Compliance Implications of the Current Enforcement Climate: An Interview with Mike Koehler, the FCPA Professor

[Originally published in two parts in The FCPA Report’s August 22 and September 5 issues]

By Rebecca Hughes Parker

The FCPA Report recently interviewed Mike Koehler, Assistant Professor at Southern Illinois University School of Law and author of the popular blog the FCPA Professor. He has testified before Congress and written extensively about FCPA issues.

Professor Koehler previously was Assistant Professor of Business Law in the College of Business at Butler University, and before that was an attorney at Foley & Lardner LLP, where he conducted FCPA investigations on behalf of companies, negotiated resolutions to FCPA enforcement actions with government enforcement agencies and advised clients on FCPA compliance and risk assessment. Since leaving legal practice, Professor Koehler has become a vocal critic of the government’s FCPA enforcement theories, which he sees as hinging on dubious and untested legal theories in contravention of Congress’s intent.

Professor Koehler spoke about the long tail on FCPA violations and the “gray cloud” that hangs over companies once they self-report, and he questioned whether companies should self-report at all. See also “When and How Should Companies Self-Report FCPA Violations? (Part Two of Two),” The FCPA Report, Vol. 1, No. 2 (Jun. 20, 2012). He also shared compliance advice in light of recent enforcement trends relating to facilitation payments, the “obtain or retain business” element of the statute and the definition of foreign officials. In addition, Professor Koehler discussed compliance lessons arising out of the unique way the FCPA is enforced and the relative lack of judicial scrutiny of the statute.

The Professor also addressed recent Supreme Court precedent affecting corporate fines; the potential for fines to be paid to victims instead of the U.S. Treasury; the cost-benefit analysis of FCPA compliance and the three buckets of FCPA costs; Professor Koehler’s distinction between license/permit cases and government procurement cases and its importance for compliance policies and procedures; and the prospect of FCPA reform, a topic on which Professor Koehler disagrees with Judge Sporkin.

Statute of Limitations and the Gray Cloud

FCPAR: Can you explain the ways the government gets around the five-year statute of limitations in the FCPA? What have the courts said about this?

Koehler: How does the government get around so many other things when it comes to the FCPA? Simply because it doesn’t become subject to judicial scrutiny.

The FCPA does not contain an express statute of limitations, so you have to fall back to the catch-all provision and that’s five years. Even as a matter of law, there are a couple of vehicles for enforcement agencies to exceed that five-year statute of limitations. The first one, of course, is the DOJ can charge conspiracy – the conspiracy statute of limitations does not begin until the last overt act in connection with that conspiracy ends. So, you can imagine a situation where a contract was obtained through an improper payment and the DOJ could logically say that the last time the company received money from that improper contract was an overt act in furtherance of the conspiracy.

Another way is if the DOJ makes a request to a foreign law enforcement agency for documents or information in connection with the investigation, the statute of limitations is tolled while that foreign legal assistance request is being considered.

To my knowledge, the only statute of limitations case in connection with the FCPA was in connection with the Frederic Bourke case in the Southern District of New York, probably about four or five years ago, which initially dismissed the FCPA-related charges on statute of limitations grounds. But the DOJ asked for that decision to be reconsidered and upon reconsideration the court reinstated those charges. [See the Second Circuit affirmance of Bourke’s conviction here.]

When it comes to the FCPA, whether we are talking about statutory elements or statute of limitations, there is very little case law out there. So long as companies are effectively unable to put the DOJ to its burden of proof and challenge them, we are going to see this dynamic continue, and it’s very unfortunate because, let’s face it, in the 35 years since the passage of the FCPA, the DOJ has only been put to its burden of proof by a company twice, and they have lost both those cases ultimately.

So you have a situation where if a company believes it has a statute of limitations defense, it can raise that issue around conference room tables in Washington, D.C. But at the end of the day, no company in America is going to risk willing to be indicted to assert a statute of limitations defense. When the DOJ offers a non-prosecution or deferred prosecution agreement, even if the conduct is 7 to 10 to 15 years old, 99% of companies are going to choose that route rather than asserting viable and legitimate legal defenses.

