted case in the FCPA’s

81. See Jonathan Tilove, William Jefferson Case Will Always be Remembered for Cash in the Freezer,TIMES-PICAYUNE, Aug. 5, 2009, http://www.nola.com/news/index.ssf/2009/08/william_jefferson_case_will_al_1.html .

82. For instance, in a November 2009 speech Assistant Attorney General Lanny Breuerstated: “In the past few months, we have the completed the trials of the Greens in California, of Mr.Bourke in New York and of former Congressman William Jefferson in Virginia. In each of thesecases, individuals were found guilty of FCPA violations and face jail time.” Lanny A. Breuer,Assistant Att’y Gen., DOJ, Prepared Keynote Address to the 10th Annual Pharmaceutical Regula-tory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available at www.ehcca.com/presentations/pharmacongress10/breuer_2.pdf.

83. See Press Release, DOJ, Film Executive and Spouse Indicted for Paying Bribes to a ThaiTourism Official to Obtain Lucrative Film Festival Management Contracts (Jan. 17, 2008),available at http://www.justice.gov/opa/pr/2008/January/08_crm_032.html.

84. See Press Release, DOJ, Film Executive and Spouse Arrested for Paying Bribes to a ThaiTourism Official to Obtain Lucrative Film Festival Management Contracts (Dec. 19, 2007),available at http://justice.gov/usao/cac/pressroom/pr2007/162.html.

85. See Press Release, DOJ, Film Executive and Spouse Found Guilty for Paying Bribes to ThaiTourism Official to Obtain Lucrative Contracts (Sept. 14, 2009), available at http://justice.gov/usao/cac/pressroom/pr2009/112.html.


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history.86 According to the indictment, Bourke and others participatedin a “massive scheme” to bribe senior Azerbaijan government officialsto ensure that those officials would privatize the State Oil Company ofthe Azerbaijan Republic and allow Bourke and others “to share in theanticipated profits arising from that privatization.”87 The nearly decade-long investigation and legal case included dismissal of FCPA substan-tive charges on statute of limitations grounds, reinstatement of theFCPA substantive charges, a superseding indictment which thendropped the FCPA substantive charges, and a six-week jury trial oncharges that Bourke conspired with others to violate the FCPA. In July2009, Bourke was found guilty by a federal jury of conspiracy to violatethe FCPA.88 In ruling on post-verdict motions, Judge Shira Scheindinof the Southern District of New York rejected the government’s aggres-sive interpretation of the FCPA knowledge element, yet still deniedBourke’s post-verdict motions.89 In seeming rejection of the DOJ’s“massive bribery scheme” theory, Judge Scheindin sentenced Bourketo 366 days in prison.90 In sentencing Bourke, Judge Scheindin stated,“After years of supervising this case, it’s still not entirely clear to mewhether Mr. Bourke is a victim or a crook or a little bit of both.”91

These trials are indeed rare. The fact remains that every corporateFCPA enforcement action over the last two decades has been resolvedthrough a DOJ NPA, DPA, plea (or combination thereof) or SECsettlement, and nearly every individual FCPA enforcement action hasbeen resolved through a plea or SEC settlement. These resolutionvehicles and how they contribute to the facade of FCPA enforcement

86. See Andrew Longstreth, Azerbaijan Bribes Put One Mogul on Trial, Another in Exile, THE

AMERICAN LAWYER (Oct. 9, 2009), http://www.law.com/jsp/law/international/LawArticleIntl.jsp?id�1202434399273&Azerbaijan_Bribes_Put_One_Mogul_on_Trial_Another_in_Exile.

87. See Press Release, DOJ, U.S. Announces Charges in Massive Scheme to Bribe SeniorGovernment Officials in the Republic of Azerbaijan (Oct. 6, 2005), available at http://www.justice.gov/usao/nys/pressreleases/October05/kozenyetalindictmentpr.pdf.

88. See Press Release, DOJ, Connecticut Investor Found Guilty in Massive Scheme to BribeSenior Government Officials in the Republic of Azerbaijan (July 10, 2009), available at http://www.justice.gov/opa/pr/2009/July/09-crm-677.html.

89. See Kenneth Winer & Gregory Husisian, Recent Opinion Sheds Light on the Relevance of DueDiligence to the FCPA’s “Knowledge” Element, in 4 CORPORATE ACCOUNTABILITY REPORT, 1, 2–3 (2009)available at http://www.foley.com/files/tbl_s31Publications/FileUpload137/6597/CorporateAccount2009.pdf (last visited Aug. 12, 2010).

90. See Press Release, DOJ, Connecticut Investor Frederic Bourke Sentenced to Prison forScheme to Bribe Government Officials in Azerbaijan (Nov. 11, 2009), available at http://www.justice.gov/opa/pr/2009/November/09-crm-1217.html.

91. David Glovin, Bourke Gets One Year in Prison in Azerbaijan Bribery Case, BLOOMBERG (Nov. 11,2009), http://www.bloomberg.com/apps/news?pid�20601103&sid�a76j6PK3anAc.


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are discussed next.

1. NPAs and DPAs

The Principles of Prosecution state that: “[i]n certain instances, itmay be appropriate . . . to resolve a corporate criminal case by meansother than indictment” and that NPAs and DPAs “occupy an importantmiddle ground between declining prosecution and obtaining theconviction of a corporation.”92 Per the Principles of Prosecution, NPAsand DPAs are intended to be a “third option” for DOJ prosecutors“besides a criminal indictment, on the one hand, and a declination, onthe other.”93 The Principles of Prosecution recognize that “[d]ecliningprosecution may allow a corporate criminal to escape without conse-quences” whereas “[o]btaining a conviction may produce a result thatseriously harms innocent third parties who played no role in thecriminal conduct.”94 Thus, the Principles of Prosecution authorize DOJprosecutors, “under appropriate circumstances” to use NPAs and DPAsgiven that they “can help restore the integrity of a company’s opera-tions and preserve the financial viability of a corporation that hasengaged in criminal conduct” while still “preserving the government’sability to prosecute a recalcitrant corporation that materially breachesthe agreement.”95

The DOJ’s use of NPAs and DPAs has exploded in recent years.Professor Peter Henning, a former DOJ prosecutor and SEC enforce-ment official, recently noted that NPAs and DPAs “have become almostthe accepted norm” and “there is even an expectation that companieswill receive them.”96 The Government Accountability Office (“GAO”)notes in a recent report that the “DOJ has made more frequent use ofDPAs and NPAs in recent years” and the report analyzes 152 NPAs andDPAs that the DOJ negotiated with business entities through Septem-ber 2009.97

While NPAs and DPAs are utilized in non-FCPA enforcement ac-

92. Principles of Federal Prosecution of Business Organizations, supra note 58, at 2.93. Id. at 18.94. Id.95. Id.96. See Henning on the White Collar Watch at the New York Times, 24 CORPORATE CRIME REPORTER 6

(Feb. 7, 2010), available at http://corporatecrimereporter.com/henning020710.htm. 12, 2010).97. See U.S. GOVERNMENT ACCOUNTABILITY OFFICE, Corporate Crime: DOJ Has Taken Steps to Better

Track Its Use of Deferred and Non-Prosecution Agreements, But Should Evaluate Effectiveness,5, 13 (2009),http://www.gao.gov/new.items/d10110.pdf (last visited Aug. 12, 2010) [hereinafter GAO-10-110].


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tions, the “lion’s share” of these agreements are used to resolve FCPAenforcement actions.98 For instance, in 2008, seven of the sixteen NPAsor DPAs were used to resolve FCPA enforcement actions.99 FCPAenforcement actions in 2009 resolved through NPAs or DPAs included:UTStarcom, Inc. and Helmerich & Payne, Inc.100 “This contrastsbrightly with the fact that prior to December 2004, prosecutors appearnever to have resolved a corporate FCPA case” through an agreementsuch as an NPA or DPA.101

An NPA is not filed with a court, but instead is a privately negotiatedagreement between the DOJ and a business entity. These agreementsoften take the form of letter agreements from the DOJ to the entity’slawyer and generally include a brief— often times bare-bones—statement of facts replete with legal conclusions that the entity acknowl-edges responsibility for, as well as a host of compliance undertakingsthat the entity agrees to implement.102

A DPA, on the other hand, is filed with a court and thus has a “lookand feel” much like a pleading, although the factual allegations also areoften bare-bones and replete with legal conclusions. Like NPAs, DPAsare also the result of privately negotiated agreements between the DOJand a business entity. In exchange for the DOJ agreeing to deferprosecution of the entity (usually for a two to four-year period), theentity acknowledges responsibility for the conduct described in theallegations and agrees to a host of compliance undertakings it agrees toimplement.103 Other than what happens with the agreement (i.e.whether it is filed with a court or not) there is very little differencebetween an NPA and a DPA.104

98. Lawrence D. Finder et al., Betting the Corporation: Compliance or Defiance? CompliancePrograms in the Context of Deferred and Non-Prosecution Agreements - Corporate Pre-Trial Agreement Update -2008, in CORPORATE COUNSEL REVIEW, SOUTH TEXAS COLLEGE OF LAW, Vol. XXVIII, No. 1, May 2009,at 9.

99. See id. at 1.100. See Press Release, DOJ, UTStarcom Inc. Agrees to Pay $1.5 Million Penalty for Acts of

Foreign Bribery in China (Dec. 31, 2009), available at http://www.justice.gov/opa/pr/2009/December/09-crm-1390.html; see also Press Release, DOJ, Helmerich & Payne Agrees to Pay $1Million Penalty to Resolve Allegations of Foreign Bribery in South America (July 30, 2009),available at http://www.justice.gov/opa/pr/2009/July/09-crm-741.html.

101. Peter Spivak & Sujit Raman, Regulating the ‘New Regulators’: Current Trends in DeferredProsecution Agreement, 45 AM. CRIM. L. REV. 159, 176 (2008).

102. See Prosecution Agreements, VIRGINIA LAW SCHOOL http://www.law.virginia.edu/html/librarysite/garrett_bycompany.htm (last visited Aug. 24, 2010) (listing examples of various NPAs).

103. See id.104. Lawrence D. Finder & Ryan D. McConnell, Devolution of Authority: The Department of

Justice’s Corporate Charging Policies, 51 ST. LOUIS U. L.J. 1, 17 (2006) (“Our review of the published


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Because an NPA is not filed with a court, there is absolutely nojudicial scrutiny of these agreements, including the statement of factsand legal conclusions that serve as the foundation of the agreement. Inother words, there is no independent review of the statement of facts todetermine if evidence exists to support the essential elements of thecrime “alleged” or to determine whether valid and legitimate defensesare relevant to the “alleged” conduct.” In fact, credible evidencesuggests that NPAs or DPAs are offered to companies even before theelements of a crime have been proven beyond a reasonable doubt.Peter Spivak and Sujit Raman, lawyers in private practice at a major lawfirm, report as follows:

We have heard from colleagues in the defense bar of prosecu-tors who, in their haste to compel the company’s cooperation inpursuit of individuals, have pressed the entity to enter into adiversion agreement before any particular’s guilt could defini-tively be established. In such cases, the company is essentiallyforced to accept the filing of criminal charges (and all therelated consequences, including negative publicity); to waive ahost of its defenses; to admit to certain facts; to undertake costlyremedial measure; and perhaps even to pay serious “criminal”penalties all before the elements of the claim(s) against it canbe proven beyond a reasonable doubt.105

Because a DPA is generally filed with a court, these agreements—atleast in theory—could be subject to judicial scrutiny. However, theGAO report found judicial scrutiny of DPAs to be essentially non-existent as well. In a separate section of the report titled “JudgesReported Limited Involvement in the DPA Process,” it is noted that the“Speedy Trial Act106 allows judges to approve the deferral of prosecu-tion pursuant to a written agreement between the government and thedefendant, for the purpose of allowing the defendant to demonstratehis good conduct; however, the law does not otherwise specify judicialinvolvement in the DPA process.”107 “To assess what role the courtshave played in the DPA process,” GAO “obtained written responses tostructured interview questions from twelve of the fourteen judges who

pre-trial agreements reveals, however, that NPAs do not necessary reveal more favorable termsthan DPAs.”).

105. Spivak & Raman, supra note 101, at 188–89.106. See 18 U.S.C. § 3161(h)(2) (2000).107. See GAO-10-110, supra note 97, at 25.


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had overseen DPAs in federal courts.”108 Based on these responses,GAO found that “judges reported that they were generally not in-volved” in the DPA process.109 Specifically, the GAO found that:

Nine of the 12 judges stated that they did not hold a hearing toreview the DPA or its terms, while the 3 remaining judges heldhearings. One of these judges did so in the context of a pleahearing. Another judge held a hearing to arraign the company;at which time, the company and DOJ informed the judge thatthey intended to enter into a DPA. The judge then had asecond hearing to approve the DPA. The third judge con-ducted a hearing to arraign the company and verify that thecompany’s decision to enter into the DPA was informed andvoluntary. Ten of the 12 judges reported that they relayed theirdecision approving the DPA through a written order. Onejudge relayed the decisions orally at a hearing, and one judgedid both.110

Thus, while DPAs could, in theory, be subject to judicial scrutiny, thefirst-of-its-kind GAO report found that judges routinely “rubber-stamp”DPAs without inquiring into whether factual evidence exists to supportthe essential elements of the crime “alleged” or to determine whethervalid and legitimate defenses are relevant to the “alleged” conduct. Infact, no court has ever rejected an NPA or DPA and all “have beenapproved without judicial modification.”111

The GAO’s findings are consistent with the observations of severalpractitioners and scholars who have experience with NPAs and DPAs.112

108. Id. at 8.109. Id. at 25.110. Id. at 25–28.111. Brandon L. Garrett, Structural Reform Prosecution, 93 VA. L. REV. 853, 893 (2007).112. See Candace Zierdt & Ellen S. Podgor, Corporate Deferred Prosecutions Through the Looking

Glass of Contract Policing, 96 KY. L.J. 1, 14 (2007) (“Deferred and non-prosecution agreements oftenoccur without judicial oversight or participation. This is because the agreement may be reachedprior to an indictment, and thus no court case will have been filed, or because the governmentmay reach a settlement with a company that is entered into outside of the criminal justice system.Even in the rare case that has court participation, it is usually a mere formality of the documentbeing filed in the court. It may be presented to the court to satisfy the statutory provision thatexempts the deferral of criminal matters from the speedy trial constraints.”). See also Joan McPhee,Deferred Prosecution Agreements: Ray of Hope or Guilty Plea By Another Name, INSIDE LITIG., 4Winter2006, available at http://www.ropesgray.com/files/Publication/a6d348fd-f6fd-4f4a-b38b-bd6de98836b7/Presentation/PublicationAttachment/4d1fdc14-3bcf-463a-b2b0-76204fc7f316/


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Given the lack of judicial scrutiny of NPAs and DPAs, some questionwhether these “agreements” are even agreements at all. David Pitofsky,a former DOJ prosecutor and Principal Deputy Chief of the CriminalDivision of the United States Attorney’s Office for the Eastern Districtof New York,113 notes:

One of the problems with the process of negotiating a deferredprosecution agreement is that it is not really a negotiation. Anypush back by the company on a provision that the governmentrequests is not only going to be shot down, but the governmentmay see it as a reflection that the company’s claimed contritionis not genuine. So, you don’t even want to make the argumentfor fear that it will cause the government to look at youdifferently and decide that a deferral isn’t appropriate.114

Professors Candace Zierdt and Ellen Podgor note:

These agreements are made under duress. There is a threat ofgovernment indictment and resulting destruction of the entirebusiness that induces the manifestation of assent to the de-ferred prosecution agreement. But for the threat of possibleprosecution by the government and its resulting consequences,these terms would not normally be agreed to by the corpora-tion . . . . In addition to the elements of classic duress, theseprovisions should be removed because they are agreed to undereconomic duress. The economic reality is that if the corpora-tion refuses to assent to the deferred prosecution agreement,the result will likely be the death of the corporation or alterna-

Article_Winter_2006_Deferred_Prosecution_Agreements_McPhee.pdf (last visited Aug. 24, 2010)(“Given the breadth of the corporate criminal liability doctrine and the potentially devastatingconsequences of a criminal conviction or even indictment, it is the rare corporation today that hasa meaningful right to a jury trial in the resolution of its corporate criminal disputes with thegovernment. While a criminal plea necessarily entails relinquishment of the right to a jury trial,DPAs are even further removed from the salutary environment of the public courtroom.Negotiated as they typically are in a conference room between a federal prosecutor and corporatecounsel, DPAs are entered into by and large without benefit of any judicial oversight or othermechanism for ensuring prosecutorial accountability.”).

113. See David B. Pitofsky Biography, GOODWIN PROCTER, http://www.goodwinprocter.com/People/P/Pitofsky-David.aspx (last visited Aug. 24, 2010).

114. CORPORATE CRIME REPORTER, Interview with David Pitofsky, 19 CORP. CRIME REP. 46 (8)(Nov. 28, 2005), available at http://www.corporatecrimereporter.com/pitofskyinterview010806.htm.


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tively, severe financial consequences that will gravely injure thecorporation. These consequences may result from an indict-ment even if the corporation is later declared innocent.115

Even though the Principles of Prosecution specifically note that NPAsand DPAs are intended to be a “third option” between criminalindictment and declination, many observers believe that NPAs andDPAs have taken the place of declinations altogether.116 ProfessorHenning asks:

I wonder – is this the best thing? I don’t think it has beenthought through on any real level. It has just become – not theflavor of the month – but – this is the way we can resolve thesecases and not be too heavily criticized one way or the other.That sometimes is what ends up happening in the government.If you can find a way to do something that doesn’t draw toomuch fire, then that becomes the accepted method of opera-tion.117

Because neither NPAs nor DPAs are subject to any meaningful judicialscrutiny, many also believe that use of these agreements give a prosecu-tor unchecked power subject to abuse.118

NPAs and DPAs may indeed be a useful tool for avoiding another“Arthur Anderson situation” (i.e., a company that died upon criminalconviction notwithstanding the fact that the U.S. Supreme Court laterreversed its conviction119). However, these agreements seem to have

115. See Zierdt & Podgor, supra note 112, at 38–40.116. See, e.g., Benjamin M. Greenblum, What Happens to a Prosecution Deferred? Judicial Oversight

of Corporate Deferred Prosecution Agreements, 105 COLUM. L. REV. 1896, 1903 (2005) (noting thatdeferral has replaced “declination in the corporate context”).

117. CORPORATE CRIME REPORTER, Henning on the White Collar Watch at the New York Times, 24CORP. CRIME REP. 6 (Feb. 7, 2010), available at http://corporatecrimereporter.com/henning020710.htm.

118. See, e.g., Greenblum, supra note 116, at 1898. See also Erik Paulsen, Imposing Limits onProsecutorial Discretion in Corporate Prosecution Agreements, 82 N.Y.U. L. REV. 1434, 1436, 1457, 1459(2007) (“It has become increasingly clear that the government holds all the cards in negotiationsover these agreements. As long as the threat of prosecution lingers over a company, thecorporation is compelled to agree to the prosecutor’s terms, vesting nearly absolute power in thegovernment’s hands . . . . Without the threat of trial, however, there is no assurance that theprosecutor is acting in a judicious manner.”).

119. Ellen S. Podgor, White Collar Innocence: Irrelevant in the High Stakes Risk Game, 85 CHI.-KENT

L. REV. 77, 79 (2010).


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traded one negative externality of white-collar criminal prosecution fora host of others, including the alarming lack of any meaningful judicialscrutiny to ensure that NPAs and DPAs are truly based on facts andappropriate legal theories to support the charges “alleged.”

Given the prevalence of NPAs and DPAs in the FCPA context,coupled with the general lack of substantive FCPA case law (an issuediscussed in more detail in Section IV of this article), the effect of thesenon-judicial resolution vehicles is more pronounced in FCPA enforce-ment than any other area of law.

2. Pleas

The Principles of Prosecution state that “[p]rosecutors may enterinto plea agreements with corporations for the same reasons and underthe same constraints as apply to plea agreements with natural per-sons.”120 “In negotiating plea agreements with corporations, as withindividuals, prosecutors should generally seek a plea to the mostserious, readily provable offense charged.”121

Even though corporate pleas are technically subject to judicialscrutiny, this too is an area of criminal prosecution in which judgesgenerally do not employ a high degree of scrutiny. Rather, judgescommonly rubber-stamp the plea deal negotiated by the DOJ and abusiness entity.122 In plea negotiations “parties can seek to achievetheir respective objectives through a process of give-and-take that mayaffect the language of the agreements, the nature and amount of thepenalties imposed, and the charges to which a company will agree toplead guilty or otherwise accept responsibility.”123 “Our existing legalsystem places the risk of going to trial, and in some cases even beingcharged with a crime so high, that innocence and guilt no longerbecome the real considerations;” rather, “maneuvering the system toreceive the least onerous consequences may ensure the best result forthe accused party, regardless of innocence.”124

If the DOJ offers a company a plea deal outside the context of an

120. See Principles of Federal Prosecution of Business Organizations, supra note 58.121. Id. at 19–20.122. See e.g., Press Release, DOJ, Latin Node Inc., Pleads Guilty to Foreign Corrupt Practices Act

Violation and Agrees to Pay $2 Million Criminal Fine (Apr. 7, 2009), available at http://www.justice.gov/opa/pr/2009/April/09-crm-318.html.

123. MILLER CHEVALIER, BAE Settles Protracted, Controversial Bribery Case with U.S. and U.K.Authorities, http://www.millerchevalier.com/Publications/MillerChevalierPublications?find�26504(last visited Aug. 24, 2010).

124. Podgor, supra note 119, at 78–79.


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NPA or DPA, there are obvious incentives for the company to acceptthe deal—no matter how untested or dubious the DOJ’s legal theorymay be and notwithstanding the fact that the company may have validand legitimate defenses to the alleged conduct. Again, the SentencingGuidelines are relevant because, by accepting a plea, the company willhave “clearly demonstrated recognition and affirmative acceptance ofresponsibility for its criminal conduct.”125 In other words, challengingthe DOJ and putting it to its burden to establish factual evidence thatsupports the FCPA’s legal elements in an adversarial proceeding is not“affirmative acceptance of responsibility” and will result in more severetreatment should a company be convicted. A company that rejects aDOJ plea and tests its innocence claim, while courageous, would befoolish against the backdrop described above.

