Frequent Writer, Speaker, Video-Podcaster on Anti-Corruption
Congratulations to the FCPA Unit and to the Southern District of New York's Andrew Fish and Harry Chernoff.
As much as I thought they lost in the courtroom, they won on the law.
The Second Circuit soundly rejected Bourke's arguments. They even went so far as to say that even if the evidence was “new,” Bourke would still lose.
I often say that there's no such thing as total victory. It looks like this might be the exception.
You're welcome. I'm saying, I'm taking credit for creating a safe harbor in FCPA prosecutions, and I'm sure you'd say thank you, so I'm saying, you're welcome.
How did this come about, you ask? After all, I'm just a junior partner in the FCPA Commentariat. I'm not Tom Fox, I'm not Dick Cassin. How could I get the DOJ and the SEC to create a safe harbor all on my lonesome?
With one question.
Here's the situation. Last week was the ACI FCPA Conference. If you didn't go, then one of two things must be true: either you were tied up and being held by Somalian pirates, or you're not part of the FCPA world. Maybe I'm exaggerating. A little. It really is the premier FCPA conference, and one which I take pains to attend, along with all my little FCPA friends. Dan Newcomb was there, Palmina Fava, Suzanne Fulsom, Andy Hinton & Therese Lee. Raja Chatterjee was there (the belle of the ball, as one participant said). Alexandra Wrage was there. Plus, plenty of DOJ and SEC people. Chuck, Koukios, Nat, Kara, Tracy, Kathryn Nickerson from Commerce, plenty of government people.
The Guidance was issued the day before (have you heard?) and of course it was a major topic of conversation. So much so, in fact, that Chuck Duross, Kara Brockmeyer, and Jeff Knox (Chuck's immediate superior) were on an impromptu panel about the Guidance.
They were excellent. And I'm a fan of the Guidance. But then came the Q&A.
If you know anything about me at all, you know I'm not going to pass up that opportunity. Only with a real question, mind you. There were a lot of people in the room, and I'm not going to waste people's time.
Here was my question:
I want to ask a question about foreign officials. Assume for a moment that a company engages in a good faith effort to decide whether a third party is a government instrumentality, using the multi-part, non-exclusive test you guys set up. Assume good faith. And using that test, the company comes to a decision that the third party is not a government instrumentality. That decision comes before you, and you decide differently. Can you see yourself bringing a case in those circumstances?
Jeff Knox's answer was the one which created the safe harbor.
He said that in his opinion—speaking for himself, not the Department of course—the DOJ would have a tough time proving knowledge in those circumstances. Proving corrupt intent. In his opinion, there's no crime.
What does this mean for practitioners? It means that if you ask the questions, and think about the issues (and, as Tom Fox always says, “document, document, document”) then you're going to be okay, even if you're wrong.
That's important. Even if you're wrong, your good faith matters a lot.
I would go so far as to expand the answer to other areas where you might be wrong, but where you went through the right process. The one that comes to mind is the idea of lavish. You provide entertainment, after going through a real process to decide if it's the right thing to do. Or gifts.
The lesson is, just because the DOJ disagrees with you doesn't mean they're going to prosecute you, if you went through a good faith process to examine the issue. So spend some time and have real discussions about these issues. It's as much of a safe harbor as you're going to get.
Like others, I read with interest the Tyco non-prosecution agreement. I was impressed by several facets of the NPA (including the fact that they got an NPA at all).
One thing I was struck by was in paragraph 16 of the compliance section (attachment B). The paragraph describes a requirement for mergers & acquisitions:
The Company will develop and implement policies and procedures for mergers and acquisitions requiring that the Company conduct appropriate risk-based due diligence on potential news business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel. If the Company discovers any corrupt payments or inadequate internal controls as part of its due diligence of newly acquired entities or entities merged with the Company, it shall report such conduct to the Department. (emphasis added).