FCPAR: Pfizer, for example, recently settled with the government after initially voluntarily disclosing its potential violations eight years ago. [See “Pfizer Subsidiaries Agree to Pay $60.2 Million to Settle Civil and Criminal FCPA Charges,” The FCPA Report, Vol. 1, No. 5 (Aug. 8, 2012).] Has the government been keeping companies on the hook longer recently?

Koehler: Yes, Pfizer did stand out for being a rather long period in which a gray cloud was hanging over the company. Typically it’s only two to four years, but the Pfizer action and a couple of others have really stuck out in terms of long periods. And I think it is too long. The DOJ and the SEC expect companies to cooperate with them and part of cooperation is being timely. And they are not bound by a statute of limitations

because one of the things companies do during the voluntary process to demonstrate their cooperation is either toll the statute of limitations or agree to waive statute of limitation defenses. So this basically gives the DOJ and the SEC the green light to take their time.

When you dig into the details of most FCPA enforcement actions, the conduct takes place longer than 5 years ago, sometimes longer than 10 years ago and sometimes longer than 15 years ago. The DOJ and the SEC are not bound by the statute of limitations as a practical matter, and that is part of the leverage they have.

The Dangers of Self-Reporting

FCPAR: Is there anything companies can do once the internal investigation begins to avoid having this gray cloud over them for so long and to move more quickly towards settlement?

Koehler: Given that the vast, vast majority of enforcement actions in the corporate context are the result of voluntary disclosure, the most obvious thing is don’t voluntarily disclose. Now this is an issue that I know people struggle with. The DOJ and the SEC clearly want companies to voluntarily disclose. There may be some unique situations with publicly traded companies where there may be affirmative disclosure obligations, but very few FCPA issues are material. However, the SEC takes the rather ridiculous position (in my opinion) that all improper payments are qualitatively material, notwithstanding the dollar amount of the revenue associated with those payments. Companies struggle with this voluntary disclosure decision.

One message companies should hear is that in most cases, there’s nothing wrong with doing a complete and thorough internal investigation and based upon the results of that investigation effectively remediating the issues through enhanced compliance policies and procedures, through discipline or termination of wrongdoers. That is all acceptable without the voluntary disclosure.

Although empirical evidence is lacking on this issue because it’s kind of a black hole issue, you do read and hear from the FCPA bar that there has been a pushback against voluntary disclosure where companies are saying we don’t necessarily have to disclose this if we take these otherwise proactive and effective steps to deal with the situation internally. [For more on the calculus of self-reporting, see “When and How Should Companies Self-Report FCPA Violations? (Part One of Two),” The FCPA Report, Vol. 1, No. 1 (Jun. 6, 2012) and “When and How Should Companies Self-Report FCPA Violations? (Part Two of Two),” The FCPA Report, Vol. 1, No. 2 (Jun. 20, 2012).]

Another way to avoid that gray cloud, which is nice to talk about but as a practical matter is a non-starter, is that a company could just not agree to toll the statute of limitations or could not agree to waive statute of limitations defenses. But then the DOJ and SEC would take the position that that’s not cooperating and we know what the DOJ and the SEC might do with companies that do not cooperate. At the end of the day, both

enforcement agencies possess a very big and sharp stick and most companies that want to assert legal defenses will feel the effect of that sharp stick.

FCPAR: Once companies do that investigation and remediation, should they then self-report it? Or are you saying, do the investigation and fix it and then never self-report it?

Koehler: Just never self-report it. I’ve been talking to some other practitioners and it seems like less than 50% of conduct that may be in violation of the FCPA is being disclosed. Particularly with privately held companies and, let’s face it, there are more privately held companies subject to the FCPA than publicly traded companies. I think those numbers are probably going to be higher when it comes to privately held companies. The DOJ and SEC will say that’s problematic, but if those companies are doing the things that I just mentioned, there’s nothing wrong with that.

FCPAR: If the government does discover the conduct, then the company can say that it has remediated and it has enhanced its compliance program.

Koehler: Well, not as a strict legal defense because, of course, there’s no affirmative disclosure obligation in the first place. But, yes, the DOJ and SEC may not like it but at the end of the day the not disclosing part is not an independent legal issue, really.

Wal-Mart and Facilitation Payments

FCPAR: From what we know about the Wal-Mart case, does that look to you like facilitation payments or illegal bribes?