Plea dynamics are not just present in corporate criminal enforce-ment actions, but individual enforcement actions as well. For individu-als, testing an innocence claim is even more risky because an indi-vidual, unlike a company, can be put in jail. Thus, given the prospect ofperhaps missing out on a son or daughter’s childhood, or at leastgrowing old in jail, many white collar individual defendants choose the“lesser of two evils,” accept a plea, and play a game in which “innocenceand guilt no longer become the real considerations.”126

Case in point is the near tragedy of Dr. Henry Samueli, the co-founder and former chief technical officer of Broadcom, who pleadedguilty to making false statements in testimony before the SEC relatingto its investigation of the alleged stock-options backdating at Broad-com.127 Under a grant of immunity, Samueli testified as a governmentwitness at the trial of another Broadcom executive, and after hearingSamueli testify, Judge Cormac Carney (Central District of California)took the highly unusual step of vacating Samueli’s prior guilty plea anddismissing the criminal charges against him.128 According to mediareports, Judge Carney concluded that even though Samueli’s answersto the SEC may have been “ambiguous, evasive and arguably nonrespon-

125. See U.S. SENTENCING GUIDELINES MANUAL § 8C2.5(g) (2009).126. Podgor, supra note 119, at 78.127. See Press Release, DOJ, Broadcom Co-Founder Pleads Guilty to Making False Statement

to the SEC in Backdating Investigation (June 23, 2008), available at http://losangeles.fbi.gov/dojpressrel/pressrel08/la062308busa.htm.

128. See Stuart Pfeifer, Testimony ends in trial of Broadcom ex-CFO; William Ruehle had pleaded not guiltyto 14 criminal counts in the stock-options backdating case., L.A. TIMES, Dec. 11, 2009, at B2; BroadcomCo-Founder Cleared in Backdating Probe, N.Y. TIMES DEALBOOK BLOG, Dec. 10, 2009, http://dealbook.blogs.nytimes.com/2009/12/10/broadcom-co-founder-cleared-in-backdating-probe.


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sive” they were not materially false—the legal basis for his criminalcharge and guilty plea.129 A few days later, Judge Carney noted:

There was no evidence at trial to suggest that Dr. Samueli didanything wrong, let alone criminal. Yet, the government em-barked on a campaign of intimidation and other misconduct toembarrass him and bring him down including crafting anunconscionable plea agreement pursuant to which Dr. Samueliwould plead guilty to a crime he did not commit and pay aridiculous sum of $12 million to the United States Treasury.130

In pleading guilty, Samueli did what a “disturbing number of otherpeople have done: pleaded guilty to a crime they didn’t commit or atleast believed they didn’t commit” for fear of exercising their constitu-tional right to a jury trial, losing, and “getting stuck with a long prisonsentence.”131

Criminal pleas are common in the FCPA context. Corporate pleas in2009 include: Control Components, Inc.,132 Latin Node, Inc.,133 andKellogg Brown & Root LLC.134 Recent individual pleas include: JohnWarwick and Charles Paul Edward Jumet,135 Paul Novak,136 and LeoWinston Smith.137 The motivations of these corporations and individu-

129. Id.; see also John Emshwiller and Nathan Koppel, Plea Bargain Get Renewed Scrutiny, WALL

STREET JOURNAL, Dec. 19, 2009, at A4.130. Reporter’s Transcript of Proceedings at 5197-98, U.S. v. Nicholas, No. 8:08-CR-00139

(D.C.D. Cal. Dec. 15, 2009), available at http://www.dandodiary.com/2009/12/articles/options-backdating/mr-ruehle-you-are-a-free-man-judge-carneys-dramatic-dismissal-of-the-broadcom-backdating-criminal-case/ (last visited Aug. 12, 2010) [hereinafter Ruehle Transcript].

131. See Emshwiller and Koppel, supra note 129.132. See Press Release, DOJ, supra note 122.133. See Press Release, DOJ, Latin Node Inc., Pleads Guilty to Foreign Corrupt Practices Act

Violation and Agrees to Pay $2 Million Criminal Fine (Apr. 7, 2009), available at http://www.justice.gov/opa/pr/2009/April/09-crm-318.html.

134. See Press Release, DOJ, Kellogg Brown & Root LLC Pleads Guilty to Foreign BriberyCharges and Agrees to Pay $402 Million Criminal Fine (Feb. 11, 2009), available at http://www.justice.gov/opa/pr/2009/February/09-crm-112.html.

135. See Press Release, DOJ, Virginia Resident Pleads Guilty to Bribing Former PanamanianGovernment Officials in Connection with Maritime Contract (Feb. 10, 2010), available at http://www.justice.gov/opa/pr/2010/February/10-ag-134.html.

136. See Press Release, DOJ, Former Willbros International Consultant Pleads Guilty to $6Million Foreign Bribery Scheme (Nov. 12, 2009), available at http://www.justice.gov/opa/pr/2009/November/09-crm-1220.html.

137. See Press Release, DOJ, Former Pacific Consolidated Industries LP Executive PleadsGuilty in Connection with Bribes Paid to U.K. Ministry of Defense Official (Sept. 3, 2009), availableat http://www.justice.gov/opa/pr/2009/September/09-crm-928.html.


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als to agree to these pleas and the answer to the question of whether theconduct at issue actually violated the FCPA will likely never be publiclyknown.

Individual FCPA defendants face a particularly difficult decision indeciding to accept a criminal plea or exercise their constitutional rightto a jury trial. Because all corporate FCPA enforcement actions havebeen resolved through NPAs, DPAs, or pleas, and given that a commonfeature of these agreements is the company accepting and acknowledg-ing responsibility for the improper conduct of its employees, theseagreements put individual FCPA defendants in an almost impossiblesituation. Thus, it is no surprise that the four individuals in 2009 whoexercised their constitutional right to a jury trial and thus challengedthe DOJ in an FCPA case did so in situations where there was noparallel NPA, DPA, or plea with a corporate entity.

Given the “carrots” and “sticks” the DOJ possesses, NPAs, DPAs, andpleas are typically used to resolve FCPA enforcement actions, and theeffect of these resolution vehicles not being subject to any meaningfuljudicial scrutiny is more pronounced in the FCPA enforcement thanany other area of law.

The typical method of resolving an SEC FCPA enforcement actionalso has an equally troubling feature in that corporate and individualdefendants are able to resolve the enforcement action “without admit-ting or denying” the SEC’s allegations. This central feature of an SECFCPA enforcement action also contributes to the facade of FCPAenforcement and is described more fully below.

3. SEC Settlements

If the SEC “concludes that a securities law has been violated, theCommission may bring an action in federal court or in an administra-tive proceeding against the purported violators.”138 Federal courtactions are “generally perceived as more severe than administrativeproceedings” and thus the decision of “whether to file an administra-tive proceeding or a federal district court action is often a point ofnegotiation” between the SEC and a company.139 As acknowledged bythe SEC in a recent high-profile case, when filing a federal court action,the burden is on the SEC “to establish a prima facie case of a legal

138. See Paul S. Atkins & Bradley J. Bondi, Evaluating the Mission: A Critical Review of the Historyand Evolution of the SEC Enforcement Program, 13 FORDHAM J. CORP. & FIN. L. 367, 372 (2008).

139. Kevin J. Harnishch & Natasha Colton, When the SEC Comes Knocking, 15 ABA Sec. Bus. L.1 (2005), available at http://www.abanet.org/buslaw/blt/2005-09-10/colton.shtml.


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violation before charging any party” and the SEC “must allege factssupporting the legal charge that, at a minimum, are sufficient to survivea motion to dismiss.”140

The SEC is empowered to seek a variety of sanctions in an enforce-ment action such as monetary penalties, disgorgement of ill-gottengains, an injunction, or a cease and desist order prohibiting currentand future violations of the securities law provision at issue.141 “TheSEC is not required to go to federal court to get an order preventingfuture violations of the federal securities laws, although in more seriouscases, resorting to the court packs more punch because a contempt actcan be pursued for any future violation.”142

If the SEC seeks civil monetary penalties, an action must be filed infederal court.143 As explained by Atkins and Bondi, both former SECofficials, “Congress took comfort in the fact that federal judges wouldoperate as an independent check to the Commission’s decision to seekan issuer penalty and the amount sought to be recovered.”144 Inpractice, however, this “independent check” is largely absent from SECenforcement actions because those pursued by the SEC “seldom chooseto litigate with the SEC, and settled injunctive actions rarely receive anyjudicial scrutiny.”145 The SEC is not shy in extolling the virtues ofsettlement. The Commission recently stated:

Settlements are an important tool for the Commission’s enforce-ment program and enable the Commission to leverage andefficiently maximize the impact of its limited resources. Duringthe last three years, for example, at least 75 percent of theCommission’s enforcement actions were concluded with someform of settlement at the time they were filed.146

140. Reply Memorandum of Plaintiff Securities and Exchange Commission in Support ofEntry of the Proposed Consent, SEC v. Bank of America Corp., No. 09 Civ. 6829 (S.D.N.Y. Feb. 4,2010), available at http://amlawdaily.typepad.com/SEC%20Brief%209-9-09%5B3%5D.pdf (lastvisited Aug. 24, 2010).

141. Id.142. Peter Henning, What’s Next for S.E.C. and Bank of America NEW YORK TIMES DEALBOOK

BLOG (Sept. 21, 2009, 10:00 EST), http://dealbook.blogs.nytimes.com/2009/09/21/the-sec-and-bofa-whats-next/.

143. See Atkins & Bondi, supra note 138, at 372.144. Id. at 393.145. Id. at 394.146. SEC, Strategic Plan for Fiscal Years 2010–2015; Draft for Comment at pg. 9, available at

http://www.sec.gov/about/secstratplan1015.pdf (last visited Aug. 24, 2010).


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“In virtually every case, the SEC is prepared to negotiate some formof both its charges and the relief it will seek” and “many of theconcessions the SEC is willing to offer a prospective defendant inexchange for settling the proposed action . . . are more a matter ofperception than reality.”147 Given the frequency in which SEC enforce-ment actions are settled, one unfortunate result is the lack of “courtopinions clearly establishing the reasons for the result in a particularcase.”148

A unique feature of the SEC settlement process is that defendants areallowed to settle an enforcement action without admitting or denyingthe SEC’s allegations. This policy149 was adopted in 1972 and states:

The Commission has adopted the policy that in any civil lawsuitbrought by it or in any administrative proceeding of an accusa-tory nature pending before it, it is important to avoid creating,or permitting to be created, an impression that a decree isbeing entered or a sanction imposed, when the conduct allegeddid not, in fact, occur. Accordingly, it hereby announces itspolicy not to permit a defendant or respondent to consent to ajudgment or order that imposes a sanction while denying theallegations in the complaint or order for proceedings. In thisregard, the Commission believes that a refusal to admit theallegations is equivalent to a denial, unless the defendant orrespondent states that he neither admits nor denies the allega-tions.150

This policy remains in effect today151 and there has been surprisinglylittle judicial or scholarly analysis of this central feature of SEC enforce-ment actions even though it can lead to absurd results.152

147. Id.148. SEC v. Clifton, 700 F.2d 744, 748 (D.D.C. 1983).149. Consent Decrees in Judicial or Administrative Proceedings, Securities Act Rel. No.

33-5337. (Nov. 28, 1972).150. Id.151. 17 C.F.R. 202.5(e) (2010).152. See Richard J. Morvillo et al., To Neither Admit Nor Deny: SEC Litigation Position Reiterates

Need to Examine Standard Provisions in SEC Settlements, CROWELL & MORING (April 2001), http://www.crowell.com/pdf/Consents.pdf (describing a case in which the authors participated, inwhich a former Chief Financial Officer of a publicly-held company consented (without admittingor denying the SEC’s allegations) to entry of final judgment of permanent injunction barringviolation of the securities laws and then in a separate proceeding, when called as a witness, theCFO testified that the reasons he settled with the SEC was that “he lacked the financial


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It is against this backdrop that the SEC enforces the FCPA. Consis-tent with the above framework, the SEC “has the option of pursuing anFCPA case either as a civil injunction action in federal court or as acease and desist proceeding in front of an administrative law judge.”153

As Paul Gerlach and George Parizek, both former SEC enforcementofficials note:

The serious nature of an illicit payments violation and the fact thatfines against issuers and their employees are only available in afederal court action suggests that most, if not all, of the SEC’s illicitpayments cases are likely to be filed in federal court.154

While filed in federal court, it is common SEC practice, including inthe FCPA context, merely for the settled civil complaint to be filed andfor a resolution to be announced on the same day of the filing.155

Recent FCPA enforcement actions resolved through a settled SECcomplaint and related SEC consent decree prohibiting future viola-tions include: UTStarcom, Inc.156 and Nature’s Sunshine Products,Inc.157 Recent FCPA enforcement actions resolved through the lesssevere SEC administrative route, in which the SEC issues a cease anddesist order, include: Helmerich & Payne, Inc.158 and United IndustrialCorp.159 Common features of both SEC resolution vehicles are little orno judicial scrutiny and the defendant being able to settle the FCPAmatter “without admitting or denying” the SEC’s allegations. Thus SEC

wherewithal and the stamina to fight the SEC and decided to settle because he was not required toadmit the allegations”).

153. Paul Gerlach & George Parizek, The SEC’s Enforcement of the Foreign CorruptPractices Act (unpublished manuscript) (on file with author).

154. Id.155. See, e.g., SEC Files Settled Civil Action Charging NATCO Group Inc. with Violations of

the Foreign Corrupt Practices Act, Litigation Release No. 21374 (Jan. 11, 2010), available athttp://www.sec.gov/litigation/litreleases/2010/lr21374.htm.

156. See SEC Charges California Telecom Company With Bribery and Other FCPA Viola-tions, Litigation Release No. 21357 (Dec. 31, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21357.htm.

157. See SEC Charges Nature’s Sunshine Products, Inc. with Making Illegal Foreign Pay-ments, Litigation Release No. 21162 (July 31, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21162.htm.

158. See, In the Matter of Helmerich & Payne, Inc., Exchange Act Release No. 60400, 2009WL 2341649 (July 30, 2009), available at http://www.sec.gov/litigation/admin/2009/34-60400.pdf.

159. See In the Matter of United Industrial Corp., Exchange Act Release No. 60005, 2009 WL1507586 (May 29, 2009), available at http://www.sec.gov/litigation/admin/2009/34-60005.pdf .


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FCPA enforcement actions also contribute to the facade of FCPAenforcement.

The net effect of the DOJ and SEC resolution vehicles typically usedto settle FCPA enforcement actions is that, in many cases, the corporateor individual defendant is nudged to accept a resolution vehiclenotwithstanding the enforcement agencies’ untested or dubious legaltheories, ambiguous facts, or the existence of valid and legitimatedefenses.

The next section explores how both parties in a government enforce-ment action are largely motivated by issues other than facts or the lawin resolving a matter. Thus, FCPA enforcement actions resolved throughany of the above-described resolution vehicles do not necessarily reflectthe triumph of one party’s legal position over the other or necessarilylead to the conclusion that the conduct at issue violated the FCPA.

C. FCPA Resolution Vehicles Do Not Necessarily Reflect a Superior LegalPosition

This section provides a rare public glimpse into the motivations ofsettling parties in a government enforcement action. Because nocorporate litigant has recently challenged the government in an FCPAenforcement action, this glimpse, unfortunately, is not of an FCPAenforcement action. Yet, this glimpse provides valuable insight relevantto all government enforcement actions, including FCPA enforcementactions.

This section highlights that government enforcement agencies, whenchallenged, are vulnerable in contested actions in the hope that moreFCPA defendants will challenge the many untested and dubious legaltheories common in FCPA enforcement. Indeed, if anything, the FCPAtrials in 2009 and the Kay decision demonstrate that the DOJ is notinfallible when enforcing the FCPA, that its aggressive interpretationsof the statute will not be accepted when challenged, and that evenjudges remain uncertain as to the dividing line between aggressivebusiness conduct and conduct that violates the FCPA.

1. Lessons from SEC v. BofA

In Fall 2009, a rare event occurred as a federal district court judgeused the legal tools at his disposal to scrutinize a settled SEC enforce-


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ment action.160 Although not an FCPA case, the scrutiny of Judge JedRakoff of the Southern District of New York with regard to a negotiatedsettlement between the SEC and Bank of America (“BofA”) providesvaluable insight into the same SEC enforcement procedures used inFCPA enforcement actions. The case also provides a rare publicglimpse into what is often not aired in public—the motivations ofsettling parties in a government enforcement action, including themotivations of a corporate litigant to settle a dispute with a primaryregulator for reasons of ease and efficiency—not necessarily because ofthe legal viability of the SEC’s claims. Thus, while outside the FCPAcontext, an extended discussion of SEC v. BofA is warranted andinstructive.

In August 2009, the SEC filed a civil suit against BofA charging it withsecurities law violations based on allegations that it mislead investorsabout billions of dollars in bonuses paid to Merrill Lynch executives atthe time of BofA’s $50 billion acquisition of Merrill Lynch.161 As iscustomary SEC practice, the charges were filed with a court on thesame day the SEC and BofA settled the charges.162 As is also customarySEC practice, BofA agreed to resolve the SEC charges “without admit-ting or denying” the allegations in the complaint. BofA consented tothe entry of a final judgment, which (i) permanently enjoined it fromviolating the specific proxy solicitation rules at issue, and (ii) ordered itto pay a $33 million civil penalty.163 “Wow, that was quick,” noted theWall Street Journal, as media headlines quickly switched from theSEC’s complaint against BofA to BofA agreeing to pay a $33 millionfine “to scratch the suit from its to-do list.”164

Ordinarily, settlement of a civil lawsuit is subject to little, if any,judicial scrutiny. However, courts are empowered to scrutinize consentjudgments, such as the one at issue in the BofA case, because a consentjudgment seeks to prospectively invoke a court’s contempt power byhaving a court impose injunctive prohibitions on the defendant.165

160. SEC v. Bank of America Corp., 653 F. Supp. 2d 507 (S.D.N.Y. 2009) (mem. order). Cf.SEC, Litigation Release No. 21164 (Aug. 3, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21164.htm.

161. See Litigation Release No. 21164, supra note 160.162. See id.163. Id.164. Ashby Jones, Over Before It Starts: SEC, BofA Settle Suit Over Merrill Bonuses, WALL ST. J. L.

BLOG, Aug. 3, 2009, http://blogs.wsj.com/law/2009/08/03/over-before-it-starts-sec-bofa-settle-suit-over-merrill-bonuses/.

165. See, e.g., SEC v. Randolph, 736 F.2d 525, 529 (9th Cir. 1984); SEC v. Wang, 944 F.2d 80,85 (2d Cir. 1991).


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Such consent judgments are also often at issue in SEC FCPA enforce-ment actions.166

Enter Judge Rakoff, a former prosecutor, who was unwilling toaccept the pre-packaged settlement negotiated between the SEC andBofA. He quickly ordered the parties to appear before him to betterexplain the factual evidence leading to the proposed settlement. In hiswritten order, Judge Rakoff noted, “[d]espite the public importance ofthis case, the proposed Consent Judgment would leave uncertain thetruth of the very serious allegations made in the Complaint.”167 JudgeRakoff’s order was unusual given the extent to which federal judgesroutinely “rubber stamp” such consent decrees and his order set thestage for a “high-profile test” of SEC enforcement policies and proce-dures.168

During the hearing, Judge Rakoff expressed “continued misgivings”about the proposed settlement and sought more information about,among other things, “the basis for the settlement itself and whether anevidentiary hearing should be held to weigh the facts of the case.”169

Judge Rakoff also chastised the SEC for filing a rather “uninformative,bare-bones complaint;” lamented that the settlement “seemed to belacking, for lack of a better word, transparency;” and ordered theparties to submit additional briefing.170 The SEC and BofA thusproceeded down the seldom-traveled path of publicly explaining anddefending the reasons for a negotiated settlement in a governmentenforcement action. This is a path that has never been traveled in anFCPA enforcement action.

In its brief, the SEC argued that the “proposed settlement [was] fair,

166. See, e.g., SEC, Litigation Release No. 21357 (Dec. 31, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21357.htm (“UTStarcom agreed, without admitting ordenying the charges, to the entry of a permanent injunction against FCPA violations . . . .”).

167. Order at 1-2, SEC v. Bank of America Corp., 09 Civ. 6829 (S.D.N.Y. Aug. 5, 2009). Seealso, e.g., Jess Bravin, Judge Calls Hearing in SEC Case Against BofA, WALL ST. J., August 6, 2009; AshbyJones, Rakoff on BofA, SEC Settlement: Not So Fast, Fellas, WALL ST. J., Aug. 6, 2009.

168. See Michael Corkery & Susanne Craig, Judge Forces SEC to Defend Its Tougher Tack, WALL ST.J., Aug. 7, 2009, at C3; Ashby Jones, Rakoff on BofA/SEC Kerfuffle: ‘Everything Needs to Be Public,’ WALL

ST. J. L. BLOG, Aug. 24, 2009, http://blogs.wsj.com/law/2009/08/24/rakoff-on-bofasec-kerfuffle-everything-needs-to-be-public/; Zachary A. Goldfarb, SEC’s About-Face on Bank of America RaisesEyebrows, WASH. POST, Aug. 28, 2009 at A18 (noting that “[i]t is unusual for judges to intervene asRakoff has done in the Bank of America case”).

169. Chad Bray, BofA Judge Seeks More Data on SEC Bonus Deal, WALL ST. J., Aug. 11, 2009, at C1.170. Id.; see also Louise Story, Judge Attacks Merrill Pre-Merger Bonuses, N.Y. TIMES, Aug. 11, 2009,

at B1; A ‘Ghost or a Human Being?’: Rakoff Hands it to BofA, the SEC, WALL ST. J., Aug. 11, 2009,http://blogs.wsj.com/law/2009/08/11/a-ghost-or-a-human-being-rakoff-hands-it-to-bofa-the-sec/tab/article/.


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reasonable, adequate and squarely in the public interest.”171 The SECmaintained that the proposed resolution was “the result of an arms-length negotiation” between itself and BofA and that the “level ofevidentiary detail in the Complaint . . . and the parties’ differing viewson liability, do not furnish a basis for overriding the negotiateddisposition or the Commission’s assessment of the public interest.”172

The SEC admitted that its complaint was “concise,” but noted that theviolation at issue was “straightforward” and that an evidentiary hearingwas “unnecessary” because such a hearing “would undercut the prin-ciple purpose of entering into a settlement, i.e., to avoid the costs andrisk of litigation in favor of a negotiated disposition.”173 In concludingthe introductory section of its brief, the SEC stated:

The Commission has a solid proxy violation claim—indeed,one that is potentially susceptible of summary judgment—butthe proffered defenses, while unavailing, are not facially frivo-lous. There is litigation risk on both sides, and that is why [sic]the parties choose to settle rather than litigate, and why theterms of a reasonable settlement do not necessarily reflect thetriumph of one party’s position over the other.174

In its brief, BofA urged the court to accept the negotiated settlement,including the $33 million civil penalty. BofA noted, in no uncertainterms, that the “proposed settlement should be approved” and that theproposed settlement represented a “constructive conclusion” to thematter.175 Yet, at the same time and in the same document, BofA wentto great lengths to describe how, if the case were to be litigated in atransparent, adversary proceeding, BofA would have “powerful andsuccessful defenses” to the SEC’s charges.176 Notwithstanding its re-peated assertions that it had “powerful and successful defenses” to theSEC’s charges, BofA also repeatedly explained that it opted to “reach asettlement with the SEC, so that [BofA] would not face the unnecessarydistraction of a protracted dispute with one of its principal regula-

171. Memorandum of Plaintiff Securities and Exchange Commission in Support of Entry ofthe Proposed Consent at 2, SEC v. Bank of America Corp., No. 09 Civ. 6829 (S.D.N.Y. Feb. 4,2010).