Interesting language. Although not new language—it was in the NORDAM resolution, and I'm not sure how many others (I really need an intern)—it's language that no one has concentrated on in the Commentariat, and I think it deserves attention.
I'm wondering whether any company under an NDA or DPA would be able to engage in merger activity. Not because they're afraid of disclosing what they'd find.
Why would any company in its right mind entertain an offer from a company that, if something in the due diligence points to an illicit payment, would be required to inform the Department? First, if I'm a director of a corporation, and a business leader says, “these people are kicking the tires,” and I hear that the people looking at us are under an NPA or DPA with this requirement, my initial reaction is, “how likely is it that the due diligence will uncover something?”
Frankly, in any real-world situation, it's just not worth it. Could I ever be that confident in my own compliance to allow a third party to rummage through my books, records, and compliance program looking for problems? With the foreknowledge that if they find something, they're required to turn me in?
And it raises the question of what level of violation must be disclosed? Suppose the due diligence produces evidence of a series of gifts. Disclosable? The paragraph says corrupt payments or “inadequate internal controls” must be disclosed. What does that mean, exactly? Inadequate according to whom? If I were a company under a paragraph 16 requirement, I would probably be overcautious, and report anything at all I found that is anything less than a best practice. Of course, in this space, defining “best practice” is a moving target at best.
For VC or private equity, it's another reason to understand FCPA risk, and the FCPA in general.
There are several of us live-tweeting the FCPA Conference in DC. The hashtag we're using is #ACIFCPAConf. Search for that to get conference highlights.
Yesterday, I spent 2-3 hours reading the guidance, jotting notes in the margin, and doing some thinking on it. I'm on page 58. I don't yet have an opinion: how could I? I haven't finished reading it, much less thinking about it. I guess everyone is just smarter than I am, because I've heard several “it stinks” opinions, and seen articles about what it has in it, and what it lacks.
Here's what I've come up with so far about the Guidance:
It's the product of a tremendous amount of work. There are 418 footnotes. Cites to relatively obscure statutes, rules, and regs. Discussions about historical cases, and where those cases fit into an overall prosecution approach. And remember, it had to go up the chain of command at both the DOJ and the SEC. Which means twice the bureaucracy. Plus, let's remember, these are people with day jobs.
The process was the right one. (right up to the end) The DOJ and the SEC could have secluded themselves in a room and come out with the Guidance. They didn't do that. I keep saying that the enforcement record shows a thoughtful approach, and the process around the Guidance proves me right. The DOJ and the SEC met with businesses large and small to get their opinions. They met with in-house counsel. They met with defense counsel. They met with the Chamber and its representatives. The process they went through to decide on content was a fair one. Now, I don't want to sound petulant, but the only thing I think they should have done different was on the press briefing. Seriously, NPR? You have NPR there and not Dick Cassin? Or Mike Volkov? Or Tom Fox? Or me? For better or worse, there is an FCPA press, and it's not Huffington Post (who was there). To be fair, Mary Jacoby from Main Justice was there. But while major outlets might write a story today, the FCPA Commentariat is going to be poring over every word, and writing about it (honestly, ad nauseam) not just today, but tomorrow, and for the weeks and months to come. Play to your audience.
It seems to hit the right notes. Mike Volkov tried to set expectations a while back. It's not going to please everyone. It seems, just on perusal, that there's something in there for everyone. It's thorough, is my point. It doesn't break new ground, or set new policy (there were not one but two questions on that at the briefing). But frankly, anyone who expected that was kidding themselves. I like that there are declination descriptions (more, please!), and I like that there are hypotheticals. So far—up to page 58—it's been a serious discussion of potential FCPA liability, with some “be scared” moments, but also—and I really liked seeing this—some “calm down” moments as well. UPDATE: Thinking on it a bit more (and talking to some people at the ACI Conference), I also realized that it has more in there than I thought it would. It's not just a compendium of disparate information sources. It's a thoughtful presentation of how the DOJ thinks about the FCPA. It's not going to satisfy every desire, but there's meat on those bones.