Koehler: It certainly falls in the area of facilitation payments. But here’s what I think has been missing on Wal-Mart coverage: Even if a payment does not meet the facilitation payment exception, in order for there to be an anti-bribery violation, all the other elements of an FCPA anti-bribery violation must be met including the “obtain or retain business” element.

Now, according to my research and based upon my understanding , the DOJ has been put to its burden of proof four times on “obtain or retain business,” all in the individual context and four times on the enforcement theory that payment outside the context of foreign government procurement (e.g., foreign government contracts) can be a violation of the FCPA. The DOJ and the SEC have an overall losing record on this enforcement theory.

So let’s look at the Wal-Mart situation and ask ourselves: do the payments at issue even violate the FCPA? I think there’s a good argument to be made that given what is known of these payments (which is really only in the press reports), these are not the type of payments Congress sought to capture when passing the FCPA.

Business Nexus

FCPAR: Have there been any recent enforcement actions that have dealt with the “retaining or obtaining business” requirement? Are there any specific lessons to draw from these enforcement actions for companies when structuring training programs?

Koehler: Two questions can be asked. First: are the payments at issue the type of payments Congress sought to capture when passing the FCPA? Given the prominence of enforcement actions concerning licenses, permits, certifications and the like (I’ll group these into non-foreign government procurement-type cases), you can ask that question in nearly every case. A different question is: are the type of payments at issue the type of payments that the enforcement agencies have brought enforcement actions on?

These are two different questions. The first question is: Did Congress seek to capture these types of payments? I think the legislative history, statute and judicial scrutiny suggest that the answer is no. The second question is: Are these the type of cases the DOJ and the SEC have brought? And the answer to that question is yes. And that’s because all of these cases, with the exception of the four I mentioned earlier, have never been subjected to judicial scrutiny; the DOJ and the SEC know that in the corporate context they won’t be subjected to judicial scrutiny. They take these prior enforcement actions and hold them out as sort of de facto case law, what other people have also called prosecutorial common law, and you have a situation in which a significant percentage of FCPA enforcement activity concerns conduct that Congress probably did not seek to capture when passing the FCPA.

But do you think Wal-Mart is going to assert statute of limitations defenses? Do you think Wal-Mart is going to put the DOJ or the SEC to their burden of proof on the business nexus issue? Of course not. You can reasonably ask the question, when you talk about statute of limitations, obtain or retain business, or other elements, whether the law even matters anymore.

Of course, this dynamic is not unique to the FCPA; it’s general to the current state of corporate criminal liability whether you want to talk about pharmaceutical companies through off-label marketing, whether you want to talk about, really, anything. Companies are, as a practical matter, unable to put the DOJ to a burden of proof. Because upon indictment, the company’s market capitalization is going to take a hit greater, much greater than anything the DOJ or the SEC can throw at a company. And when the DOJ offers up non-prosecution and deferred prosecution agreements where at the end of the day the company is not going to have to plead guilty to anything, it simply becomes a cost-benefit analysis. And the simple fact is, it’s much easier, it’s much quicker, it’s much more cost effective for a company to agree to an NPA or a DPA regardless of the theories of enforcement and regardless of whether those theories of enforcement will withstand judicial scrutiny.

Foreign Officials

FCPAR: Let’s talk about some recent cases or enforcement actions where you think the government or the courts have stretched the definition of foreign officials.

Koehler: A lot of people are saying: “oh, foreign officials – over and done with,” but show me another area of law where it is viewed as a settled issue because three trial courts at the motion to dismiss stage have issued a ruling? There’s no caselaw precedent on the foreign official issue yet. You have the Eleventh Circuit. [The Esquenazi case is pending in the Eleventh Circuit. For more on that case and the foreign official issue, see “Defendants in Haiti Teleco Case Urge the Eleventh Circuit to Limit ‘Instrumentalities’ to Entities that Perform Government Functions,” The FCPA Report, Vol. 1, No. 1 (Jun. 6, 2012).] That challenge is principally based on my foreign official declaration. I hope that the appellate court considers the legislative history because the trial court judges in the Carson case and the Lindsey case didn’t. Let’s not forget what happened in these two 2011 foreign official challenges. In Carson, the DOJ was never put to its ultimate burden of proof on this issue. After Judge Selna offered a very pro-defense jury instruction, the DOJ offered up plea agreements that most rational people would probably accept given the consequences of an adverse jury verdict.