172. Id. at 3.173. Id. at 4–5.174. Id. at 6.175. Id. at 1, 2.176. Id. at 1.


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tors. . . .”177

BofA’s brief was chiefly supported by the Affidavit of Joseph A.Grundfest, a Stanford Law School professor and former SEC Commis-sioner with substantial experience in reviewing and approving “hun-dreds of settled administrative and injunctive enforcement proceed-ings” while on the Commission.178 The picture Professor Grundfestpaints of the SEC enforcement process is not pretty if one considerstransparency and credibility a fine art.179 Professor Grundfest explainsin detail the mechanics of the SEC enforcement process and how it is“common practice in settled proceedings for the Commission to filecomplaints that cast defendants’ actions in a harsh light and then toprohibit defendants from challenging the Commission’s rendition offacts and law as articulated in the complaint.”180 Professor Grundfestfurther stated that SEC complaints: “typically omit mention of validdefenses and of countervailing facts or mitigating circumstances that, ifproven at trial, could cause the Commission to: (i) lose its case . . . ; (ii)prevail on grounds narrower than those alleged; or (iii) obtain relief

177. Id. at 2–3, 19–20, 26, 28, 31.178. Affidavit of Joseph A. Grundfest at ¶¶ 1-2, SEC v. Bank of America Corp., 09-CV-6829

(S.D.N.Y. Aug. 21, 2009) [hereinafter Grundfest Affidavit].179. Professor Grundfest certainly is not the only former SEC official to openly criticize the

SEC enforcement process. Danne Johnson is a former Branch Chief, Senior Counsel, and StaffAttorney for the SEC Division of Enforcement and a current Assistant Professor of Law atOklahoma City University School of Law. See OCU Law - Faculty - Danne L. Johnson, http://law.okcu.edu/index.php/faculty-staff/full-time-faculty/johnson-danne-l/ (last visited Aug. 24,2010). Professor Johnson argues that “SEC settlements should be scrutinized more closely” toexamine whether such settlements are supported by public policy. See Danne L. Johnson, SECSettlement: Agency Self-Interest or Public Interest, 12 FORDHAM J. CORP. & FIN. L. 627, 632 (2007).Professor Johnson also paints a harsh picture of the SEC enforcement process. Among otherthings, she notes: “In any civil lawsuit brought by the Commission, or in any administrativeproceeding of an accusatory nature pending before the Commission, the SEC attempts to avoidcreating, or allowing to be created, an impression that a decree is being entered or a sanctionimposed when the conduct alleged did not, in fact, occur. Accordingly, the Commission has apolicy not to allow a defendant or respondent to consent to a judgment or order that imposes asanction while denying the allegations in the complaint or order for proceedings. In this regard,the Commission equates a refusal to admit the allegations with a denial, unless the defendant orrespondents states that he neither admits nor denies the allegations. The Division, in accordancewith this policy, has developed language attempting to prevent a respondent from consenting toan order imposing sanctions while denying the findings in the order.” Id. at 649–50. ProfessorJohnson also notes that “SEC settlements are not agreements between equals,” and that the “SECcoercively exerts pressure on industry participants to settle in the name of cooperation and toavoid negative labeling.” Id. 660–62.

180. Grundfest Affidavit, supra note 178, at ¶ 5.


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less onerous than imposed through the settled action.”181 The “naturalresult” of these dynamics, stated Professor Grundfest, “is a one-sidedrecord in which the Commission asserts its version of the facts and thelaw, and the settling defendants commit not to challenge that rendi-tion.”182 Professor Grundfest then sets forth the “powerful” claims BofAwould have against the SEC’s charges should the matter be litigated.183

Yet, despite these powerful claims, Professor Grundfest states that it is“nonetheless rational for a defendant in Bank of America’s position tosettle the Commission’s allegations” because, among other things,BofA is a highly regulated entity and “[i]t can be imprudent forregulated entities to engage in protracted litigation with their regula-tors.”184

Judge Rakoff was not impressed by the parties’ explanations or thepicture painted of the SEC enforcement process. He immediatelydrafted an order that, while expressing “gratitude to counsel for theparties for their helpful responses,” noted that the initial submissionsraised a few additional issues.185 Among those was BofA’s seemingly180-degree reversal. Judge Rakoff wrote:

The Court recognizes that the Bank of America, having previ-ously been precluded by its tentative settlement with the SECfrom denying the Complaint’s assertions, has now, in responseto the Court’s direction to provide the Court with the Bank’sown version of the facts, asserted that the proxy statement wasneither false nor misleading. Its position, however, is thatrather than put its assertions of innocence to the test, it decidedto spend $33 million of shareholders’ money to settle the caseso that Bank of America would not face the unnecessary distrac-tion of a protracted dispute with one its principal regulators at atime when the financial industry continues to face difficultchallenges stemming from uncertain and turbulent condi-tions . . . Whatever this chain of vague expressions may mean, ifit is intended to suggest that Bank of America settled this case to

181. Id.182. Id. at ¶ 9.183. Id. at ¶¶ 15–41.184. Id. at ¶¶ 43–44.185. See SEC v. Bank of America, No. 09 Civ. 6829, 2009 WL 2842940 at *1 (S.D.N.Y Aug. 25,

2009).


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curry favor with the SEC or to avoid retaliation by the SEC, thecourt needs to know the specifics.186

Thus, not once, but twice, Judge Rakoff expressed his disapproval and“remained puzzled” by the parties’ explanations of the settlementagreement.187 Judge Rakoff again ordered the parties to file additionalbriefs and the parties again proceeded down the seldom-traveled pathof publicly explaining and defending the reasons for a negotiatedsettlement and the evidence supporting the settled charges.188

The Wall Street Journal analogized the situation to having “one ofthose teachers or professors who would let you submit an assignmentover and over again until it was worthy of an ‘A’ grade.”189 The NewYork Times said that it was “sad” that Rakoff’s refusal to sign off on thesettlement has caused controversy, and that “probing questions” likeJudge Rakoff’s “should be heartily encouraged.”190

The SEC’s second bite at the apple was much like its first; again itargued that the “proposed disposition is fair, reasonable, adequate andin the public interest” and should be entered by the Court.191 The SECargued that “Bank of America and its experts greatly exaggerate thepotency and appeal of its purported defenses” and that it was also clearthat “Bank of America had ample motivation to settle this case and paya substantial penalty due to the merits of the Commission’s claim.”192

In the SEC’s estimation, “Bank of America no doubt understood thattheir position carried significant litigation risk, which is a reasonsophisticated parties often choose to settle rather than defend difficultclaims.”193

BofA’s re-write was also much like its first attempt to convince JudgeRakoff to approve the settlement. In its reply brief, BofA stated:

186. Id. at *2.187. Louise Story, Scrutiny for S.E.C. on Merrill Bonuses, N.Y. TIMES, Aug. 26, 2009, at B1; Jess

Bravin, Judge Rips SEC on BofA Pact, WALL ST. J., Aug. 26, 2009, at C3.188. Id. at C5.189. Rakoff to SEC, BofA: ‘Thanks For This. Now Try Again,’ WALL ST. J., Aug. 26, 2009,

http://blogs.wsj.com/law/2009/08/26/rakoff-to-sec-bofa-thanks-for-this-now-try-again/tab/article/.

190. Some Good Names in a Year Gone Bad, N.Y. TIMES, Sept. 10, 2009, at B2.191. Reply Memorandum of Plaintiff Securities and Exchange Commission in Support of

Entry of the Proposed Consent Judgment at 1, 4, 12, SEC v. Bank of America Corp., No. 09 Civ.6829 (S.D.N.Y. Feb. 4, 2010).

192. Id. at 11–12.193. Id. at 12.


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The SEC made clear that, in the absence of a settlement, theSEC was prepared to go forward with the Complaint. Given theavailable options, and the prospect of facing a protracted andpublic dispute with one of its principal regulators at a time ofuncertain and difficult market conditions, Bank of Americadetermined that the $33 million penalty—while at the high endof the range—was not unacceptable. There is nothing nefari-ous about that. It is rational for a company in Bank of America’sposition to settle the SEC’s allegations despite the substantialpossibility it could prevail if the matter were litigated.194

BofA argued that the “Court need not predict the winner of such acontest; it need only conclude, as it should, that the settlement consti-tutes a fair and reasonable resolution to a dispute between parties withfirmly held beliefs that each contends is based in fact.”195 In conclu-sion, BofA stated:

Despite what it believes to be significant weaknesses in theSEC’s case, Bank of America remains committed to the pro-posed settlement, which it agreed to in the hopes of avoiding avery public dispute with one of its principal regulators and thenegative publicity that such a dispute would entail. While thecivil penalty agreed to in this settlement was indeed large—especially given the lack of merit of the SEC’s case—the settle-ment would not unfairly harm innocent shareholders and wasdetermined by Bank of America for the reasons stated to bepreferable to litigating the case.196

In September 2009, Judge Rakoff issued a scathing order. It began bynoting the “considerable deference” a court must accord the parties’proposal for a “consensual resolution” of the case.197 Yet, the orderdenied the consent judgment negotiated between the SEC and BofA

194. Reply Memorandum of Law on Behalf of Bank of America Corp. at 3, SEC v. Bank ofAmerica Corp., No. 09 Civ. 6829 (S.D.N.Y Sept. 9, 2009), available at http://www.scribd.com/doc/19581786/Reply-to-Judge-Rakoff-From-Bank-of-America.

195. Id. at 12.196. Id. at 28. In a footnote to its conclusion, BofA noted that it “was not given the option to

settle or litigate for nothing. Because of the SEC’s decision to bring charges, Bank of Americawould have to spend corporate funds whether or not it settled. Bank of America determined – forthe reasons stated – that it was preferable to spend its money to settle this action than to incuradditional litigation expenses.” See id. at 28 n.20.

197. See SEC v. Bank of America, 653 F. Supp. 2d 507, 508 (S.D.N.Y. 2009).


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and instructed the parties to prepare for a trial. “[E]ven upon applyingthe most deferential standard of review,” Rakoff concluded that “theproposed Consent Judgment [was] neither fair, nor reasonable, noradequate”—nor even “remotely . . . fair.”198

In his order, Judge Rakoff did not mince words as he explained thatthe parties’ positions “leave the distinct impression that the proposedConsent Judgment was a contrivance designed to provide the SEC withthe facade of enforcement and the management of [BofA] with a quickresolution of an embarrassing inquiry—all at the expense of the solealleged victims—the shareholders.”199 Judge Rakoff concluded that theproposed Consent Judgment “suggests a rather cynical relationshipbetween the parties” in that “the SEC gets to claim that it is exposingwrongdoing on the part of [BofA] in a high-profile merger” and“[BofA’s] management gets to claim that they have been coerced intoan onerous settlement by overzealous regulators.”200 According toJudge Rakoff, “all this is done at the expense, not only of the sharehold-ers, but also of the truth.”201

Judge Rakoff’s order was viewed as a “rare scuttling of an SECsettlement,” an “unprecedented rejection” of an SEC settlement,202

and an “unusual ruling that casts doubts about how the agency handlesprobes of major U.S. companies.”203 Others noted that Judge Rakoffshined a light “on what is a puzzling, if not harmful, prosecutorialdiscretion on the part of the SEC.”204 Judge Rakoff’s order was viewedas a “strong, blistering decision” and “a critique, not just of this case,but of a long-standing practice at the SEC, which effectively allowedcorporate managers to buy immunity with their shareholders’money.”205

In the end, Judge Rakoff did approve the SEC v. BofA settlement,albeit one containing additional substantive charges and materiallydifferent terms—most notably, a $150 million fine compared to the

198. Id. at 509–10.199. Id. at 510.200. Id. at 512.201. Id.202. Marcy Gordon, SEC Will Go to Trial Against BofA Over Bonuses, LAW.COM (Sept. 22, 2009),

http://www.law.com/jsp/article.jsp?id�1202433971105.203. Kara Scannell et al., Judge Tosses Out Bonus Deal, WALL ST. J., Sept. 15, 2009, at A1.204. Kara Scannell, BofA Ruling Questions an SEC Weapon, WALL ST. J., Sept. 16, 2009, at C1.

(quoting James Cox, a law professor at Duke University School of Law).205. Zachery Kouwe, Judge Rejects Settlement Over Merrill Bonuses, N.Y. TIMES, Sept. 14, 2009, at

A1 (quoting John C. Coffee, a law professor at Columbia University).


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original $33 million fine.206 However, his February 2010 order approv-ing the settlement is grounded in judicial restraint and deference to anadministrative agency and should not be viewed as judicial approval ofthe troubling features of SEC enforcement highlighted above—thesame features present in the SEC’s enforcement of the FCPA.207 Again,Judge Rakoff did not mince words as he “reluctantly” approved thesettlement and stated that the settlement, “[w]hile better than noth-ing,” remained “half-baked justice, at best.”208

2. The Enforcement Agencies are Vulnerable in Contested Actions

Judge Rakoff is not the only federal court judge to recently criticize agovernment enforcement agency. While it is beyond the scope of thisarticle to detail each and every DOJ/SEC litigation defeat, and while itis indeed true that these agencies do possess a decent “batting average”in contested litigation, the agencies have nonetheless suffered severalnotable litigation defeats. These recent defeats, often times at theinitial motion to dismiss stage, demonstrate that the enforcementagencies are vulnerable when their extreme legal positions, such asthose commonly found in FCPA enforcement actions, are contested inan adversary proceeding and actually subjected to judicial scrutiny.

Mark Cuban

In November 2008, the SEC filed insider trading charges againstMark Cuban, the flamboyant owner of the National Basketball Associa-tion’s Dallas Mavericks.209 The SEC’s complaint alleged that Cubanviolated the securities laws by selling his entire stake in publicly tradedMamma.com while in the possession of material, non-public informa-tion concerning the company.210 In announcing the charges, SECofficials noted that the “case demonstrates yet again that the Commis-sion will aggressively pursue illegal insider trading whenever it occurs,”and that “[i]t is fundamentally unfair for someone [like Cuban] to use

206. See Opinion and Order, SEC v. Bank of America Corp., No. 09 Civ. 6829 (S.D.N.Y. Feb.22, 2010).

207. Id. at 14–15.208. Id. at 1–2; 13–14.209. See Complaint, SEC v. Mark Cuban, No. 3-08CV2050-D (N.D. Tex. Nov. 17, 2008),

available at http://www.sec.gov/litigation/complaints/2008/comp20810.pdf; SEC Files InsiderTrading Charges Against Mark Cuban, Litigation Release No. 20810, 94 SEC Docket 1889 (Nov.17, 2008), available at http://www.sec.gov/litigation/litreleases/2008/lr20810.htm.

210. See Litigation Release No. 20810, supra note 209.


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access to non-public information to improperly gain an edge on themarket.”211 Yet, when the SEC’s fraud allegations were challenged andactually subjected to judicial scrutiny, they were dismissed. In theopinion and order dismissing the fraud charges, the judge noted,among other things, that the SEC’s complaint was legally “deficient”and “insufficient.”

Cohmad Securities Corp.

In June 2009, the SEC charged Cohmad Securities Corporation, aswell as its chairman, chief operating officer and registered representa-tive with securities fraud for “actively marketing investment opportuni-ties with [Bernard] Madoff while knowingly or recklessly disregardingfacts indicating that Madoff was operating a fraud.212 In announcingthe charges, an SEC official noted that, “[t]hese Madoff solicitorscollectively received several hundred million dollars in fees over thepast few decades while Madoff ruined the finances of countless inves-tors.”213 Yet, when the SEC’s fraud allegations were challenged andactually subjected to judicial scrutiny, they were dismissed.214 In theopinion and order dismissing the fraud charges, the judge noted,among other things, that “the SEC has failed to allege facts giving riseto a plausible inference . . . of fraudulent intent,” and that the SEC’sallegations were otherwise “speculative and flimsy.”215

These recent SEC litigation defeats at the initial motion to dismissstage demonstrate that SEC legal positions, when subjected to judicialscrutiny, have failed when dubious or lacking in factual support.

The SEC is not alone in having its extreme legal theories dismissedwhen such theories are challenged. With increasing and alarmingfrequency, the DOJ has also suffered several high-profile defeats whenits legal theories are actually subjected to judicial scrutiny or its

211. Id.212. SEC Charges Madoff Solicitors With Fraud, Litigation Release No. 21095, 96 SEC

Docket 537 (June 22, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21095.htm; see also Complaint, SEC v. Cohmad Securities Corp., No. 09 Civ. 5680, 2010 WL363844 (S.D.N.Y. 2010), available at http://www.sec.gov/litigation/complaints/2009/comp21095.pdf.

213. SEC Charges Madoff Solicitors and Feeder With Fraud, Release No. 2009-141 (June 22,2009), available at http://www.sec.gov/news/press/2009/2009-141.htm.

214. See Opinion and Order, SEC v. Cohmad Securities Corp., No. 09 Civ. 5680 (S.D.N.Y.Feb. 1, 2010), available at http://graphics8.nytimes.com/packages/pdf/business/cohmad_order.pdf.

215. See id. at 4, 9–11.


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enforcement tactics examined. The most recent, high profile exampleconcerns the criminal prosecutions of several Broadcom Corporationexecutives for stock-options backdating.

Broadcom Executives

In June 2008, the DOJ announced the unsealing of a criminalindictment against Dr. Henry Nicholas III, a co-founder and formerchief executive officer of Broadcom, and William Ruehle, the formerchief financial officer of Broadcom, charging the individuals with“engaging in a stock-option backdating scheme that forced Broadcomto write-down $2.2 billion in profits.”216 The twenty-one-count indict-ment charged conspiracy, securities fraud, false certification of finan-cial reports, false statements in reports filed with the SEC, lying toaccountants, falsification of corporate books and records, and honestservices mail and wire fraud. It alleged that Nicholas and Ruehle“engaged in a scheme from 1999 to 2005 to fraudulently backdatemillions of stock option grants, failed to record stock-based compensa-tion expenses, and falsified documents to further the fraud.”217 ADOJ official stated that “Nicholas and Ruehle were involved in awide-ranging fraud,” and an FBI official stated that the defendantsstand “accused of deliberately manipulating their company’s publicfilings, and by their failure to remain accountable, contributed to adegree of mistrust in the marketplace.”218

Nicholas and Ruehle pleaded not guilty.219 Ruehle’s trial began inOctober 2009 before Judge Cormac Carney220 and the DOJ’s case soonbegan to unravel in dramatic fashion. First, after hearing Dr. HenrySamueli testify as a witness in Ruehle’s trial under a grant of immunity,Judge Carney took the highly unusual step of vacating Samueli’s prior

216. Press Release, DOJ, Former Broadcom CEO Henry Nicholas and Former CFOIndicted in Massive Stock-Options Backdating Case (June 5, 2008), available at http://www.justice.gov/usao/cac/pressroom/pr2008/078.html (last visited Aug. 12, 2010).

217. Id.218. Id.219. Ex-CEO of Broadcom Pleads Not Guilty, MSNBC (June 16, 2008), http://www.msnbc.m-

sn.com/id/25195928/ns/business-corporate_scandals/.220. Nicholas’ trial was previously delayed until February 2010. See, e.g., E. Scott Reckard,

Trial Begins for Former Broadcom Finance Chief, L.A. TIMES, Oct. 24, 2009, available at http://articles.latimes.com/2009/oct/24/business/fi-broadcom24; Stuart Pfeifer, Nicholas Trial DelayedUntil 2010, L.A. TIMES, Feb. 3, 2009, available at http://articles.latimes.com/2009/feb/03/business/fi-nicholas3.


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guilty plea and dismissing the criminal charges against him.221 How-ever, he was not yet finished. On December 15, 2009, Judge Carneyread into the record his decision on Ruehle’s request to enter ajudgment of acquittal because of insufficient evidence and prosecuto-rial misconduct. Like Judge Rakoff, Judge Carney did not mince words.He stated:

Based on the complete record now before me, I find that thegovernment has intimidated and improperly influenced thethree witnesses critical to Mr. Ruehle’s defense. The cumulativeeffect of that misconduct has distorted the truth-finding pro-cess and compromised the integrity of the trial. To submit thiscase to the jury would make a mockery of Mr. Ruehle’s constitu-tional right to compulsory process and a fair trial.222

Accordingly, Judge Carney dismissed the indictment against Ruehleand entered a judgment of acquittal.223 Judge Carney’s decision wasbased on “two separate, but related grounds”—the government’s mis-conduct and “insufficient evidence to sustain a conviction.”224 JudgeCarney ended the hearing by saying, “Mr. Ruehle, you are a freeman.”225 Yet, Judge Carney still was not finished. Even though Nicho-las’s trial was a few months away and even though there was no pendingmotion to dismiss the charges against him, Judge Carney also dismissedthe indictment against Nicholas.226 Judge Carney was troubled by thevery notion that stock options backdating was even a crime. He stated:

The accounting standards and guidelines were not clear, andthere was considerable debate in the high-tech industry as tothe proper accounting treatment for stock option grants. In-deed, Apple and Microsoft were engaging in the exact samepractices as those of Broadcom.227

In closing, Judge Carney stated:

221. See Pfeifer, supra note 128; see N.Y. Times, supra note 128.222. Ruehle Transcript, supra note 130, at 5195.223. Id. at 5199.224. Id.225. Id. at 5209.226. Id. at 5199.227. Id. at 5201.


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Now, I’m sure there are going to be many people who are goingto be critical of my decision in this case and argue that I’mbeing too hard on the government. I strongly disagree. I have asolemn obligation to hold the government to the constitution.I’m doing nothing more and nothing less. And I ask my criticsto put themselves in the shoes of the accused.228

This rather extensive discussion of non-FCPA cases provides a rarepublic glimpse into the motivations of settling parties in a governmentenforcement action and further assists in understanding the motiva-tions that lead to FCPA resolution vehicles. This discussion of non-FCPA cases also demonstrates that, in the rare instances in whichgovernment enforcement agencies are challenged, the agencies arevulnerable in contested actions.

