FCPA Enforcement: Going After Executives

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Enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) has been running on all cylinders in the past couple of years, scaring multinationals worldwide. The number of actions involving China operations has been high and has led many firms to move forward with “internal audits” of corporate compliance programs.

I’m going to be doing lectures on CSR and FCPA over the next couple of weeks, so my radar is attuned to this stuff at the moment. The most recent bit of news on the subject came to me courtesy of Mayer Brown, a U.S.-based international law firm that has offices in China, including one here in Beijing. A recent newsletter included this nugget:

On November 30, 2010, the US Senate Judiciary Committee, Subcommittee on Crime and Drugs held a hearing examining the enforcement of the US Foreign Corrupt Practices Act (FCPA). Chairman Arlen Specter expressly called for increased criminal prosecutions against executives of companies that are alleged to violate the FCPAs anti-bribery provisions. At the same time, Chairman Specter and other members of the subcommittee sought to define vague statutory language, urged the US Department of Justice (DOJ) to clarify compliance guidelines and considered proposals from the panel . . . on how to better incentivize corporate compliance.

Companies doing business with foreign officials should be aware that the DOJ, at the instruction of the Congress, may increasingly target executives for criminal prosecution.

Chairman Specter made his position clear from the outset of the hearing: the only effective deterrent is a jail sentence.

A couple of things to point out here. First, although FCPA actions have been coming fast and furious recently, often with severe penalties, no individuals have been dragged off to jail. Specter is worried that companies will merely factor in possible fines as the “cost of doing business” in a particular jurisdiction, and then go ahead and violate the FCPA’s provisions.

Second, note that Specter himself is an ex-prosecutor. Making sure that folks are put in jail used to be his job, and his mindset reflects that. Although this is a bias, it is an outlook that I share. As my old Environmental Law professor, himself a veteran of plaintiff-side tort litigation, used to tell us, there is no greater deterrent than “frog-marching” a CEO out of his office into the waiting arms of the cops. The loss of face alone is extraordinarily significant. Why do you think so much energy has been spent over the years lobbying the Chinese government to unleash the Public Security Bureau (PSB) on IP infringers?

Third, Specter’s bias aside, is the government worried that despite the stepped-up enforcement in recent years, companies still haven’t really “got it”? It’s possible. The companies I’ve spoken to in my professional capacity are generally aware of FCPA. Some of them have done internal audits and have changed their procedures and staff training.

Others, however, are more carefree about the whole thing. One still hears the old “Oh, our Labor Contract is very clear about our zero tolerance policy about that sort of thing. I think we’re covered.” Yeah, you’ve got as much legal coverage as a bikini covers someone’s . . . um, you know. Just ask Rio Tinto about the sufficiency of tough internal corruption rules.

So what does this mean moving forward? Even more of everything. FCPA lawyers should be happy. Companies will be well advised to get their house in order, do audits, revise internal documentation, institute training programs, etc.

Believe me, after one or two CEOs get frog-marched out of an office in Manhattan (I’d love to see it, by the way), the phone calls and emails between in-house counsel and international law firms will be fast and furious. Needless to say, since China operations are always a big part of potential FCPA troubles, China FDI lawyers will be busy with this stuff for years to come.