In the third foreign official challenge, the O’Shea case in the Southern District of Texas, the judge granted the motion of acquittal after the DOJ’s case. If you read the trial transcripts, the judge was very troubled with the foreign official issue. He issued a jury instruction that incorporated OECD commentary number 15 that says that employees of a state-owned enterprise that competes on a normal commercial basis aren’t foreign officials. So people, I think, incorrectly view these three trial court decisions in 2011 as being victories for the DOJ. I’m not suggesting they were losses, but the fact of the matter is they were ended during the pretrial phase. And in O’Shea and Carson, the DOJ was never put to its burden on this issue.

FCPAR: Before the Esquenazi decision in the Eleventh Circuit comes down, should companies assume that all entities are state-owned instrumentalities and all their employees are foreign officials, even if the state owns a minority of the entity, and the entity performs no government function?

Koehler: Absolutely positively yes. Because at the end of the day, corporate officers and those tasked with compliance need to tailor their programs to what the enforcement theories and agencies say.

That’s the new enforcement reality of this new era of FCPA enforcement. Companies are not necessarily complying with the law that Congress passed, but companies are complying with the law as the DOJ and the SEC outside the context of judicial scrutiny say the law is. Now, I’m all for proactive corporate compliance, I’m all for doing the right thing, I’m all for that. But, and this is a very old fashioned statement: the law ought to be what Congress says the law is and not what the DOJ and the SEC say the law is.

The FCPA Enforcement Club

FCPAR: So right now, as it stands, you have to have a compliance program that is very expansive in the definition of foreign official and narrow in the definition of facilitation payment?

Koehler: Yes. Most companies are going to be risk averse here and reasonably tailor their compliance to the enforcement climate, not what the law says or what Congress intended the law to say.

The FCPA is enforced per DOJ policy like really no other law. All FCPA enforcement actions must be approved by Main Justice in D.C. That’s unlike any other area of law. A U.S. Attorney’s office can bring an insider trading case from Seattle to Los Angeles to Miami. But all FCPA enforcement actions, per the U.S. Attorneys’ Manual, need to be filed through Main Justice.

What that essentially means is that from a supervisory, discretionary, authority standpoint, there’s literally three to five people in America who control this area of law. And look at where these people are going. The statistics are undeniable. Most former DOJ and SEC FCPA officials are now in the private bar. And when you are enforcing a niche statute, to a large extent outside judicial scrutiny, to a large extent around conference room tables in Washington, D.C., and then go to the other side, I think that raises some significant public policy issues that people are not willing to talk about. I raise this issue because I’ve written about this, and some people say “that is just the way Washington works.” To a small town Midwesterner such as myself, to come back with “that’s just how Washington works” is not very persuasive.

Fines

FCPAR: The Supreme Court, in Southern Union Co. v. U.S ., held that the Sixth Amendment’s reservation of facts that increase criminal sentencing to the jury applies to the imposition of criminal fines as well. You have written that the Southern Union decision should be included in the talking points memo of company counsel when resolving corporate enforcement actions with the DOJ. How should companies include it? What should they say?

Koehler: What the Supreme Court said was that any fact which increases a criminal fine is ultimately a jury issue that needs to be proved beyond a reasonable doubt. You look into the sentencing guideline calculation of enforcement actions and you’ll see an enhancement because a high-level personnel was involved in the bribery. You may see an enhancement based upon the net financial benefit that resulted from the improper payments. The point is that FCPA counsel now should say, in the context of these negotiations (which, as a practical matter is probably a non-starter), if this goes to trial, in order for you to get yourself some guidelines range, you’re going to have to prove beyond a reasonable doubt that this high-level personnel was involved in the improper payment. You’re going to have to prove beyond a reasonable doubt this net financial benefit you say resulted from the improper payment. I mean it gives the DOJ and the SEC something to think about. But as a practical matter, at the end of the day, when is

the DOJ and the SEC ever put to their burden of proof on these issues? That’s why I noted that Southern Union is an interesting case.

FCPAR: So you’re saying that as a practical matter it may not make that much of a difference, but the law has changed?