Section III of this article returns to the FCPA and highlights fourpillars that contribute to the facade of FCPA enforcement. Whenreading of these pillars ask yourself how a “Judge Rakoff” or a “JudgeCarney” would view the uninformative, bare-bones statement of facts orallegations typically found in FCPA enforcement actions, the untestedand dubious legal theories typically found in FCPA enforcement ac-tions, and the lack of transparency and accountability typically found inFCPA enforcement actions. Ask yourself as well how a “Judge Rakoff” ora “Judge Carney” would react upon learning that seemingly clear-cutinstances of corporate bribery and corruption are resolved withoutFCPA anti-bribery charges. In other words, ask yourself how a “JudgeRakoff” or a “Judge Carney,” if given the opportunity, would view thefacade of FCPA enforcement.

IV. THE FACADE OF FCPA ENFORCEMENT

This section highlights four pillars that contribute to the facade ofFCPA enforcement. The fact that this section highlights only fourpillars should not be interpreted to mean that these are the only pillarsthat contribute to the facade of FCPA enforcement. Indeed, in an areaof law seemingly enforced like no other, where private agreementssubject to little or no judicial scrutiny are viewed as de facto case law, andwhere untested and dubious legal theories are the foundation for mostsettlements, other pillars could also be highlighted.

This section does not argue, or even suggest, that every FCPAenforcement action is unwarranted or that no company or individual

228. Id.


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has never violated the FCPA. Rather, this section demonstrates that asignificant majority of recent FCPA enforcement actions are a facade.The entire universe of FCPA enforcement actions that could contrib-ute to a particular pillar are not discussed, but demonstrative examplesare profiled to support each pillar. Further, many FCPA enforcementactions could contribute to several pillars, but may only be discussed inconnection with one.229

The first pillar highlights the frequency in which FCPA enforcementactions are resolved based on uninformative, bare-bones, conclusorystatements of facts or allegations or conclusory legal statements. Thesecond pillar highlights the increasing trend of FCPA enforcementactions resolved based on untested and dubious legal theories, as wellas enforcement theories seemingly in direct conflict with the FCPA’sstatutory provisions. The third pillar highlights the opaque nature ofFCPA enforcement and how similar enforcement actions, based on thegovernment’s own allegations, are resolved with materially differentcharges and penalties. The fourth and most alarming pillar highlightshow seemingly clear-cut instances of corporate bribery, per the govern-ment’s own allegations, are resolved without FCPA anti-bribery charges.

A. First Pillar: Bare-Bones, Uninformative Facts, and Legal Conclusions

Given the typical resolution vehicles used to resolve FCPA enforce-ment actions, and the absence or practical absence of any judicialscrutiny of these vehicles, it is not surprising that public documentsassociated with FCPA enforcement actions often contain little morethan uninformative, bare-bones statements of facts replete with legalconclusions. This is one pillar where picking just a few FCPA enforce-ment actions to profile is difficult because nearly all FCPA enforcementactions suffer from such deficiencies.

For instance, in May 2009, the SEC found that United IndustrialCorporation (“UIC”), a Maryland-based defense firm, violated theFCPA anti-bribery provisions.230 Even for corporations, the FCPA re-quires proof of corrupt knowledge and intent for an anti-briberyviolation to be charged.231 However, the SEC findings are “entirely

229. The information in this article regarding certain FCPA enforcement actions and relatedissues is current as of March 2010.

230. See Corrected Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21cof the Securities and Exchange Act of 1934, Making Findings, and Imposing a Cease-and-DesistOrder, Exchange Act Release No. 60005, 95 S.E.C. Docket 2659 (May 29, 2009), available athttp://www.sec.gov/litigation/admin/2009/34-60005.pdf.

231. See 15 U.S.C. §§ 78dd-1(a) (2006); Urofsky & Newcomb, supra note 1, at 14.


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devoid of any suggestions that UIC itself had any involvement in theforeign payments which were allegedly made by its wholly-ownedsubsidiary, ACL, to Egyptian Air Force officials through an agent.”232 AsPhilip Urofsky and Danforth Newcomb note, “although this theory isnot spelled out in the pleadings, the SEC seems to have concluded thatthe involvement of ACL’s senior executive, Thomas Wurzel (alsocharged) and assorted internal control failures that allowed the pay-ments to go forward without significant review by the parent companywas sufficient to establish constructive knowledge by the parent com-pany.”233 However, the SEC’s apparent theory was not tested in courtbecause the company settled, without admitting or denying the SEC’sfindings, by agreeing to—among other things—pay approximately$350,000 in disgorgement (and prejudgment interest).234 This enforce-ment action suggests that not even the absence of a key FCPA anti-bribery element will derail a settlement.

The most common and troubling use of bare-bones, uninformative,legal conclusory statements of facts or allegations is when the enforce-ment agencies describe the “foreign officials” involved in the allegedconduct giving rise to the FCPA violation. As alluded to earlier, and asdescribed more fully below, the enforcement agencies’ interpretationof this key FCPA element to include employees of SOEs is dubious andhas never been subjected to judicial scrutiny. For present purposes,even if this interpretation would be subjected to judicial scrutiny andupheld by a court, the vast majority of FCPA enforcement actions stillfail to identify or describe why certain commercial enterprises are“instrumentalities” of a foreign government or why certain individualsare “foreign officials” under the FCPA.

For instance, in the July 2009 enforcement action against ControlComponents, Inc. (“CCI”) charging anti-bribery violations, the crimi-nal information contains this statement full of legal conclusions:

Defendant CCI’s state-owned customers included, but were notlimited to, Jiangsu Nuclear Power Corporation (China), Guo-hua Electric Power (China), China Petroleum Materials andEquipment Corporation, PetroChina, Dongfang Electric Corpo-ration (China), China National Offshore Oil Company, KoreaHydro and Nuclear Power, Petronas (Malaysia), and National

232. Id.233. Id.234. Id.


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Petroleum Construction Company (United Arab Emirates).Each of these state-owned entities was a department, agency, orinstrumentality of a foreign government, within the meaning ofthe FCPA, Title 15, United States Code, Section 78dd-2(h)(2)(A).The officers and employees of these entities, including but notlimited to the Vice-Presidents, Engineering Managers, GeneralManagers, Procurement Managers, and Purchasing Officers,were “foreign officials” within the meaning of the FCPA, Title15, United States Code, Section 78dd-2(h)(2)(A).235

Because CCI pleaded guilty,236 these key legal conclusions werenever tested and the public will likely never know what attributes ofthese entities, such as Petronas (Malaysia), made them an “instrumen-tality” of a foreign government in the eyes of the enforcement agencies.In addition, whether the enforcement agencies conduct any meaning-ful investigation prior to making the significant legal conclusion that aseemingly commercial enterprise is nevertheless an “instrumentality”of a foreign government remains an open question. For instance,Petronas “is a fully-integrated oil and gas corporation”237 and is rankedamong FORTUNE Global 500’s largest corporations in the world; it“has four subsidiaries listed” on a stock exchange; and it “has venturedglobally into more than [thirty-two] countries worldwide in its aspira-tion to be a leading oil and gas multinational of choice.”238 Would acourt conclude that such a profit-seeking enterprise, one of the largestin the world, and one that does business all over the world, is truly aninstrumentality of the Malaysian government? Because of the facade ofFCPA enforcement, the answer to this question, like so many othercore FCPA questions, is unknown.

Even so, the description of the “foreign officials” in the CCI actionseems clear, at least from a comparative standpoint, to the descriptionoften found in FCPA enforcement, actions. For instance, the SEC’scomplaint against Lucent Technologies Inc. contains this wonderfullydescriptive statement: the Chinese “foreign officials” “were employees of

235. Complaint at ¶ 5, United States v. Control Components, Inc., No. SACR09-00162 (C.D.Cal. July 22, 2009), available at http://www.justice.gov/criminal/pr/documents/07-31-09control-guilty-information.pdf.

236. See Press Release, DOJ, Control Components, Inc. Pleads Guilty to Foreign BriberyCharges and Agrees to Pay $18.2 Million Criminal Fine, (July 31, 2009), available at http://www.justice.gov/opa/pr/2009/July/09-crm-754.html.

237. PETRONAS, http://www.petronas.com.my/about_us.aspx (last visited Aug. 24, 2010).238. Id.


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Chinese state-owned or state-controlled telecommunications enter-prises . . . .”239 Likewise, the SEC’s complaint charging Oscar Meza, aformer employee of Faro Technologies, Inc., with FCPA anti-briberyviolations is silent as to any factual evidence supporting the theory thatemployees of unidentified “Chinese state-owned companies” are “foreignofficials.”240

Numerous other examples abound and because there is generally nothreat that these bareboned, uninformative facts or legal conclusionswill ever be subject to meaningful judicial scrutiny, those subject to theFCPA find little tangible guidance from these settled enforcementactions. This pillar of the facade of FCPA enforcement matters, becauseas discussed in Section IV of this article, enforcement officials routinelyencourage those subject to the FCPA to carefully review FCPA resolu-tion vehicles for insight into the FCPA in order to conform conduct tothe guidance that can be derived (at least in the eyes of the enforce-ment agencies) from these vehicles.

Bareboned, uninformative facts and legal conclusions are but onepillar contributing to the facade of FCPA enforcement. This pillar,while significant, seems small compared to the second pillar—theincreasing and alarming trend of FCPA enforcement actions resolvedbased on untested and dubious legal theories—as well as enforcementtheories seemingly in direct conflict with the FCPA’s statutory provisions.

B. Second Pillar: What is the Legal Support?

Because the resolution vehicles typically used to resolve FCPA enforce-ment actions are subject to little or no scrutiny and because of the “carrots”and “sticks” and motivations nudging FCPA defendants to accept theseresolution vehicles, FCPA enforcement actions are routinely resolved eventhough many of the enforcement agencies’ legal theories are untested anddubious. In addition, as demonstrated fully below, in some cases, theenforcement theories seem to be in direct conflict with the statute.

Why aren’t the enforcement agencies’ untested and dubious legaltheories challenged? Quite simply, businesses subject to the FCPA arenot in the business of setting legal precedent, and for these companiesto even attempt to set legal precedent will result in painful pokes by theDOJ’s “sticks.” As a practical matter, to challenge a DOJ legal interpre-

239. Complaint at ¶ 1, SEC v. Lucent Tech., Inc., (Dec. 21, 2007), available at http://www.sec.gov/litigation/complaints/2007/comp20414.pdf.

240. See Complaint, SEC v. Meza, No. 1:09-CV-01648, 2009 WL 2875827 (D.C. Cir. Aug. 28,2009), available at http://www.sec.gov/litigation/complaints/2009/comp21190.pdf.


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tation in an FCPA enforcement action, a company would first need tobe criminally indicted, something no member of a board of directors isgoing to let happen regardless of the ultimate criminal fine or penaltythe DOJ is seeking.241 If any of the resolution vehicles discussed inSection II above is offered by the DOJ, the conduct at issue will likely beresolved by the company through one of those vehicles. Lost in thisprocess, however, is the salient question of whether the conduct at issuein many cases even violated the FCPA.

Thus, the enforcement agencies’ many dubious FCPA legal theoriesremain untested. It is this feature of FCPA enforcement that distin-guishes the FCPA from nearly every other area of law, and it signifi-cantly contributes to the facade of FCPA enforcement.

Four dubious legal theories are discussed below: (i) the theory thatseemingly private, profit-seeking enterprises are “instrumentalities” ofa foreign government and the related theory that all employees of suchentities are “foreign officials” under the FCPA; (ii) misapplication ofthe Kay holding and the explosion in FCPA enforcement actionsinvolving foreign licenses, permits, applications, certifications, andcustoms and tax duties; (iii) strict liability theories for FCPA books andrecords and internal control violations; and (iv) the theory that disgorge-ment is an appropriate remedy when only FCPA books and records andinternal control violations are charged.

1. The “Foreign Officials” All Around Us?

It may surprise many that the majority of recent FCPA enforce-ment actions have absolutely nothing to do with government offi-cials. Rather, the alleged “foreign official” is an employee of analleged SOE who is deemed a “foreign official” by the enforcementagencies. This designation rests on the theory that the “foreignofficial’s” employer (even if it is a company with publicly tradedstock and other attributes of private business) is an “instrumentality”of a foreign government.

The DOJ has publicly acknowledged that there can be difficult

241. See, e.g., Kenneth Winer & Gregory Husisian, The ‘Knowledge’ Requirement of the FCPAAnti-Bribery Provisions: Effectuating or Frustrating Congressional Intent?, 24 WHITE COLLAR CRIME 1, 10(2009), available at http://www.foley.com/files/tbl_s31Publications/FileUpload137/6535/FCPAWinerHusisian2009.pdf (“Even if the government’s application of the anti-bribery provi-sions of the FCPA is excessively aggressive, no company or individual wants to have to test thegovernment’s application in court.”).


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assessments of who qualifies as a “foreign official” under the FCPA.242

Despite this difficult assessment and despite the lack of any FCPAcase law to support its position, the DOJ continues to aggressivelyinterpret the “foreign official” element and has steadfastly refusedto provide useful guidance on this issue to those subject to theFCPA.

For instance, in November 2009, Assistant Attorney General LannyBreuer gave a keynote address to the Tenth Annual PharmaceuticalRegulatory and Compliance Congress and Best Practices Forum.243 Inhis address, Breuer rhetorically asked “ . . . who exactly qualifies as a‘foreign official’ in the context of a public health system, and whatconstitutes a corrupt offer or payment that violates the FCPA? Ofcourse, the answers to those questions depends on the facts andcircumstances of every case, and I can’t give you binding guidance fromthe podium today.” Nevertheless, Breuer continued to tell the audi-ence:

. . . consider the possible range of ’foreign officials’ who arecovered by the FCPA. Some are obvious, like health ministryand customs officials of other countries. But some othersmay not be, such as the doctors, pharmacists, lab techniciansand other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certaincircumstances and in certain countries, that nearly everyaspect of the approval, manufacture, import, export, pricing,sale and marketing of a drug product in a foreign countrywill involve a ’foreign official’ within the meaning of theFCPA.244

Thus, Breuer and other DOJ officials continue to publicly proclaimthat such non-core government officials “are covered by the FCPA”and that such individuals fall “within the meaning of the FCPA”when the truth is it is merely the DOJ’s interpretation of the “foreignofficial” element, an interpretation that has never been subjected tojudicial scrutiny and an interpretation that is widely disputed.245

242. See Alexandra A. Wrage, The Latest FCPA Forecast From U.S. Regulators, WRAGEBLOG (Sept. 17,2009, 2:26 PM), http://wrageblog.org/2009/09/17/the-latest-fcpa-forecast-from-u-s-regulators/.

243. See Breuer, supra note 57.244. Id.245. See, e.g., Joel Cohen, Michael Holland & Adam Wolf, Under the FCPA, Who is a Foreign

Official Anyway?, 63 BUS. LAW 1243, 1243 (2008) (“Despite the marked increase in high-profile


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No enforcement agency interpretation contributes more to thefacade of FCPA enforcement and no FCPA element is more urgently inneed of judicial scrutiny than the FCPA’s “foreign official” element. Farfrom being an academic hypothetical, the enforcement agencies’untested and dubious legal interpretation was at the core of 66% (sixout of nine) of the 2009 FCPA enforcement actions against businessentities as demonstrated by the chart below.246 Also, because many ofthe enforcement actions (most notably the CCI action) resulted inseveral related actions against company employees where the “foreignofficials” were exactly the same, the impact of this untested anddubious legal interpretation extends far beyond the enforcementactions profiled below.

[FCPA] enforcement activity, it remains unsettled whether the FCPA’s definition of ‘foreignofficial’ includes employees of foreign companies that are owned or controlled by those compa-nies’ governments.”).

246. Excluded from the chart are two Iraqi-Oil-For Food enforcement actions involvingAGCO Corporation and Novo Nordisk A/S. See, e.g., Press Release, DOJ, AGCO Corp. to Pay $1.6Million in Connection with Payments to the Former Iraqi Government under the U.N. Oil-for-Food Program (Sept. 30, 2009), available at http://www.foley.com/files/DOJagcopenalty.pdf;Press Release, DOJ, Novo Nordisk Agrees to Pay $9 Million Fine in Connection with Payment of$1.4 Million in Kickbacks Through the United Nations Oil-for-Food Program (May 11, 2009),available at http://www.foley.com/files/NovoDOJRelease.pdf. These actions involved kickbackpayments to the Iraqi government – not to any particular “foreign official” and thus the conductwas not actionable under the FCPA’s anti-bribery provisions. Even so, the payments and recordingof the payments still resulted in an enforcement action for FCPA books and records and internalcontrol violations as well as conspiracy.

247. Complaint at 1, 3-6, SEC v. Avery Dennison Corp., CV09-5493 (C.D. Cal. Jul. 28, 2009),available at http://www.sec.gov/litigation/complaints/2009/comp21156.pdf.

2009 CORPORATE FCPA ENFORCEMENT ACTIONS – THE “FOREIGN

OFFICIALS”

Company “Foreign Official(s)”

Avery Dennison Corp. Chinese foreign officials including: “TrafficManagement Research Institute under theMinistry of Public Security located in Wuxi,Jiangsu Province;” “an official at HenanLuqiao, a state-owned enterprise;” and “astate-owned end user.”

Indonesian customs and tax officials.

Pakistani customs officials.247


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The most aggressive application of the enforcement agencies “for-eign official” interpretation would seem to be in the KBR / Halliburton

248. Complaint at ¶5, United States v. Control Components, Inc., supra note 234.249. Non-Prosecution Agreement from DOJ Crim. Div. to Kimberley A. Parker, Esq., regarding

Helmerich & Payne, Inc. (Jul. 29, 2009), available at http://www.law.virginia.edu/pdf/faculty/garrett/helmerich.pdf; SEC Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21c of theSecurities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, In reHelmerich & Payne, Inc., Exchange Act Release No. 60,400, 96 S.E.C. Docket 1446 (July 30, 2009) at 3,available at http://www.sec.gov/litigation/admin/2009/34-60400.pdf.

250. Complaint at 1, 3–4, SEC v. ITT Corp., No. 1:09-CV-00272 (D.D.C. Feb. 11, 2009),available at http://www.sec.gov/litigation/complaints/2009/comp20896.pdf.


OFFICIALS”


Control Components,Inc.

Vice President, Engineering Managers, GeneralManagers, Procurement Managers, and PurchasingOfficers at state-owned entities including, but notlimited to: “Jiangsu Nuclear Power Corporation(China), Guohua Electric Power (China), ChinaPetroleum Materials and Equipment Corporation,PetroChina, Dongfang Electric Corporation(China), China National Offshore Oil Company,Korea Hydro and Nuclear Power, Petronas(Malaysia), and National Petroleum ConstructionCompany (United Arab Emirates).”248

Helmerich & Payne Inc. “Various officials and representatives of theArgentine and Venezuelan customs services.”249

ITT Corp. “Employees of numerous Chinese state-ownedentities;” “thirty-two different SOE customers;”“employees of Design Institutes (some of whichwere SOEs) that assisted in the design of largeinfrastructure projects in China.”250

KBR/Halliburton Co. “High-level Nigerian government officials;”“Nigerian government officials;” “The NigerianNational Petroleum Corporation (NNPC), aNigerian government-owned company chargedwith development of Nigeria’s oil and gas wealthand regulation of the country’s oil and gasindustry. NNPC was a shareholder in certain jointventures with multinational oil companies. NNPC


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enforcement action. The enforcement agencies asserted that officersand employees of Nigeria LNG Limited (“NLNG”) were “foreignofficials” despite the fact that NLNG is owned 51% by a consortium

251. United States v. Kellogg Brown & Root LLC, supra note 17, at 6, 7, 10; Complaint at 3-5,8, SEC v. Halliburton Co., No. 4:09-399 (S.D. Tex. Feb. 11, 2009), available at http://www.sec.gov/litigation/complaints/2009/comp20897.pdf.

252. Complaint at 2-3, United States v. Latin Node, Inc., No. 09-20239 (S.D. Fla. Mar. 24,2009), available at http://fcpaenforcement.com/FILES/tbl_s31Publications/FileUpload137/5945/Item1LatinNode.pdf .


OFFICIALS”

Company “Foreign Official(s)” entity and instrumentality

was an entity and instrumentality of theGovernment of Nigeria . . .” “Nigeria LNGLimited (‘NLNG’) created by the Nigeriangovernment [. . .] and was the entity thatawarded the related EPC contracts. Thelargest shareholder of NLNG was NNPC,which owned 49% of NLNG. The otherowners of NLNG were multinational oilcompanies. Through the NLNG boardmembers appointed by NNPC, among othermeans, the Nigerian government exercisedcontrol over NLNG [. . .] NLNG was an entityand instrumentality of the Government ofNigeria . . .”251

Latin Node Inc. “Hondutel, the Honduran government-ownedtelecommunications company headquarteredin Tegucigalpa, Honduras, an‘instrumentality’ of the Hondurangovernment, and thus its employees anddirectors were ’foreign officials’ under theFCPA.”

“TeleYemen, the Yemeni government-ownedtelecommunications company headquarteredin Sana’a, Yemen, an ‘instrumentality’ of theYemeni government, and thus its employeesand directors were ‘foreign officials’ under theFCPA.”252


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of private multinational oil companies—Shell, Total, and Eni.256 Inother words, even if an entity is undeniably majority owned byprivate companies, the enforcement agencies will not retreat fromits dubious legal interpretation that employees of that entity are“foreign officials” under the FCPA.

It is beyond the scope of this article to set forth the detailedarguments why profit-seeking enterprises should not be deemed “instru-mentalities” of a foreign government and why employees of allegedSOEs should not be deemed “foreign officials” under the FCPA. Forpurposes of this article, the salient facts are these: there is no judicialapproval of this interpretation; there is no support in the FCPA’sextensive legislative history for this interpretation; and there is noanalogous case law support for this interpretation. Further, the enforce-

253. Complaint at 2, SEC v. Nature’s Sunshine Prods., Inc., No. 2:09CV0672 (D. Utah Jul. 31,2009), available at http://www.sec.gov/litigation/complaints/2009/comp21162.pdf.

254. SEC Exchange Act Release No. 60005, supra note 28.255. Non-Prosecution Agreement from the DOJ Crim. Div. to Leo Cunningham, Esq.,

regarding UTStarcom, Inc. (Dec. 31, 2009), available at http://www.law.virginia.edu/pdf/faculty/garrett/utstarcom.pdf.