I don't know what the rest of the Guidance holds—and I still haven't reached the substantive compliance discussion—but so far, I'm cautiously positive. If I were smarter, I guess I'd already have read it and formed full-fledged opinions, like some have. For my fully-formed opinion, you'll have to wait until I've finished reading it, or until I get smarter.
Bourke should lose. On the law, he should lose. And on the law, he's lost every time he's made the argument. So I don't know whether I should be impressed by his tenacity, or annoyed that he's bringing up the same argument over and over. I can say that his counsel performed excellently in front of the 2nd Circuit the other day—better than the government, honestly—and might actually pull out a Hail Mary win.
Let's start with the facts, and what was before the 2nd Circuit. Then to the argument itself.
Frederic Bourke was convicted at trial for scheming to bribe Azeri government officials so he could benefit from the privatization of the Azerbaijan oil industry. Bourke claimed he was an innocent investor, so knowledge was the crucial issue. The government established knowledge through the testimony of a Swiss lawyer named Hans Bodmer.
Bodmer testified that he and Bourke went for a “walk talk” in the early morning hours of February 6, 1998, after a short discussion the day before at the Baku Hyatt (Baku is the capital of Azerbaijan). During that “walk talk,” says Bodmer, he laid out the bribery scheme to Bourke. Two weeks later, Bourke invested $7 million of his and other people's money.
After Bodmer finished testifying (and presumably flew back to Switzerland), the defense raised an issue with his testimony: flight records show that he wasn't in Baku until the late morning of February 6th, after the walk-talk was supposed to have taken place.
These were Bourke's flight records, and the government had turned them over to defense counsel years before. Bourke's counsel could have used the records on cross-examination, but made what can only be called a strategic decision not to. After Bodmer left the stand, defense first brought up the records, and then used them effectively in closing argument. Not effectively enough—Bourke was convicted—but he used the records in front of the jury to discredit Bodmer.
A slight digression: I don't quite understand why the government didn't know about these flight records. On the one hand, given today's data volumes, can we really hold anyone to account for everything in every document in their possession? On the other hand, this was probably the most crucial piece of testimony in the entire trial. I try to avoid second-guessing government prosecutors, but I admit to being a bit surprised that they didn't check to make sure that that defendant was actually in the country for this crucial conversation.
After conviction, defendant appealed. In that appeal, AUSA Chernoff answered a hypothetical badly. He said that it wasn't a problem putting false testimony on the stand if correcting information was also put in. He also said that he couldn't tell Bodmer about the records because it would be grossly improper. I admit to not understanding that last piece. In my experience, if a witness contradicts a document, you show him or her the document and ask about the discrepancy. I don't see that as improper. It's call prep.
Anyway, the whole thing was a hypothetical, because here, the prosecution didn't know Bodmer was wrong about the date.
We've seen skillful defense counsel pick up on these kind of minor missteps before. And they did here. All of a sudden, the bad answer to the hypothetical becomes a “government policy” of putting false testimony on the stand.
That argument didn't last that long in front of Judge Scheindlin (the trial judge). In order to win, defense needs “new” evidence. The main problem for the defense is that they knew about, and used, the flight records at trial. And lost. So the flight records aren't “new” evidence.
Neither is this whole non-issue “new” evidence. It's actually neither new, nor is it evidence. And Judge Scheindlin rejected it without a hearing.
Now comes the second appeal, from that denial. It was heard earlier this week, and I was there.
It was an interesting experience. I forget sometimes that pro se litigants can also appeal. The case directly before the Bourke case was an age discrimination suit brought by a teacher. The teacher argued her own case, in casual clothes, complete with pictures of the kids in her classroom.
Another interesting thing: each side was allotted 10 minutes. Does that seem paltry to you? It did to me.