Koehler: Yes. The Supreme Court has spoken on factors relevant to criminal fines and the FCPA involves corporate criminal fines and I think there should be something in the talking points memo along the lines of what I just said, when FCPA counsel is talking about negotiating a resolution.

Fines and Victims

FCPAR: Right now, the fines companies pay when they settle with the government to resolve FCPA violations go into the U.S. Treasury, but this is not supposed to be a victimless crime. In the U.K., and in the U.S., specifically in the recent Eleventh Circuit case Alcatel-Lucent, there has been some movement to change that, and pay the fines to the victims. Do you see a shift towards that, and if that does happen, how could that affect a company’s negotiation process with the DOJ and the fine levels?

Koehler: Let’s start with the question: does every FCPA enforcement action involve victims? The traditional notion of bribery of course, and the one that has oft been repeated by NGOs and government organizations, is that the bribe payments allowed a company with an inferior product or inferior services to get the contract. So the reason that bridge crumbled is that a company that was incompetent got the contract because of the bribe payment. That can’t be right. Let’s look at the companies that are resolving FCPA enforcement actions. These companies are otherwise viewed as industry leaders who are putting out the best product for the best price.

Who are the victims in the Pfizer enforcement action? Are we truly to believe that the only reason Pfizer (or Wyeth) was able to sell drugs in China was because the midwife got an alarm clock or something silly like that? Are we saying that the only reason those Italian physicians prescribe Pfizer drugs was that they held a conference in the Swiss Alps? I’m not prepared to say that. While I think that’s true in some cases and I’m not condoning improper payments, I think it is worth asking the big picture “but for” question. I don’t think you can say of many FCPA enforcement actions, “but for the payment the company would not have gotten this contract.” So, do all FCPA enforcement actions involve victims? I’m not prepared to say that.

Furthermore, let’s say that, yes, all FCPA enforcement actions involve victims. Well, given the dynamics associated with resolving an enforcement action and the notion that companies effectively are unable to put the DOJ to their burden of proof – given the notion that companies effectively are unable to assert legal arguments and make factual arguments – why should a non-profit in Nigeria get money because the U.S. government has leverage over companies to resolve cases? That is almost a windfall to people who

are seeking this pot of money. I agree that it is problematic that this money simply goes into the U.S. Treasury. But the notion that there should be some payouts to NGOs, payouts to these so-called victims (recognizing that I do not think in all cases there are victims), that’s problematic as well.

I think the greatest victim when it comes to payments that legitimately satisfy the elements of an FCPA violation are perhaps the competitors who lost out on the contract, lost out on a business opportunity because of the improper payment. And if that’s the case, and I think those are probably the most direct victims, let’s revisit the issue of perhaps having a private right of action in the FCPA to allow these victims the ability to bring an action to recover the harm that they’ve suffered because of the actions of their competitor.

FCPAR: So you are saying that it is the competitor who is not willing to pay the bribe who suffers, and who may be the victim of an FCPA violation?

Koehler: I am more prepared to call a company like that more of a victim than all Chinese citizens are victims because Pfizer just resolved an enforcement action in connection with Chinese physicians.

FCPAR: Since Pfizer had this very public, massive fine, indirectly the competitors do benefit because of all the negative publicity around Pfizer and the financial penalty. [See Pfizer Subsidiaries Agree to Pay $60.2 Million to Settle Civil and Criminal FCPA Charges,” The FCPA Report, Vol. 1, No. 5 (Aug. 8. 2012)]. Even though it’s not going to the competitor, it still is a penalty, right?

Koehler: That ignores the fact that there is a pharmaceutical industry sweep so all the competitors have already either resolved or will be resolved in a similar enforcement action. But, I take your point. I think economists call this the contagion effect: the notion that if an industry leader is experiencing some legal scrutiny there might be a contagion effect on peer firms – I say contagion effect in terms of how the market reacts. For instance, Wal-Mart is not the only company in Mexico that needs licenses and permits. Reuters has reported now that scrutiny of Wal-Mart has led to an entire retail industry sweep. The so-called contagion effect describes a situation in which FCPA exposure faced by one company in an industry has collateral effects on other participants in the same industry.