256. See NIGERIA LNG LIMITED, http://www.nlng.com/NR/exeres/F48DE9A7-F3F3-4A8E-929A-0C34F1CFF92B%2Cframeless.htm (last visited Aug. 12, 2010).


OFFICIALS”


Nature’s SunshineProducts, Inc.

“Brazilian customs officials.”253

United Industrial Corp. “Active [Egyptian Air Force] officials.”254

UTStarcom, Inc. “Government-controlled municipal or provincialtelecommunications companies;” “employeesof Chinese government-controlledtelecommunications companies;” “managersand other employees of 9 governmentcustomers in China;” “a Chinese-government-controlled telecommunicationscompany.” “A government-controlledtelecommunications company in Thailand;”“One Mongolian government official to helpUTSI obtain a favorable ruling in a disputeover its license.”255


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ment agencies’ interpretation of the key “foreign official” element ofan FCPA anti-bribery violation leads to several absurd results.

For instance, Dubai World is a wholly-owned investment vehicle ofDubai, one of seven emirates that comprise the United Arab Emir-ates (“UAE”).257 According to Dubai World’s website, it owns a hostof real estate, leisure and financial services assets both inside andoutside of Dubai.258 In fact, according to its website, “the sun neversets on Dubai World” and its investment portfolio extends across 100cities worldwide.259 Many of Dubai World’s entities bear all theresemblances of a private sector business, such as public stockofferings and loan agreements with private banks.260 One of DubaiWorld’s main holdings is Nakheel, “the world’s largest privately heldreal estate company,”261 and its CEO is an Australian citizen.262

Likewise, Istithmar World is an investment house wholly owned byDubai World,263 and its CEO is an American citizen.264 Under theenforcement agencies’ interpretation, the Australian citizen and theAmerican citizen would be considered UAE “foreign officials” sim-ply because they work for Dubai World.

Similarly absurd would be application of the enforcement agencies’interpretation to CITGO Petroleum Corporation (“CITGO”). CITGOis a Delaware corporation based in Houston, Texas and its logo is aniconic backdrop to historic Fenway Park, home of the Major League

257. See Dubai World (Aug. 24, 2010), http://www.dubaiworld.ae.258. See id.259. See Neil Hume, “The Sun Never Sets on Dubai World.” Really? FT.COM/ALPHAVILLE (Nov. 25,

2009, 3:46 PM), http://ftalphaville.ft.com/blog/2009/11/25/85291/the-sun-never-sets-on-dubai-world-really/?source�rss.

260. Some Dubai World Creditors Said to Seek Loan Sale, THE NEW YORK TIMES DEALBOOK (Jan. 19,2010, 4:35 AM), http://dealbook.blogs.nytimes.com/2010/01/19/some-dubai-world-creditors-may-sell-loans-report-says/; Emirates NBD, One of Major Dubai World Creditors, Expects Deal Soon onDebt with Conglomerate BUSINESS NEWS (Apr. 26, 2010), http://blog.taragana.com/business/2010/04/26/emirates-nbd-one-of-major-dubai-world-creditors-expects-deal-soon-on-debt-with-conglom-erate-54062/.

261. Nakheel and Bharat Hotels Announce Joint Hotel Venture in Dubai, NAKHEEL (Feb. 5, 2007),http://www.nakheel.com/en/news/Bharat-Hotel.

262. Nakheel appoints new Chief Executive Officer, AMEINFO.COM (March 2, 2006, 12:42 PM),http://www.ameinfo.com/79283.html.

263. See ISTITHMAR WORLD, http://www.istithmarworld.com/index.php?option�com_content&view�article&id�22&Itemid�48 (last visited Aug. 24, 2010).

264. See Rachna Uppal, Dubai World’s Istithmar CEO Resigns, ARABIANBUSINESS.COM (Jan. 20,2010), http://www.arabianbusiness.com/579412-dubai-worlds-istithmar-ceo-resigns.


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Baseball Boston Red Sox.265 Yet, in a little known fact, CITGO is awholly owned subsidiary of Petroleos de Venezuela S.A. (“PDVSA”)266—the state-owned oil company of Venezuela.267 Thus, all employees ofCITGO will be Venezuelan “foreign officials” under the enforcementagencies’ interpretation, notwithstanding the salient fact that CITGO isa Delaware corporation based in Houston.

The enforcement agencies’ interpretation of the key “foreign offi-cial” element seems even more absurd if applied in an intellectuallyhonest manner to determine who is a U.S. “official.” It is ridiculous tothink that a person you play softball with on Thursday nights or aperson you sing with in the church choir could be a “U.S. official”merely because that person (regardless of rank, title or position) worksfor General Motors or American International Group. Yet the enforce-ment agencies’ interpretation, if applied to the U.S., would compelsuch a conclusion given that these two companies are majority ownedand controlled by the U.S. government.

With foreign government owned sovereign wealth funds makinginvestments around the world (including in U.S. companies)268 andwith SOEs listing public shares on various exchanges and otherwisedoing business around the world, there has never been a more criticaltime for the enforcement agencies to make clear their legal reasoningand support for this untested and dubious “foreign official” interpreta-tion. Before another company or individual is subject to an FCPAenforcement action based on this legal theory, shouldn’t there at leastbe some judicial acceptance of the theory?

2. Just How Was that Business Obtained or Retained?

Section I of this article noted that prior to Kay, the FCPA’s key“obtain or retain business” element was in flux and subject to muchdebate. Section I also examined the equivocal Kay holding and that,contrary to popular misperception, Kay does not hold that all paymentsto “foreign officials” for the purpose of avoiding customs duties and

265. See The Boston CITGO Sign, http://www.citgo.com/AboutCITGO/BostonSign.jsp (lastvisited Aug. 12, 2010).

266. See Company History, http://www.citgo.com/AboutCITGO/CompanyHistory.jsp (lastvisited Aug. 12, 2010).

267. See PDVSA, http://www.pdvsa.com/ (last visited Aug. 12, 2010).268. See e.g., Dinny McMahon, China Gives Glimpse of U.S. Holdings, WALL STREET JOURNAL, Feb.

9, 2010 at C1 (noting that stated-owned China National Investment Corporation has a combined$9.63 billion in equity stakes in various U.S. companies including American International Group,Inc., Apple, Inc., and News Corp.).


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sales taxes in a foreign country fall within the FCPA’s scope. In fact, theKay court specifically noted that payments to secure lower customs andtax duties, which do not suggest an actual or intended cause-and-effectnexus to business obtained or retained, or payments that merelyincrease the profitability of an existing profitable company, presumablydo not satisfy the “obtain or retain business” element.

Despite Kay’s equivocal holding, there has since been an explosion inFCPA enforcement actions where the improper payments are alleged notto obtain or retain any particular business, but rather, involve customsduties and tax payments, or payments alleged to have assisted the payer insecuring foreign government licenses, permits, and certifications. Accord-ing to the enforcement agencies, such payments generally assisted thepayer in doing business in a foreign country,269 even if only with strictlyprivate parties. These recent cases are profiled in the chart below.

269. See, e.g., Urofsky & Newcomb, supra note 1 at 18. (Noting that the “Kay holding has set apowerful precedent that has allowed the government to bring a number of cases againstcompanies that paid bribes to customs officials to reduce or eliminate duties and taxes in ways thatfacilitated the companies’ ability to do business with private parties in a foreign country.”).

270. See Nature’s Sunshine Complaint, supra note 251, at ¶ 1.271. See Non-Prosecution Agreement, supra note 247 , at ¶ 4; Cease and Desist Order at ¶¶

5-8, In re Helmerich & Payne, Inc., Exchange Act Release No. 60400, 2009 WL 2341649 (June 30,2009), available at http://www.sec.gov/litigation/admin/2009/34-60400.pdf .

RECENT FCPA ENFORCEMENT ACTIONS CONCERNING FOREIGN LICENSES,PERMITS, APPLICATIONS, CERTIFICATIONS, AND CUSTOMS AND TAX DUTIES

Date Company Allegation

July 2009 Nature’s SunshineProducts, Inc.

Payments to Brazilian customsagents to import certainunregistered products intoBrazil.270

July 2009 Helmerich &Payne, Inc.

Payments to various officialsand representatives of theArgentine and Venezuelancustoms services in connectionwith the importation andexportation of goods andequipment related to H&P’sbusiness operations in thosecountries.271


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Because none of these enforcement actions were challenged, it

272. U.S. v. Aibel Group Ltd., No. CR H-07-005 ¶22 (S.D. Tex. 2008).273. See SEC v. Con-Way Inc., Exchange Act Release No. 2866, 2008 WL 3925208 (Aug. 27, 2008);

Cease and Desist Order at ¶¶ 7-10, In re Con-Way Inc., Exchange Act Release No. 58433, 2008 WL3925200 (Aug. 27, 2008), available at http://www.sec.gov/litigation/admin/2008/34-58433.pdf.

274. Deferred Prosecution Agreement at ¶¶ 4-19, U.S. v. AGA Medical Corp., No. CR08-172JMR (D. Minn. June 3, 2008), available at http://www.law.virginia.edu/pdf/faculty/garrett/agamedical.pdf.



Nov. 2008 Aibel GroupLimited

Participation in a scheme tomake payments to NigeriaCustoms Service officials toinduce those officials toprovide preferential treatmentin the customs clearanceprocess.272

Aug. 2008 Con-Way Inc. Payments, through a shippingand freight firm, toPhilippine customs officials toinduce the officials to allowthe firm to store shipmentslonger than otherwisepermitted and to settledisputes with the PhilippineBureau of Customs, as well aspayments to employees ofstate-owned airlines to inducethe officials to improperlyreserve space on airplanes.273

June 2008 AGA MedicalCorp.

Payments, through a distributor,to physicians employed byChinese hospitals to causethem to purchase companyproduct and to officials in theChinese State IntellectualProperty Office in order tocause that office to approvethe company’s patentapplications.274


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remains an open question whether the payments at issue in these

275. See Non-Prosecution Agreement from DOJ to Eric A. Dubelier, Esq. at ¶ 4, regardingWestinghouse Air Brake Tech. Corp. (Feb. 8, 2008), available at http://www.law.virginia.edu/pdf/faculty/garrett/wabtec.pdf .

276. Cease and Desist Order, In re Bristow Group Inc., Exchange Act Release No. 56533, 2007WL 2790630 (Sept. 26, 2007), available at http://www.sec.gov/litigation/admin/2007/34-56533.pdf.

277. See Complaint at ¶4, SEC v. Delta & Pine Land Co., 2007 WL 2137185 (July 26, 2007) (No.1:07-CV-01352), available at http://www.sec.gov/litigation/complaints/2007/comp20214.pdf; Ceaseand Desist Order at 2-3, In re Delta & Pine Land Co., Exchange Act Release No. 56138, 2007 WL2140170 (July 26, 2007), available at http://www.sec.gov/litigation/admin/2007/34-56138.pdf.

278. See Complaint at ¶ 2, SEC v. The Dow Chemical Co., (D. N.H. Feb. 9, 2007), available athttp://www.sec.gov/litigation/complaints/2007/comp20001.pdf.



Feb. 2008 Westinghouse AirBrakeTechnologiesCorp.

Payments to various agents ofthe Indian government to assistthe company in obtainingbusiness, to schedulepre-shipping productinspections, to have certificatesof product delivery issued, andto curb excise tax audits.275

Sept. 2007 Bristow GroupInc.

Payments, through a Nigerianaffiliate, to tax officials in twoNigerian states to influence themto improperly reduce the amountof expatriate employmenttaxes.276

July 2007 Delta & Pine LandCo. / TurkDeltapine, Inc.

Payments to officials of theTurkish Ministry of Agriculturaland Rural Affairs to obtaingovernment reports andcertifications that were necessaryto operate in Turkey.277

Feb. 2007 The DowChemical Corp.

Payments, through a fifth tiersubsidiary, to Indiangovernment officials to registerseveral agro-chemical productsslated for marketing in time forIndia’s growing season.278


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actions, if subjected to judicial scrutiny, would satisfy the “obtain orretain business” element as interpreted in Kay. Many of these paymentswould appear attenuated to any specific cause-and-effect businessnexus or otherwise would appear to have merely increased the profit-ability of an existing profitable business. The payments would thuspresumably not satisfy the FCPA’s obtain or retain business elementper the Kay holding. In many respects, the FCPA’s key “obtain or retainbusiness” element remains as murky today as it did before Kay.

The lack of clarity of this key FCPA element matters because, unlikeoffering a suitcase full of cash to a government leader to obtain agovernment contract, nearly every business operating internationallymust make payments to get products in and out of the country and tosecure foreign licenses, permits, applications, and the like. Whenconfronted by a low-level foreign government bureaucrat with an openhand, it is an open question whether such payments violate the FCPAor fall within the FCPA’s express exception for so-called facilitatingpayments. The exception states that the anti-bribery prohibitions “shallnot apply to any facilitating or expediting payment to a foreign official,political party, or party official the purpose of which is to expedite or tosecure the performance of a routine governmental action by a foreignofficial, political party, or party official.”280

279. Cease and Desist Order at 2, In re The Dow Chemical Co., Exchange Act Release No.55281, 2007 WL 460872 (Feb. 13, 2007), available at http://www.sec.gov/litigation/admin/2007/34-55281.pdf; see Please Agreement at ¶ 30, U.S. v. Vetco Gray Controls, Inc., No. 4:07-cr-00004(S.D. Tex. Feb. 6, 2007), available at http://www.justice.gov/criminal/fraud/fcpa/cases/docs/02-06-07vetcogray-plea.pdf.

280. 15 U.S.C. §§ 78dd-1(b), 78dd-2(b), 78dd-3(b) (2000).



Jan. 2007 Vetco GrayControls, Inc.,Vetco Gray UKLimited, VetcoGray ControlsLimited

Participation in a scheme tomake payments to NigeriaCustoms Service officials toinduce the officials to providepreferential treatment inconnection with the customsclearance process and theavoidance of Nigerian customsduties and tariffs.279


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While some find facilitating payments to be a corrupt payment undera different name,281 the fact remains that the FCPA contains an expressexception for facilitating payments. It is this statute that the enforce-ment agencies are obligated to enforce, and this express exceptionwould certainly appear relevant to the above-described actions; how-ever, because these enforcement actions were not challenged, thisobviously relevant defense was not explored in these post-Kay cases. Yet,these post-Kay cases stand as de facto FCPA case law, notwithstanding thefact that the alleged conduct in question may have been excused by theFCPA’s facilitating payment exception. Thus, these numerous enforce-ment actions also contribute to the facade of FCPA enforcement.

The FCPA’s key “obtain or retain business” element concerns morethan just suitcases full of cash to a foreign government leader to securea foreign government contract. But just how much more remains amystery given the equivocal holding of Kay and the fact that none of theabove enforcement actions were challenged. Before another companyor individual is subject to an FCPA enforcement premised on suchattenuated payments, should there not at least be some legal support,besides an equivocal holding from one circuit court, for the enforce-ment agencies’ expansive interpretation?

3. Strict Liability for Books and Records and Internal ControlsViolations?

The facade of FCPA enforcement is not just limited to the FCPA’santi-bribery provisions, but is also found in the SEC’s enforcement ofthe FCPA’s books and records and internal control provisions. Withincreasing frequency, the SEC has charged FCPA books and recordsand internal control violations based on untested and dubious legaltheories, as well as theories seemingly in direct conflict with the FCPA’sstatutory provisions.

“On its face, the FCPA appears to require some degree of scienter, orculpable knowledge, even for books and records or internal controlsviolations.”282 Yet, in the Nature’s Sunshine Products, Inc. enforce-ment action, the SEC charged company executives without pleadingany evidence to suggest that the executives knew of or participated inthe conduct giving rise to the FCPA violations.

281. See, e.g., Good News at Today’s OECD Celebration, WRAGEBLOG (Dec. 9, 2009, 2:21 PM),http://wrageblog.org/2009/12/09/good-news-at-todays-oecd-celebration.

282. See UROFSKY & NEWCOMB, supra note 1, at 13.


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Nature’s Sunshine

In July 2009, the SEC filed a settled FCPA enforcement action againstNature’s Sunshine Products, Inc. (“NSP”), a Utah-based company thatsells herbal supplements and health products, its CEO, Douglas Fag-gioli, and former CFO, Craig Huff.283 The SEC’s complaint alleged thatNSP, through its wholly-owned subsidiary in Brazil, made payments tocustoms agents to import certain unregistered products into Brazil,thereby assisting NSP in obtaining or retaining business in Brazil.284

According to the SEC, the payments were improperly booked by thesubsidiary as “importation advances,” but without supporting documen-tation.285 Based on this alleged conduct, the SEC charged NSP withFCPA anti-bribery and books and records and internal control viola-tions.286

The SEC also charged Faggioli and Huff, as “control persons” ofNSP, with violating the FCPA’s books and records and internal controlprovisions even though the SEC did not allege that Faggioli or Huffdirectly or indirectly knew of the payments at issue.287 In language sureto induce a cold sweat for any executive, the SEC merely alleged thatboth Faggioli and Huff had “supervisory responsibilities” over NSP’ssenior management and policies; yet, as “control persons,” they “failedto make and keep books, records, and accounts which, in reasonabledetail, accurately and fairly reflected the transactions of NSP” andfailed to devise and maintain an adequate system of internal account-ing controls.288

Without admitting or denying the SEC’s charges, Faggioli and Huffresolved the matter by agreeing to pay a $25,000 civil penalty.289 Acompany press release issued in connection with the settlement statesthat “no current NSP officers, directors, or employees are alleged tohave participated in or had knowledge of any of the improper conduct”alleged in the SEC complaint.290 The press release notes that NSP,which agreed to settle the SEC’s charges without admitting or denyingthe allegations by paying a $600,000 civil penalty, voluntarily disclosedthe conduct at issue to both the SEC and DOJ and fully cooperated with

283. See SEC Litigation Release No. 21162, supra note 157.284. See Natures Sunshine Complaint, supra note 251.285. Id. at 23–42.286. Id. at 49–51, 60–65.287. See id. at 43–48.288. Id.289. See SEC Litigation Release No. 21162, supra note 157.290. See id.


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the government’s investigation.291

Philip Urofsky, a former DOJ FCPA prosecutor who is currently inprivate practice, notes that the NSP enforcement action is the “firstFCPA action in which the SEC has charged individuals under theExchange Act’s control liability theory” and that this action “de-part[ed] from the [SEC’s] former practice” in that previous SEC FCPAenforcement actions included “direct allegations that the individu-als . . . charged were involved in the action, in creating the false booksand records or creating controls or authorizing payment of thebribes.”292 Urofsky calls the SEC’s use of control person liability in theFCPA context “unique and unprecedented.”293 Commenting generallyon the SEC’s use of control person liability, and specifically on thecontrol person liability in the NSP action, Kenneth Winer, a formerSEC Division of Enforcement attorney currently in private practice,noted that the “statutory language, and legislative history, of therelevant provisions of the Exchange Act and public policy do notsupport the application of Section 20(a) [control person liability] toSEC enforcement actions.”294 Winer and his co-author note that the“legislative history indicates that Congress intended Section 20(a) toapply to private actions by injured investors, and not to either enforce-ment actions by the SEC or criminal prosecutions by the Department ofJustice.”295

However, because neither NSP nor Faggioli nor Huff challenged theSEC’s allegations, there was no judicial scrutiny of this novel “controlperson” liability theory in the FCPA context. Nor has the propriety ofcharging individuals for FCPA books and records and internal controlviolations, without any allegation that the individual directly or indi-rectly knew of the payments at issue, received judicial scrutiny. Further,because NSP settled the matter without contesting the SEC’s FCPAanti-bribery charges, it remains an open question whether, if chal-lenged, the SEC’s anti-bribery charges would have fit within the Kaycourt’s interpretation of the “obtain or retain business” element or

291. See id.292. Amanda Bronstad, SEC Trots Out a New Weapon: Control Person Liability, NAT’L L. J., Aug.

20, 2009, http://www.law.com/jsp/cc/PubArticleCC.jsp?id�1202433157801.293. Id.294. Kenneth Winer & Kimberly Shur, A Mighty Sword: Should the SEC Bring Enforcement Actions

Solely on the Basis of Control Person Liability?, 41 SEC. REG. & LAW REP. 1686 at *2 (Sept. 14, 2009),available at http://www.foley.com/files/tbl_s31Publications/FileUpload137/6411/winershurbna91409.pdf.

295. Id.


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whether the alleged payments would have implicated the FCPA’sexception for facilitating payments. Thus, in just the Nature’s Sunshineenforcement action alone, three key unsettled enforcement theoriesescaped judicial scrutiny.

It is one thing to base an enforcement action on an untested ordubious legal theory. It is quite another to base an enforcement actionon a theory directly in conflict with the FCPA’s statutory provisions. Yet,that is what the SEC routinely does when it charges parent companieswith FCPA books and records and internal control violations basedsolely on the conduct of indirect subsidiaries or affiliates in the absenceof any allegation that the parent company participated in, or hadknowledge of, the conduct at issue.

As described in Section I of this article, the FCPA specifically statesthat when an issuer holds 50% or less of the “voting power with respectto a domestic or foreign firm,” the books and records and internalcontrol provisions “require only that the issuer proceed in good faith touse its influence, to the extent reasonable under the issuer’s circum-stances, to cause a domestic or foreign firm to devise and maintain asystem of internal accounting controls consistent” with the provi-sions.296 The FCPA further states that an issuer “which demonstratesgood faith efforts to use such influence shall be conclusively presumedto have complied with the requirements of” the provisions.

Yet, in direct conflict with the FCPA’s statutory provisions, the SECroutinely charges parent companies for the books and records andinternal control violations of its indirect subsidiaries and affiliatesunder what can only be called a strict liability theory.

For instance, in July 2009, the SEC filed a settled civil complaintagainst Avery Dennison, a California-based manufacturer of self-adhesive materials and products (“Avery”), charging it with violationsof the FCPA’s books and records and internal control provisions.297

The conduct at issue involved its “indirect subsidiary” Avery (China)Co. Ltd. (“Avery China”). Avery China allegedly provided things ofvalue to Chinese “foreign officials” in seeking business opportunitieswith Chinese state-owned entities.298 According to the SEC, the thingsof value were improperly recorded in Avery China’s books and records.

296. 15 U.S.C. § 78m(b)(6) (2000).297. See SEC Files Settled Charges Against Avery Dennison Corporation for Violating the

Books and Records and Internal Controls Provisions of the Foreign Corrupt Practices Act,Litigation Release No. 21156 (Jul. 28, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21156.htm.

298. See SEC v. Avery Dennison Corp. Complaint, supra note 245.


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The SEC alleged that Avery China is wholly-owned by Avery DennisonHong Kong BV, which in turn is wholly-owned by Avery DennisonGroup Danmark ApS, which in turn is wholly-owned by Avery.299

Despite these legally significant facts, without making a single allega-tion as to the absence of Avery’s good faith, and without alleging in anyway that Avery participated in or had knowledge of the conduct at issue,the SEC charged Avery with violating the FCPA’s books and recordsand internal control provisions.300

Similarly, in February 2007, the SEC filed a settled civil complaintagainst The Dow Chemical Company (“Dow”), a large manufacturerand seller of chemicals, plastic materials, and agricultural and otherspecialized products and services, charging it with violations of theFCPA’s books and records and internal control provisions.301 Theconduct at issue involved Dow’s “fifth-tier subsidiary” and payments itallegedly made to “Indian government officials to register severalagro-chemical products slated for marketing in time for India’s grow-ing season.”302 Again, without making a single allegation as to theabsence of Dow’s good faith, and without alleging in any way that Dowparticipated in or had knowledge of the conduct at issue, the SECcharged Dow with violating the FCPA’s books and records and internalcontrol provisions.303

Whether the FCPA’s books and records and internal controls provi-sions as applied to issuers and indirect subsidiaries and affiliates are inthe public interest is a debatable issue. However, it is beyond disputethat the FCPA passed by Congress and signed by the President specifi-cally states that issuers that demonstrate good faith efforts to causeindirect subsidiaries and affiliates to devise and maintain effectiveinternal controls “shall be conclusively presumed to have compliedwith” the FCPA’s applicable requirements. It is this statute that theenforcement agencies are obligated to enforce. Yet, the Avery and Dow(and numerous other) FCPA enforcement actions charging parentcompanies for the books and records and internal control violations ofindirect subsidiaries or affiliates, in the absence of any allegation thatthe parent company lacked good faith or participated in or had

299. Id. at ¶ 8.300. Id.301. See SEC Files Settled Enforcement Action Against The Dow Chemical Company for

Foreign Corrupt Practices Act Violations, Litigation Release No. 20000 (Feb. 13, 2007), available athttp://www.sec.gov/litigation/litreleases/2007/lr20000.htm.

302. Complaint at ¶ 2, SEC v. The Dow Chem. Co., No. 07-cv-00336 (D.D.C. Feb. 12, 2007).303. See id.


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knowledge of the conduct at issue, seem to be in direct conflict with theFCPA’s specific statutory provision.

Because the Avery and Dow (and numerous other FCPA enforce-ment actions based on this same theory) were not challenged, thistheory of parent company liability, seemingly in direct conflict with theFCPA, has never been subjected to judicial scrutiny. Before anotherparent company is subjected to liability for the books and records andinternal control violations of its indirect subsidiaries or affiliates,should not this strict liability theory have judicial approval?

4. Disgorge What?

The facade of FCPA enforcement is evident not only in connectionwith the FCPA’s substantive provisions, but also in the remedies theenforcement agencies typically pursue in an FCPA enforcement action.The FCPA contains specific penalty provisions for both violations of theanti-bribery and books and records and internal control provisions.304

Yet, during the current facade era of FCPA enforcement, there hasbeen a dramatic shift away from the FCPA’s statutory penalties in nearlyevery enforcement action towards disgorgement, which is the forfei-ture of ill-gotten gains from illegal activity.

The 2004 FCPA enforcement action against ABB Ltd. (“ABB”) isbelieved to be the first use of the disgorgement remedy in an FCPAenforcement action.305 The action involved both a DOJ and SECcomponent.306 The SEC enforcement action, in which the disgorge-ment remedy was pursued, generally alleged that ABB, a Swiss powerand automation technology company, violated the FCPA when its U.S.and foreign based subsidiaries allegedly made illicit payments totalingover $1.1 million to foreign officials in Nigeria, Angola, and Kazakhstanto influence the acts and decisions of those officials in order to assistABB in obtaining and retaining business.307 The SEC’s complaintspecifically alleged that the payments to the various officials “yielded”or “generated” more than $5 million in profits for the company.308

Without admitting or denying the SEC’s allegations, ABB consented toentry of a final judgment that, among other things, ordered it to pay

304. See 15 U.S.C. §§ 78dd-2(g), 78dd-3(e), 78ff (2000).305. See SEC Sues ABB Ltd in Foreign Bribery Case, Litigation Release No. 18775 (July 6,

2004), available at http://www.sec.gov/litigation/litreleases/lr18775.htm.306. See id.307. See id.308. See Complaint at ¶¶ 11, 18, 22, SEC v. ABB Ltd., No. 1:04CV01141 (D.D.C. Jul. 6, 2004),

available at http://www.sec.gov/litigation/complaints/comp18775.pdf .


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“5.9 million in disgorgement.”309

Since the ABB enforcement action in 2004, the SEC has soughtdisgorgement “in virtually every” FCPA enforcement action it hasbrought.310 Use of the disgorgement remedy in these FCPA enforce-ment actions “raises significant questions.”311 As David Weiss notes:

The history surrounding the passage of the FCPA indicates thatit is unclear whether Congress intended that the SEC pursuedisgorgement in FCPA enforcement. This fact alone should atleast give pause to question the normative function of disgorge-ment . . . Neither the reports of the House or Senate floordiscussion of the FCPA or its subsequent amendments, nor the1981 follow-up report from the U.S. General Accounting Officeon corporate bribery and the FCPA, mention disgorgement as aremedy.312

Even with a less than enlightening legislative history, disgorgement ofill-gotten gains would seem to have an intuitive appeal in an FCPAenforcement action charging violations of the anti-bribery provisions,given that a company may have obtained or retained business becauseof the improper payment. However, as demonstrated below, the SEC’suse of the disgorgement remedy has not been limited to cases involvinganti-bribery charges. Rather, the SEC also routinely seeks a disgorge-ment remedy when only charging violations of the FCPA’s books andrecords and internal control provisions.

For instance, in February 2009, the SEC filed a settled civil complaintagainst ITT Corporation (“ITT”), a New York-based multi-industrycompany, charging it with FCPA books and records and internalcontrol violations.313 The complaint alleged that ITT violated theFCPA’s books and records and internal control provisions based onpayments “to Chinese government officials by ITT’s wholly-ownedChinese subsidiary, Nanjing Gould Pumps Ltd. (“NGP”) and that

309. See SEC Litigation Release 18775, supra note 303.310. See UROFSKY & NEWCOMB, supra note 1, at 10.311. See David Weiss, The Foreign Corrupt Practices Act, SEC Disgorgement of Profits, and the

Evolving International Bribery Regime: Weighing Proportionality, Retribution, and Deterrence, 30 MICH.J. INT’L L. 471, 474 (2009).

312. Id. at 496–97.313. See SEC Filed Settled Charges Against ITT Corporation for Violations of the Books and

Records and internal Controls Provisions of the Foreign Corrupt Practices Act, Litigation ReleaseNo. 20896 (Feb. 11, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr20896.htm.


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“[f]rom 2001 through 2005, NGP’s illicit payments to employees ofnumerous Chinese state-owned entities totaled approximately$200,000.”314 Although the complaint does not charge anti-briberyviolations, the SEC nevertheless alleged that the “SOE customersassociated with those illicit payments generated over $4 million in salesto NGP, from which ITT realized improper profits of more than $1million.”315 Despite the lack of an anti-bribery charge, the complaintsought an order requiring ITT “to disgorge profits derived fromcontracts resulting from its inappropriate payments to SOEs during theyears 2001 through 2005” as well as the payment of prejudgmentinterest on those amounts.316 In resolving the matter, ITT, withoutadmitting or denying the allegations, consented to entry of a finaljudgment ordering it to pay “disgorgement of $1,041,112 together withprejudgment interest thereon of $387,538.11” and a $250,000 civilpenalty.317

The ITT enforcement action, just one of many such enforcementactions where the SEC has sought such a disgorgement remedy,demonstrates the increasing trend of the SEC seeking disgorgementremedies in cases only charging books and records and internalcontrols violations. It also demonstrates that the disgorgement remedytypically exceeds the statutory penalty amount.

Non-FCPA disgorgement case law clearly holds that because “disgorge-ment primarily serves to prevent unjust enrichment” a “court mayexercise its equitable power only over property causally related to thewrongdoing.”318 This case law also makes clear that while the remedy ofdisgorgement “may well be a key to the SEC’s efforts to deter othersfrom violating the securities laws . . . disgorgement may not be usedpunitively.”319

It is difficult to see how a disgorgement remedy premised solely onan FCPA books and records and internal controls case is not punitive. Itis further difficult to see how the mis-recording of a payment (apayment that the SEC does not allege violated the FCPA’s anti-briberyprovisions) can properly give rise to a disgorgement remedy. As Urof-sky and Newcomb state: “[w]hether or not a false entry in a company’s

314. See Complaint at ¶ 1, SEC v. ITT Corp., 1:09-CV-00272 (D.D.C. Feb. 11, 2009), availableat http://www.sec.gov/litigation/complaints/2009/comp20896.pdf.

315. Id.316. Id. at ¶ 7.317. See SEC Litigation Release 20896, supra note 311.318. See, e.g., SEC v. First City Fin. Corp. Ltd., 890 F.2d 1215, 1230–31 (D.D.C. 1989).319. Id. (citations omitted).


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books and records (or a failure to implement adequate internalcontrols) truly results in increased profits is open to question.”320

However, “the propriety and legality of this remedy has not beentested in the courts,”321 and to date, “no FCPA defendant has publiclychallenged the SEC on whether disgorgement is appropriate when thesole charge is false books and records.”322 Before the SEC seeksdisgorgement against another company based only on FCPA books andrecords and internal control violations, should not the propriety of thisremedy have judicial approval?

This section has highlighted four untested and dubious legal theo-ries seen with increasing and alarming frequency in FCPA enforcementactions. Yet these four legal theories are just some of the questionableand aggressive legal theories common in FCPA enforcement.323 Be-cause those subject to the FCPA are not in the business of setting legalprecedent, and because of the resolution vehicles typically used toresolve FCPA enforcement actions, these legal theories, and in somecases enforcement theories in direct conflict with the FCPA’s statutoryprovisions, remain untested. It is this feature of the FCPA that distin-guishes FCPA enforcement from nearly every other area of law andwhy, as explained in more detail in Section IV of this article, the facadeof FCPA enforcement matters.

Bareboned, uninformative facts and legal conclusions, and enforce-ment based on untested and dubious legal theories are just two of thepillars that contribute to the facade of FCPA enforcement. The facade ofFCPA enforcement is also present when the same core set of government-alleged facts lead to materially different charges and penalties.

C. Third Pillar: Same Facts, Different Results

If two FCPA enforcement actions were ever carbon-copies of eachother, they would be the December 2007 enforcement action against

320. See UROFSKY & NEWCOMB, supra note 1, at 10.321. See David Weiss, supra note 309, at 486.322. See UROFSKY & NEWCOMB, supra note 1, at 10.323. Other aggressive, untested prosecution theories include: whether U.S. dollar denominated

transactions through correspondent bank accounts in U.S. intermediary banks, whether intended orunintended, “standing alone and without any traditional [U.S.] territorial act, is sufficient to conferU.S. jurisdiction over foreign individuals or entities.” UROFSKY & NEWCOMB, supra note 1, at 14–15. Seealso Winer & Husisian, supra note 239 (“The DOJ and SEC . . . now interpret the knowledgerequirement [of the FCPA] so broadly that they have effectively eviscerated the 1988 statutory changes,thereby raising an important question: Are the DOJ and SEC frustrating the intent of Congress byignoring the reason that Congress amended the FCPA?”).


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Lucent Technologies, Inc. (“Lucent”) and the December 2009 enforce-ment action against UTStarcom, Inc. (“UTSI”). As explained below,both enforcement actions involved telecommunications companies,principally concerned business conduct in China, involved payment ofexcessive travel and entertainment expenses, and were resolved througha DOJ NPA and an SEC settled civil complaint and consent decree.Despite these similarities, the end results were materially different.

Lucent

In December 2007, the DOJ announced that Lucent had “entered anagreement with the Department of Justice and ha[d] agreed to pay a $1million fine to resolve allegations that it violated the Foreign CorruptPractices Act.”324

The agreement was an NPA, which included this statement offacts;325

From at least 2000 to 2003, Lucent provided approximately 315trips for Chinese government officials that included primarilysightseeing, entertainment and leisure. These trips were re-quested and approved with the consent and knowledge of thehighest Lucent China officials and with the assistance of Lucentemployees in the United States, including at corporate head-quarters in Murray Hill, New Jersey. Lucent improperly re-corded expenses for these trips in its books and records andfailed to provide adequate internal controls to monitor theprovision of travel and other things of value to Chinese govern-ment officials.326

According to the statement of facts, these trips included at leastsixty-five visits to the U.S. by “senior level government officials, includ-ing the heads of state-owned telecommunications companies . . . and theleaders of provincial telecommunications subsidiaries.”327 These pre-sale trips lasted for two weeks and included brief stops at certain Lucent

324. See Lucent Technologies Inc. Agrees to Pay $1 Million Fine to Resolve FCPA Allegations,DOJ Release No. 07-1028 (Dec. 21, 2007), available at http://www.justice.gov/opa/pr/2007/December/07_crm_1028.html.

325. Non-Prosecution Agreement from the U.S. D.O.J Crim. Div. to Martin J. Weinstein,Esq., Regarding Lucent Technologies (Nov. 14, 2007), available at http://www.law.virginia.edu/pdf/faculty/garrett/lucent.pdf.

326. Id. app. A at 1–2.327. Id. at 2.


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facilities, but the majority of the trips consisted of visiting Boston, LasVegas, the Grand Canyon and Hawaii “for strictly entertainment, traveland leisure purposes.”328 Nevertheless, the trips were entirely paid forby Lucent at a total expense of $1.3 million.329

Other trips included hosting a Chinese foreign official in Californiafor “two and a half days of sightseeing, entertainment and leisure,”approved by the company “after learning of the past and futurerevenues associated with this customer and [the] official’s decisionmaking role.”330 Another trip included paying for a Chinese “foreignofficial” and his wife and daughter to travel “to Thailand and HongKong for a seven-day vacation” and the planning for this trip indicatedthat the “vacation was aimed at influencing the [foreign official] and‘strengthening the customer relationship’ to expand the businessrelationship with the customer.”331 Other trips included post-sale visitsdubbed “factory tours” which “consisted primarily or entirely of sightse-eing to locations such as Disneyland, Los Angeles, San Francisco,Universal Studios, the Grand Canyon, Las Vegas, tours of WashingtonD.C., tours of New York City, and stop-overs in Hawaii.”332 According tothe statement of facts, these trips typically lasted fourteen days, costLucent between $25,000 – $55,000 per trip, and the officials received a$500 to $1,000 a day in “per diem.”333

The statement of facts describes yet additional trips by “foreignofficials” paid for by the company and cites internal company e-mailssuggesting that the “foreign official’s” employer was a “very special casein light of the fact that Lucent had already received $50 million in salesfrom the company and additional business opportunities totaling $2billion – $3 billion existed for the future.”334

The statement of facts also indicates that Lucent: (i) “paid or offeredto pay for educational opportunities for relatives or associates ofChinese government officials, some of whom were in a position toinfluence China’s use of Lucent-compatible technologies;” (ii) “ap-proved payments totaling over $71,000 to cover the tuition and livingexpenses of an employee of a Chinese government ministry, who wasobtaining a master’s degree in international management” when that

328. Id.329. Id. at 2–3.330. Id. at 3.331. Id.332. Id. at 4–5.333. Id. at 5.334. Id. at 6.


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employee was “an assistant to a committee chairman at the ministry”and the “committee was at least partially responsible for choosingwhich mobile telecommunications platform China would adopt;” (iii)paid, upon the request of a “foreign official,” approximately $22,000 sothat the individual could obtain an MBA; and (iv) “provided a paidinternship to the daughter of a Chinese government official working atthe Chinese embassy in the United States” because “it [was] veryimportant for Lucent to continue building a good relationship with theChinese embassy, which has close ties to leaders in China when it comesto wireless standards and vendor selections.”335

The SEC’s settled civil complaint and consent decree concerned thesame core set of facts, but provided a bit more specificity in that italleged that “[f]rom at least 2000 to 2003, Lucent spent over $10million for approximately 1,000 Chinese officials” employed by “govern-ment enterprises” that were “either entities to which Lucent wasseeking to sell its equipment and services or existing Lucent customers”to travel to the U.S. and elsewhere for predominately leisure pur-poses.336 The SEC complaint alleged that these “foreign officials” wereassociated with contracts Lucent obtained “worth a reported $428million,” a customer “Lucent estimated was worth $500 million inrevenues in potential business,” a contact “valued at $23 million” and acustomer with which Lucent had “$2–3 billion in potential businessopportunities.”337

The SEC release accompanying the settled civil complaint indicatesthat Lucent agreed to settle the matter, without admitting or denyingthe allegations, by paying $1.5 million in civil penalties.338

UTStarcom

In December 2009, the DOJ announced that UTSI had “entered anagreement with the Department of Justice, agreeing to pay a $1.5million fine for violations of the Foreign Corrupt Practices Act byproviding travel and others things of value to foreign officials, specifi-cally, employees at state-owned telecommunications firms in the Peo-

335. Id. at 8–9.336. See Complaint at ¶ 1, SEC v. Lucent Tech. Inc., No. 1:04CV01141 (D.D.C. Dec. 21,

2007), available at http://www.sec.gov/litigation/complaints/comp18775.pdf.337. Id. at ¶¶ 15, 20, 23.338. See SEC Files Settled Action Against Lucent Technologies Inc. in Connection With

Payments of Chinese Officials’ Travel and Entertainment Expenses; Company Agrees to Pay $1.5Million Civil Penalty, SEC Litigation Release No. 20414 (Dec. 21, 2007), available at http://www.sec.gov/litigation/litreleases/2007/lr20414.htm.


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ple’s Republic of China.”339

The agreement, like the Lucent agreement, was an NPA. Its state-ment of facts read:340

Between 2002 and 2007, UTSI spent nearly $7 million onapproximately 225 trips for customer employees pursuant totraining provisions in systems contracts entered into betweenUTS-China and government-controlled municipal or provincialtelecommunications companies.341

According to the statement of facts, these trips, like the Lucent trips,were to places such as Hawaii, Las Vegas and New York, and companysenior management believed that these trips were “necessary in orderto obtain and retain the systems contracts.”342 The statement of factsdoes not specify the dollar value associated with these contracts, but itdoes state that China historically had been “UTSI’s most importantmarket.”343 In fact, unlike the Lucent statement of facts, which is a fullnine pages, the statement of facts in the UTSI NPA is approximatelytwo pages. This enforcement action could thus also support the firstpillar of the facade of FCPA enforcement in that it involved bareboneduninformative facts and legal conclusions.

The SEC’s settled civil complaint and consent decree against UTSIconcerned the same core set of facts, but like the Lucent matter,contained additional allegations that “UTSI provided other gifts andbenefits to foreign government customers, including paying for themto attend executive training programs at U.S. universities” and thatUTSI provided “foreign government customers or their family mem-bers with work visas and purportedly hired them to work for UTSI inthe U.S., when in reality they did not work for the company.”344

The SEC settled civil complaint also alleged that: (i) “UTSI’s generalmanager in Thailand spent nearly $10,000 on French wine as a gift to

339. See Press Release, DOJ, UTStarcom Inc. Agrees to Pay $1.5 Million Penalty for Acts ofForeign Bribery in China (Dec. 31, 2009), available at http://www.justice.gov/opa/pr/2009/December/09-crm-1390.html.

340. Non-Prosecution Agreement from the U.S. DOJ Crim. Div. to Leo Cunningham, Esq.,regarding UTStarcom, Inc. (Dec. 31, 2009), available at http://www.law.virginia.edu/pdf/faculty/garrett/utstarcom.pdf.

341. Id. at app. A at 2.342. Id. at app. A at 2.343. Id. at app. A at 1.344. Complaint at ¶. 2, SEC v. UTStarcom, Inc., No. CV 09-6094 (N.D. Cal.), available at,

http://www.sec.gov/litigation/complaints/2009/comp21357.pdf.


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agents of the government customer, including rare bottles that costmore than $600 each” and that the manager “also spent $13,000 forentertainment expenses for the same customer in an attempt to securethe contract;” (ii) a UTSI employee authorized payment to a Mongo-lian company pursuant to a purported consulting agreement whileknowing that the Mongolian company intended to use a portion of themoney to “make payments to at least one Mongolian governmentofficial to help UTSI obtain a favorable ruling in a dispute over itslicense”; and (iii) “UTSI’s former Executive Vice President and CEO ofUTS-China authorized a $200,000 payment to a Chinese companypursuant to a purported consulting agreement” when “[i]n reality itwas a sham consulting company and the payment was made as part ofan effort to obtain a contract from a Chinese government customer.”345

The SEC release accompanying the settlement indicates that UTSIagreed to settle the matter, without admitting or denying the allega-tions, by paying $1.5 million in civil penalties.346

Thus, both the Lucent and UTSI matters, per the government’sstatements of facts and allegations, involved payment of money andother “things of value” (primarily excessive travel and entertainmentexpenses) to “foreign officials” to “obtain or retain business.”

Yet, the outcomes of these carbon-copy enforcement actions werematerially different. UTSI settled its matter by agreeing to pay $3million in total fines and penalties for FCPA anti-bribery, books andrecords and internal control violations. However, Lucent settled itsmatter by agreeing to pay $2.5 million in total fines and penalties formerely FCPA books and records and internal controls violations—thatis, no anti-bribery violations. This, despite the fact that, per the govern-ment’s statement of facts and allegations, Lucent sponsored more tripsthan UTSI (315 compared to 225) and spent more money on theproblematic trips than UTSI ($10 million compared to $7 million) toinfluence more foreign officials in the hopes of winning billion dollarand multi-million dollar contracts. Also relevant is that UTSI wascharged with anti-bribery violations and paid a higher combinedfine/penalty amount than Lucent based on less severe allegations,despite the fact that UTSI, per the DOJ’s release, voluntarily disclosedthe conduct at issue. Notably, the DOJ’s Lucent release is silent as tovoluntary disclosure.

345. Id. at ¶¶ 22-28.346. See SEC Charges California Telecom Company with Bribery and Other FCPA Violations,

Litigation Release No. 21357 (Dec. 31, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21357.htm.


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The fact that the carbon-copy Lucent and UTSI enforcement actionsresulted in materially different charges and penalties contributes to thefacade of FCPA enforcement by suggesting that FCPA charging deci-sions are not based solely on the facts and law, but less transparentfactors as well.