The Cost-Benefit Implications of FCPA Violations

FCPAR: In terms of the cost-benefit analysis we discussed earlier: another big case in the news is the Las Vegas Sands case regarding its casino in Macau, where Adelson’s company is accused of bribing Chinese officials. The Macau business is contributing a material and growing proportion of Sands’ revenue. So obviously this is an embarrassment to Sands and investigating them and defending them will be costly. That’s probably not going to stop throngs of Chinese visitors from spending hundreds of millions of dollars at Sands, though. Putting the ethics

question aside and looking at the pure business calculus, does it make sense for a company like Sands to care about the FCPA in light of the tremendous business rewards of making a few bribes (which in China are pretty customary anyway)? Koehler: Yes. Any instance of FCPA scrutiny, regardless of whether the conduct at issue violates the law, is going to cost a large company north of $100 million in pre-enforcement action professional fees and expenses.

This gets back to the fine issue. I like to talk about financial exposure in three buckets:

1. The first bucket is the pre-enforcement action (professional fees and expenses: lawyers, forensics, accountants, etc.);

2. The second bucket is the monetary penalty you hear or read about on enforcement action day; and

3. Bucket number three is post enforcement action (professional fees and expenses: remediation and compliance obligations, perhaps a monitor).

In most cases, the first bucket is always going to be the biggest financial hit for a company. The DOJ, the SEC and the company will want to answer the “where else” questions? So, the initiation of FCPA scrutiny will lead to a worldwide review of a company’s operations that may take a couple of years.

That’s why bucket number one, pre-enforcement action expenses, will be the biggest financial hit to a company in almost every case. So, companies ought to take the FCPA seriously because it’s going to result in a long gray cloud hanging over the company – it’s going to result in significant bucket number one expenses and it may impact their ability to merge or be acquired as well.

FCPAR: With Avon, bucket number one has reportedly climbed to $280 million.

Koehler: Yes and bucket number two is not going to be that high. If it is it will be the sixth largest enforcement action of all time. And it’s a license permit-type case. None of the cases in the top ten, I don’t believe, are license-permit-type cases.

License/Permit versus Government Procurement Cases

Koehler: I put FCPA enforcement actions in two categories. The first is foreign government procurement-type cases, which clearly Congress intended to capture: payments to foreign officials in the context of government procurement. But these other cases involve license/permits/certifications/customs issues/tax issues. This is all in the facilitation payments realm and these are all non-foreign government procurement cases.

FCPAR: And Avon is a license-permit case?

Koehler: It’s my understanding, based on the publicly disclosed issues, that Avon received the first direct selling permits, apparently in China, and it needs certain licenses

and permits to do direct selling in other countries. It was recently talked about in The Wall Street Journal that there are also allegations of improper payments to tax officials in France and in other countries.

FCPAR: Even though in some of these permits cases there is discretion involved, unlike facilitation payments. I’m thinking of Tyson Foods, where they had the veterinarians skip inspections.

Koehler: Right, but that gets us into the fact that even if a payment does not meet the facilitation payments exception, the obtain or retain business element has to be met.

Given what the Fifth Circuit said in U.S. v. Kay, it would be very difficult for the DOJ or the SEC to prove that a large multi-million dollar multinational obtained or retained business because of that payment. That’s what the Fifth Circuit said. And if the DOJ and SEC respect the rule of law, that’s what the only caselaw precedent said.1

Let’s assume that the Eleventh Circuit says that employees who work for state-controlled companies are not foreign officials under the FCPA (which I believe, given the legislative history, would be the correct decision). I don’t believe that that Eleventh Circuit decision is going to affect DOJ or SEC enforcement. We have one case as precedent on “obtain or retain business.” And has that conclusion of the Fifth Circuit changed anything?

FCPAR: Maybe around the negotiating table it has?

Koehler: Yeah, point taken there.

FCPAR: But in terms of the outcomes, you don’t think it has?

Koehler: No. According to my statistics, well over 50 percent of FCPA enforcement actions are outside the context of foreign government procurement. In November of 2010, you had eight cases all brought on the same day – I called them “Customsgate.” Those cases were all involving, for the most part, customs issues in Nigeria. Look at the facts of those cases and read the Kay decision and ask yourself: could the DOJ and the SEC have persuaded the Fifth Circuit as to what it was saying in Kay and those cases? Not likely.