Both the Lucent and UTSI enforcement actions could also supportthe second pillar of the facade of FCPA enforcement given that bothactions involved employees of Chinese SOEs, and thus the individualsreceiving the “things of value” were “foreign officials” only under theenforcement agencies’ untested interpretation of that term.

Thus far, the pillars contributing to the facade of FCPA enforcementhave primarily focused on enforcement actions where the conduct atissue is arguably not even an FCPA violation. That there is no judicialscrutiny of these enforcement actions is troubling. However, even moretroubling and most alarming is the fourth pillar that contributes to thefacade of FCPA enforcement and that is where seemingly clear-cutinstances of corporate bribery, per the government’s own allegations,are resolved without FCPA anti-bribery charges.

D. Fourth Pillar: Bribery, Yet No Bribery

The Principles of Prosecution state that “[p]rosecutors may enterinto plea agreements with corporations”347 but that “[i]n negotiatingplea agreements with corporations, as with individuals, prosecutorsshould generally seek a plea to the most serious, readily provableoffense charged.”348 In the most high-profile and egregious instancesof corporate bribery, the DOJ seemingly violated this principle byagreeing to plea agreements with Siemens and BAE Systems (“BAE”)that did not include FCPA anti-bribery charges. Resolution of theseenforcement actions, which—per the government’s allegations—involved clear-cut instances of corporate bribery, certainly suggeststhat, contrary to rule of law principles, certain companies in certainindustries are essentially immune from FCPA anti-bribery charges.Thus, these enforcement actions further contribute to the facade ofFCPA enforcement.

347. See DOJ Office of Pub. Affairs, Principles of Federal Prosecution of Business Organiza-tions, Title 9, Chp. 9-28.000, 9-28.1300(B), available at http://www.justice.gov/opa/documents/corp-charging-guidelines.pdf.

348. Id. at 9–28.1300(A).


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Siemens

In December 2008, the DOJ announced the filing of a criminalinformation against Siemens Aktiengesellschaft (“Siemens”).

Despite being a German company with principal offices in Berlinand Munich, Siemens became subject to the FCPA because, sinceMarch 2001, its shares have been listed on the New York StockExchange, making it an “issuer” for purposes of the FCPA.349 Further-more, as described below, certain Siemens subsidiary companies withoffices in the U.S. participated in the bribery scheme, thus providing anindependent U.S. nexus for FCPA anti-bribery charges.350

According to the DOJ release announcing the charges, over asix-year period:

Siemens AG made payments totaling approximately $1.36 bil-lion through various mechanisms. Of this amount, approxi-mately $554.5 million was paid for unknown purposes, includ-ing approximately $341 million in direct payments to businessconsultants for unknown purposes. The remaining $805.5 mil-lion of this amount was intended in whole or in part as corruptpayments to foreign officials through the payment mecha-nisms, which included cash desks and slush funds.351

The DOJ’s Acting Assistant Attorney General stated in the release thatthe charges “make clear that for much of its operations across theglobe, bribery was nothing less than standard operating procedure forSiemens.”352 The Director of the SEC’s Division of Enforcement statedin the release that the “pattern of bribery by Siemens was unprec-edented in scale and geographic reach” and the “corruption involvedmore than $1.4 billion in bribes to government officials in Asia, Africa,Europe, the Middle East and the Americas.”353

At the press conference announcing the charges, senior governmentenforcement officials stated that “Siemens engaged in a systematic andwidespread effort to make and hide hundreds of millions of dollars in

349. See Complaint at 2, U.S. v. Siemens Aktiengesellschaft (D.D.C. Dec. 12, 2008), availableat http://www.justice.gov/opa/documents/siemens-ag-info.pdf.

350. See id. at 6.351. See Press Release, DOJ, Siemens AG and Three Subsidiaries Plead Guilty to Foreign

Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines (Dec.15, 2008), available at http://www.justice.gov/opa/pr/2008/December/08-crm-1105.html.

352. Id.353. Id.


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bribe payments across the globe;” Siemens employees “sometimescarried . . . cash in suitcases across international borders to pay bribes;”“Siemens received billions of dollars worth of government contracts”because of these payments; Siemens’ conduct was “egregious,” “stagger-ing,” “brazen,” and “systematic;” and that there existed a “corporateculture in which bribery was tolerated and even rewarded at the highestlevels of the company.”354

The egregious nature of Siemens’ conduct is specifically alleged in thecriminal information. Among other allegations, the information detailshow Siemens paid out, through various mechanisms, $805.5 million in“corrupt payments to foreign officials,” including: (i) payments made byvarious subsidiaries, including those with offices in the U.S., to “purportedbusiness consultants, knowing that at least some or all of those fundswould be passed along to foreign government officials;” (ii) moneywithdrawn from “cash desks within Siemens’ offices” for “corrupt pay-ments;” and (iii) “slush funds to generate cash for corrupt payments.”355

As to the amount of business Siemens obtained or retained becauseof these corrupt payments to “foreign officials,” the DOJ’s sentencingmemorandum states that calculating a traditional loss figure under theSentencing Guidelines “would be overly burdensome, if not impos-sible” given the “literally thousands of contracts over many years.”356

The fine range under the Sentencing Guidelines for the conductcharged in the information was $1.35 billion to $2.70 billion.357

Based on the above information, the Siemens bribery scheme wouldseem to be a clear-cut case of an FCPA anti-bribery violation. Yet, theDOJ’s criminal information against Siemens charges only FCPA inter-nal control and books and records violations. While the DOJ also didcharge Siemens S.A. – Argentina, Siemens Bangladesh Limited andSiemens S.A. – Venezuela with conspiracy to violate the FCPA’s anti-bribery provisions and/or violating the FCPA’s books and records andinternal control provisions,358 Siemens, the entity that orchestrated theentire bribery scheme according to the DOJ’s allegations, escaped themore serious criminal anti-bribery charges.359 A key factor the DOJ

354. Id.355. See Siemens Complaint, supra note 348, at 23.356. Sentencing Memorandum at 11, United States v. Siemens Aktiengesellschaft (D.D.C.

Dec. 12, 2008) available at http://www.justice.gov/opa/documents/siemens-sentencing-memo.pdf.357. See id. at 12.358. DOJ Siemens Press Release, supra note 350.359. The SEC, which also had jurisdiction over Siemens given its “issuer” status also filed a

settled civil complaint against the company alleging violations of the FCPA’s anti-bribery provi-


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considered in resolving the case against Siemens in the way it did wasthe “collateral consequences” that could have resulted from criminalanti-bribery charges including the “risk of debarment and exclusionfrom government contracts.”360

The DOJ release notes that Siemens, along with its above referencedsubsidiaries, agreed to pay $450 million in criminal fines.361 The SECrelease notes that Siemens, without admitting or denying the allega-tions, agreed to pay $350 million in disgorgement.362 The combined$800 million in U.S. fines and penalties, a record in an FCPA case, wasin addition to fines and penalties Siemens paid to settle Germanenforcement actions based on the same core conduct.363 Even so, thetotal amount of fines and penalties Siemens paid in the U.S. issubstantially less than the fine range allowed under the SentencingGuidelines, substantially less than the amount of business Siemensobtained or retained because of its corrupt conduct, and substantiallyless than the bribe amounts Siemens paid.

Although Siemens dodged the more serious criminal FCPA anti-bribery charges, the company clearly did not escape liability for its“egregious,” “staggering,” and “brazen,” conduct. Yet the lack of crimi-nal FCPA anti-bribery charges against a company that engaged in a“pattern of bribery” “unprecedented in scale and geographic reach,”and a company in which “bribery was nothing less than standardoperating procedure” is startling. If ever a company deserved to beprosecuted for FCPA anti-bribery violations, it would seem to Siemens.Yet, the Siemens matter is not the only enforcement action contribut-ing to this fourth pillar of the facade of FCPA enforcement.

BAE

For years, BAE Systems (“BAE”), a British defense contractor, hadbeen under intense scrutiny concerning allegations that it had engaged

sions, as well as the FCPA’s books and records and internal control provisions. See SEC Files SettledFCPA Act Charges Against Siemens AG for Engaging in Worldwide Bribery with Total Disgorge-ment and Criminal Fines of Over $1.6 Billion, Litigation Release No. 20829 (Dec. 15, 2008),available at http://www.sec.gov/litigation/litreleases/2008/lr20829.htm.

360. See Sentencing Memorandum, supra note 355, at 13.361. DOJ Siemens Press Release, supra note 350.362. See Litigation Release No. 20829, supra note 358.363. Press Release, DOJ, Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt

Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines (Dec. 15,2008), available at http://www.justice.gov/opa/pr/2008/December/08-crm-1105.html.


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in widespread bribery and corruption.364

In February 2010, the DOJ announced the filing of a criminalinformation against BAE. Among other allegations, the informationcharges that BAE served as the “prime contractor to the U.K. govern-ment following the conclusion of a Formal Understanding between theU.K. and the Kingdom of Saudi Arabia (“KSA”)” in which BAE soldseveral Tornado and Hawk aircraft, “along with other military hard-ware, training and services” to the U.K. government, which sold thematerial and services to the Saudi government.365 The informationrefers to these frequent arrangements as the “KSA Fighter Deals.”366

In connection with these deals, the information alleges that “BAEprovided substantial benefits to one KSA public official, who was in aposition of influence regarding the KSA Fighter Deals (the “KSAOfficial”), and to the KSA Official’s associates.”367 According to theindictment, BAE “provided these benefits through various paymentmechanisms both in the territorial jurisdiction of the U.S. and else-where.” This allegation is important from an FCPA perspective becausethe FCPA only applies to a company like BAE (a foreign company withno shares listed on a U.S. exchange) if conduct in furtherance of thebribery scheme has a U.S. nexus.368

The information contains additional allegations that clearly demon-strate that BAE’s bribery scheme had a U.S. nexus. For instance, theinformation alleges that BAE “provided support services to [the] KSAOfficial while in the territory of the U.S.” and that these benefits“included the purchase of travel and accommodations, security ser-vices, real estate, automobiles and personal items.”369 The informationalleges that a single BAE employee during one year submitted over $5million in invoices for benefits provided to the KSA Official.370

The information also alleges that BAE “used intermediaries and shell

364. See e.g., Frontline: Black Money (PBS television broadcast Apr. 7, 2009), available athttp://www.pbs.org/wgbh/pages/frontline/blackmoney/view/.

365. Complaint at ¶ 41, United States v. BAE Sys., No. 1:10-cr-00035-JDB (D.D.C. Feb. 4, 2010),available at http://www.justice.gov/criminal/fraud/fcpa/cases/docs/02-01-10baesystems-info.pdf.

366. Id.367. Id. at ¶ 43.368. 15 U.S.C. § 78dd-3. BAE does have a wholly owned U.S. subsidiary, BAE Systems, Inc. a

company headquartered in Rockville, Maryland, and thus a “domestic concern” under the FCPAand independently subject to the FCPA regardless of any U.S. nexus test being met. SeeComplaint, supra note 364, at ¶ 2. However, the information alleges that none of the facts inthe information “relate or represent any conduct” of BAE Systems, Inc. See id.

369. BAE Complaint, supra note 364, at ¶ 44.370. Id. at ¶ 45.


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entities to conceal payments to certain advisors who were assisting inthe solicitation, promotion and otherwise endeavoring to secure theconclusion or maintenance of the KSA Fighter Deals.”371 Specifically,the information alleges that “in connection with the KSA Fighter Deals,BAE agreed to transfer sums totaling more than £10,000,000 and morethan $9,000,000 to a bank account in Switzerland controlled by anintermediary.” According to the information, “BAE was aware thatthere was a high probability that the intermediary would transfer partof these payments to the KSA Official.”372 “Though unnamed in theDOJ information, the Saudi intermediary is widely reported” to beSaudi Prince Bandar bin Sultan—at the time the Saudi Ambassador tothe U.S.373

The above language (i.e., a company being aware that there was a“high probability” that an intermediary would transfer improper pay-ments to a foreign official) is frequently used by the DOJ in chargingcompanies with FCPA violations. For instance, in the InVision FCPAenforcement action, the “investigations by the DOJ and SEC revealedthat InVision, through the conduct of certain employees, was aware of ahigh probability that its agents or distributors” in Thailand, China andthe Philippines “had paid or offered to pay money to foreign officials orpolitical parties in connection with transactions or proposed transac-tions for the sale by InVision of its airport security screening ma-chines.”374

Yet, the DOJ’s criminal information against BAE merely charges onecount of conspiracy; it lacks any FCPA anti-bribery charges. Moreover,the conspiracy charge relates only to “making certain false, inaccurateand incomplete statements to the U.S. government and failing tohonor certain undertakings given to the U.S. government, therebydefrauding the United States” and “caus[ing] to be filed export licenseapplications with [various U.S. government entities] that omitted a

371. Id. at ¶ 46.372. Id. at ¶ 47.373. MILLER & CHEVALIER , BAE Settles Protracted, Controversial Bribery Case with U.S. and U.K.

Authorities (Feb. 11, 2010), http://www.millerchevalier.com/Publications/MillerChevalierPublica-tions?find�26504. As noted in the alert, “[t]wo years ago, the U.S. television program Frontlinere-broadcast an earlier interview with Prince Bandar in which he shrugged off $50 billion ofcorrupt payments in a hypothetical $400 billion transaction with a ‘so what?’, adding that this was,in his view, ‘human nature.’” See Frontline: Black Money, supra note 363.

374. See Press Release, DOJ, InVision Technologies Inc. Enters Into Agreement with theUnited States (Dec. 6, 2004), available at http://www.justice.gov/opa/pr/2004/December/04_crm_780.htm.


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material fact” concerning fee and commission payments.375 Among thefalse statements BAE is alleged to have made to the U.S. government isits commitment to not knowingly violate the FCPA.376 That is the onlymention of the FCPA in the information despite the above allegationsconcerning the KSA Fighter Deals—facts that clearly implicate theFCPA’s anti-bribery provisions.

The DOJ release accompanying announcement of the informationstates that BAE is “expected to plead guilty” and pay “a $400 millionfine.”377 Thus, BAE clearly did not escape liability for its egregiousconduct, but the lack of FCPA anti-bribery violations against BAE is justas startling as in the Siemens matter.

Under the rule of law, facts are to be applied to the law, and the law isto be applied equally to all those subject to the law.378 However,Siemens and BAE are no ordinary companies. Siemens is a major U.S.government contractor and its diverse business units have contractswith a wide range of U.S. government agencies, including Departmentof Defense, Department of the Air Force, Department of the Army,Department of Transportation, Department of Health and HumanServices, Department of Energy, Department of Commerce, Depart-ment of Housing and Urban Development, and the General ServicesAdministration.379 The DOJ stated specifically in its sentencing memo-randum that it chose to resolve the Siemens matter the way it did toavoid “collateral consequences” that could have resulted from criminalFCPA anti-bribery charges including the “risk of debarment and exclu-sion from government contracts.”380 Likewise, BAE is a major U.S.government contractor. The DOJ criminal information specificallystates that in “2008, BAE was the largest defense contractor in Europeand the fifth largest in the . . . U.S. as measured by sales.”381

The message the DOJ sent in the Siemens and BAE enforcementactions is that certain companies in certain industries, particularly thosethat sell certain products to certain customers, are essentially immunefrom FCPA anti-bribery charges. The Siemens and BAE enforcementactions thus also contribute to the facade of FCPA enforcement.

375. Id. at ¶ 5.376. Id. at ¶ 9.377. See Press Release, DOJ (Feb. 5, 2010) (on file with author).378. Robert Stein, Rule of Law: What Does it Mean? 18 MINN. J. INT’L L. 292, 298–99 (2009).379. See Siemens . . . the Year After, FCPA PROFESSOR BLOG (Dec. 14, 2009, 12:12 EST),

http://fcpaprofessor.blogspot.com/2009/12/siemens-year-after.html.380. See Sentencing Memorandum, supra note 355, at 11.381. See Press Release, supra note 377, at ¶ 1.


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V. WHY THE FACADE OF FCPA ENFORCEMENT MATTERS

This article first provided an overview of FCPA enforcement anddemonstrated how FCPA enforcement actions are typically resolvedthrough resolution vehicles subject to little or no judicial scrutiny. Thisarticle then explored the various “carrots” and “sticks” motivatingFCPA defendants to accept these resolution vehicles notwithstandinguntested and dubious enforcement theories and noted that resolutionvehicles in DOJ or SEC enforcement actions do not necessarily reflectthe triumph of one party’s legal position over the other. Because ofthese dynamics, FCPA enforcement is often a facade, and this articlethen highlighted four pillars that contribute to the facade of FCPAenforcement. This article now concludes by demonstrating why thefacade of FCPA enforcement matters and why judicial scrutiny of FCPAenforcement actions is in the public interest and of vital importance tothose subject to the FCPA as well as the broader marketplace.

As a matter of general jurisprudence, it is troubling when any area oflaw largely develops outside of the judicial process. The judicial processfacilitates the thoughtful presentation of opposing views, mitigatingfacts and circumstances, and potential defenses in an adversarialproceeding culminating in an impartial decision-maker weighing thefacts and applying the law in rendering a decision in a transparentmanner.

These fundamental hallmarks are largely missing in FCPA enforce-ment. Rather, the enforcement agencies, occupying positions of advo-cate, judge, and rule-maker, induce settlement through the “carrots”and “sticks” they possess even though many of the enforcement theo-ries leading to these resolutions are untested and dubious, and in somecase in direct conflict with the FCPA’s statutory provisions. The endresult is resolution vehicles that do not facilitate the thoughtful presen-tation of opposing views, mitigating facts and circumstances, potentialdefenses, or testing of legal theories. Yet, these resolution vehicleslargely define the FCPA. When the parameters of any law developthrough such an opaque process, public confidence in that law, as wellas the rule of law, suffers.

Even more troubling is that the FCPA is the most important U.S. lawgoverning international commerce. For much of the FCPA’s history,the statute was viewed as a law that largely applied to large companies—often resource extraction companies—doing business in emergingmarkets. However, with the increase in globalization and the saturationof domestic markets, it is no longer just large resource extractioncompanies that are doing business in overseas markets. If the increasein FCPA enforcement over the last decade has taught anything, it is that


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large and small companies in all industries face FCPA risk and expo-sure.382 Further, given the FCPA’s broad reach and applicability tocertain foreign companies and citizens, the facade of FCPA enforce-ment is a global issue affecting a broad segment of the marketplace.

These are general reasons why the facade of FCPA enforcementmatters are troubling enough in isolation. Yet these reasons pale incomparison to the specific reasons why the facade of FCPA enforce-ment matters. This article concludes by identifying three specificreasons why the facade of FCPA enforcement matters: the absurdity ofresolution vehicles serving as de facto case law; the breeding of overcom-pliance; and the increasing frequency by which other nations aremodeling enforcement of their own bribery laws on U.S. enforcementmethods and theories.

A. The Absurdity of FCPA “Case Law”

The facade of FCPA enforcement results in the absurd result thatprivately negotiated settlements subject to little or no judicial scrutinyserve as de facto case law. This negative byproduct of the facade of FCPAenforcement is problematic to those subject to the FCPA who face atriple legal “whammy” in trying to comply with the law in an aggressiveenforcement environment.

The first legal “whammy” is that several of the FCPA’s key elementsare vague and ambiguous. In a rare instance in which an FCPAenforcement action did result in a judicial decision, the Kay courtfound the key “obtain or retain business” element of an FCPA anti-bribery violation to be vague and ambiguous.383 As to the FCPA’s key“foreign official” element, the DOJ has publicly acknowledged thatthere can be difficult assessments of who qualifies as a “foreign official”under the FCPA.384 Should this element ever be subjected to judicialscrutiny, it is likely that a court would find it to be vague and ambiguousas well.

The second legal “whammy” is the dearth of substantive FCPA caselaw. A judge put in the rare position of deciding an FCPA issue recentlynoted the “surprisingly few decisions throughout the country on the

382. FCPA enforcement actions in 2009 ranged from KBR/Halliburton – an oil and gascompany – concerning conduct in Nigeria to Nature’s Sunshine Products Inc., - a nutritionalsupplement company – concerning conduct in Brazil. See DOJ Press Release, supra note 134.

383. See Kay, 359 F.3d at 743–44.384. See WRAGEBLOG, supra note 240.


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FCPA over the course of the last thirty years.”385 FCPA practitioners,who must tell clients that, in many cases, the FCPA means what theenforcement agencies say it means, have noted the lack of substantiveFCPA case law on numerous occasions as demonstrated below:

Although the [FCPA] was enacted more than thirty years ago,there is little case law addressing many of the FCPA’s mostimportant elements.386 One of the problems with trying to naildown the requirements of the FCPA is that there is so littlejudicial precedent because most companies and individualschoose to avoid the embarrassment and expense of trial.387

Because of the dearth of adjudicated court decisions relatedto the FCPA, settlement agreements containing compromisesthat may be acceptable to both sides are also frequently cited asprecedents, including by U.S. enforcement agencies. As a re-sult, terms accepted as conditions of settlement become part ofFCPA ‘jurisprudence,’ but may not always reflect how a court orjury would have decided the same issue.388

Unfortunately . . . some of the government’s more interest-ing theories have been announced in settled cases, providingno opportunity to test the validity of those theories in court.389

Against the backdrop of a largely vague and ambiguous statute and adearth of substantive FCPA case law, the gap is filled with the resolutionvehicles typically used to resolve FCPA enforcement actions. The third“whammy” then is that the “gap filler” is a resolution vehicle that is:privately negotiated; entered into in the context of the enforcementagencies possessing substantial “carrots” and “sticks;” motivated byissues other than law and facts; and subject to little or no judicialscrutiny.

Although FCPA resolution vehicles are not legal precedent, andalthough they do not necessarily represent the triumph of one party’slegal position over the other, the unfortunate reality in the FCPA

385. See U.S. v. Kozeny, 493 F.Supp. 2d 693, 697 (S.D.N.Y. 2007).386. Kenneth Winer & Gregory Husisian, Recent Opinion Sheds Light on the Relevance of Due

Diligence to the FCPA’s ‘Knowledge’ Requirement, BNA CORP. ACCOUNTABILITY REP. (Nov. 13, 2009),http://www.foley.com/publications/pub_detail.aspx?pubid�6597.

387. WINER & HUSISIAN, supra note 239.388. MILLER & CHEVALIER, supra note 372.389. UROFSKY & NEWCOMB, supra note 1.


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context is that they do serve as de facto case law.390 In fact, theenforcement agencies specifically endorse viewing NPAs and DPAs asevidence of improper conduct. For instance, the GAO report, de-scribed in Section II of this article, includes a DOJ letter explaining, inDOJ’s view, why NPAs/DPAs “are beneficial” including the statementthat “DPAs and NPAs benefit the public and industries by providingguidance on what constitutes improper conduct.”391

While FCPA resolution vehicles may, in certain instances, representevidence of improper conduct, that conclusion is not warranted inmost FCPA enforcement actions given the resolution vehicles areprivately negotiated agreements based on untested and dubious enforce-ment theories, subject to little or no judicial scrutiny, and executedunder circumstances in which one of the signatories to the agreement(i.e., the enforcement agency) wields a massive, sharp stick.

Even if one accepts the premise that FCPA resolution vehicles doalways reflect conduct that actually violates the law—and thus shouldserve as de facto case law to which those subject to the FCPA shouldconform—the additional absurdity then is that the de facto case law islargely opaque and thus not illuminating. As discussed in Section IIIabove, a common feature of FCPA resolution vehicles is that they oftencontain little more than bare-bones, uninformative facts and legalconclusions. For instance, it is difficult to see how one could gleananything as to the meaning of the key “foreign official” element fromthe CCI or Lucent enforcement actions, given that the resolutionvehicles used to resolve these FCPA enforcement actions lack anyclarity or guidance on this key element.

Compounding the problem of FCPA resolution vehicles serving as defacto case law is that seemingly carbon-copy facts lead to materiallydifferent results, as demonstrated in Section III above when discussingthe Lucent and UTSI FCPA enforcement matters.

Even if FCPA resolution vehicles should be viewed as de facto case law,it is incumbent on the enforcement agencies to provide sufficientclarity and guidance in the resolution vehicles as to the specific factsand circumstances that support essential elements of the FCPA provi-sions charged. For instance, what are the specific facts and circum-stances leading the enforcement agency to conclude that a seemingly

390. See The Foreign Corrupt Practices Act: Enforcement Trends in 2010 and Beyond , JONES DAY (Jan.2010), http://www.jonesday.com/newsknowledge/publicationdetail.aspx?publication�7005 (“Thebest method for predicting future enforcement is to undertake a thorough analysis of past FCPAinvestigations, prosecutions, and settlements.”).

391. See GAO-10-110, supra note 97.


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profit-seeking commercial enterprise with shareholders is neverthelessan “instrumentality” of a foreign government and that therefore all ofits employees are “foreign officials” under the FCPA? Similarly, whatare the specific facts and circumstances to support the theory that anattenuated payment had the actual or intended cause-and-effect nexusto a specific identified business opportunity necessary to support theFCPA’s “obtain or retain business” element, as interpreted in Kay?

The absurdity of FCPA resolution vehicles serving as de facto case lawis just one direct result of the facade of FCPA enforcement and why thefacade of FCPA enforcement matters. Yet this absurdity leads to anequally absurd result and that is the tendency of businesses subject tothe FCPA to model FCPA compliance policies and procedures, not onwhat the law actually says, but rather on what the enforcement agenciessay the law says—to the extent one can extract such guidance from thetypical resolution vehicle used to resolve an FCPA enforcement action.Thus, the facade of FCPA enforcement also matters because it breedsovercompliance.

B. The Breeding of Overcompliance

Any company conducting business or seeking business opportunitiesin a foreign market should address legal risk and develop and imple-ment effective FCPA compliance policies and procedures specificallytailored to the company’s unique FCPA risk profile. However, thefacade of FCPA enforcement has bread overcompliance because mostrisk-averse companies calibrate FCPA compliance policies and proce-dures to whatever legal signpost may be gleaned from a typical FCPAresolution vehicle. However, these vehicles, as discussed throughoutthis article, are not subject to any meaningful judicial scrutiny and donot, because of the “carrots” and “sticks” which nudge FCPA defen-dants to accept these vehicles, necessarily reflect the triumph of oneparty’s legal position over the other. Yet companies nevertheless cali-brate FCPA compliance to these resolution vehicles.

The facade of FCPA enforcement also contributes to overcompli-ance by prompting risk-averse companies to reflexively launch expen-sive and time-consuming internal investigations when the allegedconduct at issue may not even violate the FCPA.

Compliance based on the law is wise and cost-effective from thestandpoint of reducing legal exposure. However, compliance basedsolely on an enforcement agency’s untested or dubious interpretationof a law is wasteful and diverts limited corporate resources from othervalue-added endeavors. The substantial and wasteful costs that flowfrom the facade of FCPA enforcement are discussed below.


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Much has been written how statutes with uncertain terms anduncertain defenses, coupled with sparse judicial interpretation, canresult in overdeterrence.392 When the statute with uncertain terms anddefenses is a criminal statute, such as the FCPA, the risk of overcompli-ance is greatest. As Professor Miriam Baer (an individual with DOJ,private practice, and in-house compliance experience393) notes:

Because the current corporate criminal liability standard is sobroad and the collateral consequences of a criminal indictmentare so devastating, entities will attempt to avoid formal chargesex ante by investing in ‘compliance’ products intended to im-press prosecutors in the future, even if these programs aremore costly than effective. Risk averse corporate managers mayfurther attempt to avoid entity-based criminal liability by declin-ing beneficial investments simply because they seem too risky.394

The FCPA is “Exhibit A” for how a criminal law with vague terms anddefenses, coupled with little judicial scrutiny can result in overcompli-ance. During the facade era of FCPA enforcement, FCPA compliancehas exploded. Seemingly every major law and accounting firm hasFCPA-specific practice groups and an entire compliance industry hassuddenly appeared on the business landscape. These groups are effec-tively able to market and sell their FCPA compliance services tobusiness consumers across a wide industry spectrum.395 Seemingly lostin the aggressive marketing of FCPA Inc., however, is that many of thecompliance services are based merely on the enforcement agencies’

392. See, e.g., Mark Lillie & D. Joseph Piech, State Price Gouging Legislation: ComplianceDifficulties and Counterproductive Overdeterrence, THE ENERGY ANTITRUST NEWS (Fall 2009), available athttp://www.kirkland.com/sitecontent.cfm?contentID�223&itemId�2857 (“By combining uncer-tain standards and unclear defenses with significant potential exposure, many price gougingstatutes create a serious risk of overdeterrence.”).

393. See Biography of Miriam Baer, THE BROOKLYN LAW SCHOOL, http://www.brooklaw.edu/Faculty/Directory/FacultyMember/Biography.aspx?id�miriam.baer (last visited Aug. 12, 2010).

394. Miriam Baer, Insuring Corporate Crime, 83 IND. L.J. 1035, 1036 (2008), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id�982594.

395. See Steven Pearlstein, Cashing in on Corruption, WASHINGTON POST, April 25, 2008, availableat http://www.washingtonpost.com/wp-dyn/content/article/2008/04/24/AR2008042403461.html(“For most of the 30 years since the passage of the Foreign Corrupt Practices Act, advisingcompanies on compliance and, on rare occasions, defending them against prosecution, has beena niche business in most corporate law firms, part-time work for a partner or two. But these days,FCPA business is booming, a welcome growth area for Washington law offices just as work onmergers and securities offerings has begun to wane.”).


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untested and dubious interpretations of the FCPA.For instance, because of the enforcement agencies’ interpretation of

the key “foreign official” element to include all employees of SOEs (seeSection I and III above), companies spend significant time and moneyinvestigating the ownership structure of foreign customers and poten-tial customers for any trace of foreign government ownership orcontrol. Such a costly investigation, often involving lawyers and otherinvestigative firms, is not motivated by the company’s desire to makeimproper payments to the foreign customer or potential customer toobtain or retain business should the investigation reveal no foreigngovernment ownership or control. Rather, the costly investigation isoften motivated for the simple reason that the company wants to treatthese foreign customers the same as it treats its other customers. Thatmeans hosting such customers at corporate events in which some funmay take place (e.g., golf) or inviting such customers to an industrytrade show—events that often take place in tourist locations. Compa-nies fear providing such “things of value” to a “foreign official” (underthe enforcement agencies’ interpretation) even though the company islegitimately and legally providing the exact same thing to its non-“foreign official” customers or potential customers.

It is highly questionable whether Congress foresaw company lawyersbeing involved in the simple decision of whether to invite a particularcustomer to the company’s golf outing or trade show. Yet because ofthe facade of FCPA enforcement, specifically the enforcement agen-cies’ untested and dubious interpretation of the “foreign official”element to include SOE employees, this is exactly what has occurredeven though there is no judicial support for the enforcement agencies’interpretation that such SOE employees are even “foreign officials”under the FCPA.

Similarly, because of the enforcement agencies’ aggressive post-Kayinterpretation of the FCPA’s key “obtain or retain business” element,companies spend significant time and money policing business seg-ments that have little or no contact with foreign government decisionmakers. These business segments may be involved in paying foreigntaxes, helping secure foreign licenses, or simply tasked with movingproduct into and out of a country. Monitoring the activity of thesebusiness segments, if done on a rational risk-basis, makes sense. How-ever, it is wasteful to over-monitor the activity of these business seg-ments based on a paranoia induced by the post-Kay explosion in FCPAenforcement actions involving foreign licenses, permits, and certifica-tions discussed in Section III of this article. None of these enforcementactions were subject to judicial scrutiny, many of the payments involved


2010] 1003

would not appear to fall within the FCPA’s scope per the Kay holding,and many of these payments, in fact, would appear to fall within theFCPA’s express exception for so-called facilitating payments. Yet de-spite these legally relevant qualifications, because of the facade ofFCPA enforcement, companies fear enterprise-threatening liabilityshould such seemingly benign payments be made in the above-described circumstances. Risk-averse companies thus respond withfear-based, not risk-based, FCPA compliance measures.

Another area in which the facade of FCPA enforcement significantlyincreases FCPA compliance costs is third-party due diligence. A com-pany can be exposed to FCPA anti-bribery liability indirectly based onthe conduct of its foreign agents under the FCPA’s so-called third-partypayment provisions.396 Under these provisions, liability hinges on thecompany “knowing” that a “thing of value” will be given to a “foreignofficial” by the third-party. Because of the enforcement agencies’controversial application of this knowing standard,397 companies seek-ing to engage or retain a foreign agent often start from the mind-setthat the foreign agent is corrupt and is an FCPA violation waiting tohappen. Thus, companies often engage in extensive and expensive duediligence and monitoring of the agent in an attempt to prove thenegative so that if the enforcement agencies ever come calling, thecompany can turn over an extensive due diligence file to negate any“knowledge” finding.

Such paranoia is unwarranted, yet facilitated by the facade of FCPAenforcement. No doubt some level of third-party due diligence isprudent, and if a red-flag does appear as to a foreign agent, companiesshould react in an effective and responsible manner. However, the“steroid” version of third-party due diligence that many risk-aversecompanies have adopted and deployed during the facade era of FCPAenforcement is simply wasteful. Companies should ask themselves, inthe absence of red flags, why the same level of due diligence for anagent in Boise is also not effective for an agent in Beijing.398

The increased costs that directly flow from the facade of FCPA

396. See 15 U.S.C. §§ 78dd-1(a)(3), 78dd-2(a)(3) (2006).397. See Winer & Husisian, supra note 239, at 3. (“The DOJ and SEC [. . .] now interpret the

knowledge requirement [of the FCPA] so broadly that they have effectively eviscerated the 1988statutory changes, thereby raising an important question: Are the DOJ and SEC frustrating theintent of Congress by ignoring the reason that Congress amended the FCPA?”).

398. See id. at 10 (noting that typical foreign agent “red flags” such as the agent wanting alarge commission payment or the agent having governmental contacts may “arise in manyperfectly benign contexts and often can never be truly resolved”).


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enforcement are not only “front-end” FCPA compliance costs, but alsocosts associated with how a typical company reacts to ambiguous,internal allegations of conduct that could potentially implicate theFCPA.

Because of the “carrots” offered to a company in an FCPA enforce-ment action (a topic discussed in great detail in Section II), the typicalpath of a corporate FCPA enforcement action is a company voluntarilydisclosing conduct to the DOJ after an extensive and costly internalinvestigation. Many of these internal investigations and voluntary disclo-sures are premised on conduct involving SOE “foreign officials” orattenuated payments made to secure foreign licenses, permits, andcertifications.399 Thus, for the reasons stated elsewhere in this article,the conduct giving rise to the investigation and disclosure may not evenviolate the FCPA. However, because of the “carrots” offered to acompany to voluntarily disclose, and because of the fear of enterprise-threatening liability for perhaps failing to disclose, risk-averse compa-nies routinely disclose conduct to the enforcement agencies notwith-standing the fact that the potential FCPA liability may only be based onan untested or dubious enforcement theory and regardless of theexistence of ambiguous facts or valid and legitimate defenses. The endresult, in many instances, is that a company deploys teams of lawyers,forensic accountants, and other professional experts around the world,at a cost of several million dollars, to investigate conduct or allegationsof conduct that may not even violate the FCPA. In many cases, the costof investigating the conduct that may not even violate the FCPA bearsno rational relationship to the underlying conduct.400

The absurdity of FCPA resolution vehicles serving as de facto case lawand the breeding of overcompliance are not the only reasons why thefacade of FCPA enforcement matters.

C. Modeling

The final reason highlighted in this article for why the facade ofFCPA enforcement matters relates to the increasing frequency by

399. For an example of a company voluntarily disclosing ambiguous conduct to the DOJ thatmay not even violate the FCPA, see, FCPA PROFESSOR BLOG, supra note 64.

400. See Team of Plenty, FCPA PROFESSOR BLOG (Jan. 6, 2010, 03:23 PM), http://fcpaprofessor.blogspot.com/2010/01/team-of-plenty.html (noting that, in connection with one FCPA internalinvestigation, the total professional costs exceeded $3 million, even though the conduct at issueconcerned non-material payments made by a company’s branch office that represented less thanone-half of one percent of the company’s annual consolidated revenue under circumstances thatmay not even violate the FCPA).


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which other nations are modeling enforcement of their own briberylaws on U.S. enforcement methods and theories. These methods andtheories, unless addressed and corrected here in this country, willcontinue to be replicated elsewhere, perhaps leading to a global facadeof enforcement.

Case in point is the United Kingdom (“U.K.”), a country that haslong been subject to criticism for lax enforcement of its hodgepodgecollection of antiquated bribery statutes. This year, the U.K. is widelyexpected to enact into law a new “Bribery Bill” that will likely result insignificantly more bribery prosecutions in that country.401 The SeriousFraud Office (“SFO”), the U.K. lead agency “for investigating andprosecuting cases of domestic and overseas corruption” and an agencyfunctionally similar to the DOJ, will be responsible for enforcing theBribery Bill and the U.K.’s other similar laws.402

The SFO has publicly stated its intention to model its enforcement ofthe U.K.’s bribery laws on the DOJ’s enforcement of the FCPA, includ-ing use of NPAs and DPAs. In a July 2009 release titled, “Approach ofthe Serious Fraud Office to Dealing With Overseas Corruption,” theSFO sets forth several DOJ-style enforcement factors, such as voluntarydisclosure and a preference for negotiated settlements, that it willconsider when determining how to resolve a potential corporate brib-ery matter.403 Most alarming, despite being an investigative agency, theDirector of the SFO recently stated the agency’s “strong preference” isthat corporations come to it with pre-packaged evidence of wrongdo-ing so that “it is not necessary for the SFO to conduct any investigationitself.”404 The Director of the SFO also recently indicated that “he wantsto borrow from the U.S. justice system by encouraging companies tovoluntarily report corruption problems and strike plea deals to resolvethem rather than face prosecution.”405 The Director further noted that

401. See, e.g., U.K. Parliament’s Joint Committee on the Draft Bribery Bill, available athttp://www.parliament.uk/business/committees/committees-archive/joint-committee-on-the-draft-bribery-bill/ (last visited Aug. 24, 2010).

402. Bribery & Corruption, SERIOUS FRAUD OFFICE, http://www.sfo.gov.uk/bribery—corruption/bribery—corruption.aspx (last visited Aug. 24, 2010).

403. Approach of the Serious Fraud Office to Dealing with Overseas Corruption, SERIOUS FRAUD

OFFICE (July 21, 2009), http://www.sfo.gov.uk/media/28313/approach%20of%20the%20sfo%20to%20dealing%20with%20overseas%20corruption.pdf.

404. See Letter from Richard Alderman, SFO Director, to Marcus A. Asner, Arnold & PorterLLP (Dec. 7, 2009), available at http://www.arnoldporter.com/resources/documents/FINAL_ASNER_LETTER.pdf.

405. Cassell Bryan-Low, U.K. Fraud Office Upgrades Foreign-Corruption Fight, The Wall StreetJournal European Edition, Jan. 20, 2010 at 6.


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he has pushed the SFO “to move more quickly on cases and sought tosettle deals as an alternative to prosecutions.” He is also “encouragingcompanies to come forward with problems in exchange for morelenient treatment.”406 Thus, one of the pillars contributing to thefacade of FCPA enforcement—the prevalence of NPAs, DPAs, andpleas, as well as the “carrots” offered to corporations to enter into suchresolution vehicles—is clearly being constructed on the other side ofthe Atlantic as well.

Even more concerning is the clear presence in the U.K. of the fourthpillar contributing to the facade of enforcement—bribery, yet nobribery—given the SFO’s recent handling of the BAE matter. By way ofshort summary, in 2004 the SFO began investigating whether BAEmade bribe payments to secure the KSA Fighter Deals.407 However, inlate 2006, the SFO was forced to halt its investigation under pressurefrom the U.K. government, which cited national security concerns withthe investigation.408

Because BAE also allegedly made bribe payments in numerous othercountries to secure business, the SFO, under a new Director, revived itsinvestigation of BAE, at least as to non-Saudi issues, including whetherthe company paid bribes to secure contracts in various European andAfrican countries.409 After settlement talks stalled—the conventionalwisdom is that BAE was unwilling to plead guilty to bribery-relatedoffenses given the collateral effect of the mandatory European Uniondebarment provisions—the SFO pressed ahead with the case.410 TheSFO Director stated in January 2010 that “BAE is clearly a very impor-tant case” and that “it is very important that we get it right.”411

In late January 2010, the SFO issued a release stating that a formerBAE agent was criminally charged with “conspiracy to corrupt” and for“conspiring with others to give or agree to give corrupt payments . . .to officials and other agents of certain Eastern and Central Europeangovernments, including the Czech Republic, Hungary, and Austria asinducements to secure, or as rewards for having secured, contractsfrom those governments for the supply of goods to them, namely

406. Id.407. See id. For more extensive coverage of the SFO’s bungled BAE investigation see Frontline:

Black Money, supra note 363.408. Id.409. Id. It was widely reported that the Saudi government threatened to cease its cooperation

on terrorism issues should the investigation of BAE’s relationship with Saudi officials go forward.410. Id.411. Id.


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SAAB/Gripen fighter jets, by BAE Systems Plc.”412

Then in early February 2010, the SFO announced its long-awaitedresolution of the BAE matter. Despite allegations of widespread briberyon a global scale, and despite BAE’s agent being criminally indicted afew days earlier in connection with bribe payments, the SFO resolutionrelated solely to BAE’s failure “to keep reasonable and accurate account-ing records in relation to its activities in Tanzania.”413 The SFO releasenotes that BAE will pay a £30 million penalty “comprising a fine to bedetermined by the Court with the balance paid as a charitable paymentfor the benefit of Tanzania.”414

The company’s press release responding to the SFO charges notedthat:

In connection with the sale of a radar system by the Company toTanzania in 1999, the Company made commission payments toa marketing adviser and failed to accurately record such pay-ments in its accounting records. The Company failed to scruti-nize these records adequately to ensure that they were reason-ably accurate and permitted them to remain uncorrected. TheCompany very much regrets and accepts full responsibility forthese past shortcoming.415

Most dramatic, and in a strange turn of events, the SFO announcedthat it had withdrawn the criminal charges filed days earlier againstBAE’s agent.416 The SFO release also notes that “[t]his decision bringsto an end the SFO’s investigations into BAE’s defense contracts.”417

Thus, in a matter of days, allegations of BAE’s bribery in severalcountries disappeared. The SFO’s multi-year investigation of BAE

412. See Press Release, Serious Fraud Office, Former BAE Agent Charged with Corruption(Jan. 29, 2010), available at http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2010/former-bae-agent-charged-with-corruption.aspx.

413. BAE Systems Plc, SERIOUS FRAUD OFFICE (Feb. 5, 2010), http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2010/bae-systems-plc.aspx.

414. Id.415. Press Release, BAE Systems, BAE Systems Announces Global Settlement With United

States Department of Justice and United Kingdom Serious Fraud Office (Feb. 5, 2010), available athttp://www.baesystems.com/Newsroom/NewsReleases/autoGen_1101517013.html.

416. See Press Release, Serious Fraud Office, SFO Withdraws Proceeding Against CountAlfons Mensdorff-Pouilly (Feb. 5, 2010), available at http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2010/sfo-withdraws-proceedings-against-count-alfons-mensdorff-pouilly.aspx (last visited Aug. 12, 2010).

417. Id.


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ended with a whimper. Just like the message the DOJ sent in resolvingits BAE investigation without any anti-bribery charges, the SFO’s mes-sage was also that certain companies in certain industries—particularlythose that sell certain products to certain customers—are essentiallyimmune from bribery charges.

The SFO’s handling of the BAE matter and its stated intention ofadopting DOJ enforcement strategies and procedures common inFCPA enforcement is just one example of why addressing the facade ofFCPA enforcement has global implications.

VI. CONCLUSION

The FCPA is enforced like no other law. Against the backdrop of anoften times vague and ambiguous statute and general lack of substan-tive FCPA case law, the FCPA is aggressively enforced based on untestedand dubious theories. Because of the “carrots” and “sticks” the FCPAenforcement agencies possess, FCPA defendants are often nudged toresolve FCPA enforcement actions notwithstanding such questionablelegal theories and without consideration of mitigating factors or rel-evant defenses. Thus, in many instances, the FCPA simply means whatthe DOJ and SEC say it means and “FCPA law” largely develops throughprivately-negotiated agreements, subject to little or no judicial scrutiny.The end result is often the facade of FCPA enforcement. This articlehas highlighted four pillars that contribute to the facade of FCPAenforcement and demonstrated certain reasons why the facade ofFCPA enforcement matters. Identifying and acknowledging the exis-tence of a problem is a necessary first step to crafting solutions. Thisarticle exposes the facade of FCPA enforcement, argues that address-ing the facade and subjecting FCPA enforcement actions to greaterjudicial scrutiny is in the public interest, and encourages more FCPAdefendants to challenge the enforcement agencies and further exposethe facade of FCPA enforcement.


2010] 1009

koehler - facade of fcpa enforcement

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