FCPAR: So, basically, companies need to keep this expansive compliance program and train their employees on the ground to track what the DOJ enforcement actions are dictating, not as the Eleventh Circuit may dictate and as the Fifth Circuit has dictated.

1 Editor’s note: In 2004, the Kay court held that though the bribes in that case, paid to avoid customs duties and sales tax, could be proscribed by the FCPA, “this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect – here, through tax savings – that would ‘assist in obtaining or retaining business.’”

Koehler: That is absolutely correct. One can have differing opinions on what this says about the FCPA enforcement climate, the notion of corporate criminal liability and the leverage the DOJ and SEC have, but I think it’s a meaningful commentary on the current state of white collar criminal issues.

FCPA Reform

FCPAR: We spoke with Judge Sporkin, and he characterized the proposed amendments to the FCPA as “ridiculous.” [See “An Interview with Judge Stanley Sporkin, the ‘Father of the FCPA,’” The FCPA Report, Vol. 1, No. 4 (Jul. 25, 2012).] Do you agree? What do you think the prospects are for Congress, especially in light of the Chamber of Commerce’s recent efforts and difficulties, to pursue any kind of modification to the FCPA?

Koehler: First of all, FCPA reform is not simply a Chamber of Commerce issue. Yes, the Chamber has a very high profile platform. But even before the Chamber of Commerce’s white paper was released in October of 2010, many people had been calling for FCPA reform. So my criticism of the general media coverage of FCPA reform is it is focused more on one messenger in this debate, the Chamber of Commerce, rather than the substantive issues.

So let’s divorce the issue from one of the messengers and have a legitimate substantive discussion about the FCPA, which history proves is very difficult to have because this is a law called the Foreign Corrupt Practices Act. The FCPA was amended around the margins in 1998; but the last major period of substantive FCPA reform was in 1988. That process, from the point in which the first bill was introduced until President Reagan signed the FCPA amendment, took eight years. And you saw the exact same discussions and arguments being made then. “Oh my gosh! How can we consider amending a law called the FCPA? This would be akin to waving the white flag of surrender and giving companies carte blanche to go on a bribery binge.”

That’s ridiculous. It was recognized as being ridiculous in the ’80s. But the point I’m trying to make is that FCPA reform, given the simple title of this law, is very difficult. It will take political courage by certain people to introduce this reform bill. It’s not going to be introduced this term. But I do think limited FCPA reform has a chance, such as the compliance defense I have proposed. As for Judge Sporkin, I know that he has said that these things are ridiculous, but frankly I don’t know where he’s coming from on this because he has been one of the most vocal proponents of rethinking some of these issues, such as his inoculation program proposal. I was on a panel with Judge Sporkin at an ABA-sponsored event in June. And, far be it from me to disagree with this distinguished individual, but he seems to take the position that the FCPA’s books and records and internal control issues are a panacea for everything. But those only apply to publicly-traded companies. And I guess given his prior SEC experience, he’s well-versed on these issues, but still.

FCPAR: He did talk to us about the “flu shot” program, where companies can get “inoculated.”

Koehler: I think Judge Sporkin is comfortable with companies being rewarded for compliance. But he wants to have that as a matter of DOJ and SEC discretion. I say, put it in the law. Because what the FCPA needs is not non-binding DOJ or SEC guidance. What the FCPA needs is not opaque decisions being made around conference room tables in Washington, DC. It needs the transparency and predictability of liability actually being in the statute. If you read my article [“Revisiting a Foreign Corrupt Practices Act Compliance Defense”], I go through many of the reasons why I believe a compliance defense would best accomplish the objective of the FCPA which is, after all, to reduce instances of bribery. I set forth reasons why a compliance defense will better incentivize corporate compliance. Why a compliance defense will allow the DOJ and the SEC to better allocate the prosecutorial resources. Why a compliance defense will allow the DOJ to learn more about bad actors, individuals, than they know now.

In my mind, the compliance defense is not a race to bottom, as some people have said, it’s a race to the top. It’s figuring out how we can best incentivize corporate policies and procedures to reduce improper conduct. And the current system, the current enforcement climate, I don’t believe is best accomplishing that objective.