At the very end of his ten minutes, defense was asked a question that he didn't answer very well, because he couldn't. The question was, essentially, assuming that the prosecution knew about the records, what was the prosecution to do?
You have a witness with a story. You have a document that contradicts that story. According to AUSA Chernoff, you can't show the witness the document. I respectfully disagree. But suppose the witness said, “well, that's what I recall…what am I supposed to do, lie?” What does the prosecutor do then? Not call the witness?
I think that answer depends on two things: whether there's any reason to believe the witness believes he's telling the truth and how bad of a mistake it is. If the mistake is central to the case—testimony about a drug sale where the “seller” was in lockup at that time—or where the story becomes just gut-feeling wrong, you don't put on the witness.
If the mistake is minor—it happened on the 6th, not on the 5th—you put the person on, but tactically you need to prepare the jury. In Opening Statements, you say, “look, we're presenting testimony from human beings. Humans are fallible. We make mistakes. If you ask me and my wife when the two of us first saw each other, you'll get two different stories. That doesn't mean we're not married, right? It doesn't mean we didn't meet, fall in love, and walk down the aisle, right? Judge for yourselves on all the facts whether someone is just mis-remembering a minor detail or not. By the way, I don't care what she says, she was wearing the blue dress.” See?
Counsel for Bourke, though, made his best points when he was talking about the lack of a record. Although his “new”-ness argument is weak, the fact is that Bodmer left without the government asking what happened looks bad. Tigar made it look very bad, and combined that badness with Chernoff's bad answer about putting false testimony on the stand, and Tigar got his hooks into an actual argument.
The defense has thematically argued about how one of the most important people on the government's side, the person who could explain about how Bodmer was approached, interviewed, spoken to, counseled, convinced to testify, and prepared as a witness, the prosecutor who investigated the underlying case, wasn't at the District Court argument. Robertson Park, the former DOJ lawyer (now in private practice), stayed in DC for “budgetary reasons”. Welcome to the world, defense counsel. Yes, the DOJ is under budgetary constraints. Don't even get me started on the fallacy that the government has unlimited resources. No one who has spent day 1 in public service would ever say such a thing. But Park's absence was another hook that Counsel used to make it seem like there should have been a hearing. This was exacerbated by Chernoff not making the argument in the 2nd Circuit. Nothing wrong with that—I've had people fill in for me when I was on trial (as Chernoff was)—but it played into the Defense theme.
One exchange by Counsel and the Judges, by the way, is potentially indicative of an out for the 2nd Circuit if they want to reverse. You see, there're a couple of cases which talk about what the prosecutor must do when he or she has reason to suspect a problem with a witness' testimony. A duty to investigate. The question the judge wanted to know was what the prosecutors did once they belatedly discovered the discrepancy. The answer—remember, Bodmer had already gone home—was…nothing.
But there wouldn't have been an inquiry, because this wasn't a case where the prosecutors knew that something was wrong. The government, for whatever reason, was blindsided by the flight records. Each piece forms part of the whole: Park wasn't there, Scheindlin didn't have a hearing, Chernoff's bad answer would have opened avenues of inquiry, nobody confronted Bodner. Each refutable on its own, but if you look long enough at a set of random dots, patterns will emerge regardless of whether they're there or not. In hindsight, whatever actually happened appears as if it were inevitable.
The defendant's lawyer—Michael Tigar—was excellent, if a little flamboyant. “The engine of justice is fueled by adversarial questioning…” kind of thing. The metaphors got a little thick. Still, he did extremely well. He made his best points when he talked about how the record was silent: his main argument is that Scheindlin should have had an evidentiary hearing (the engine of justice is fueled….)
He seemed to be especially playing to one of the Judges. I'm not sure why, exactly: I think it was a Judge who was in on one of the decisions about how the DOJ has the duty to inquire. I'm not certain of that, but that was my impression.
There's no question in my mind that Tigar won the argument The main problem for the prosecution was that AUSA Fish wasn't the trial lawyer, and evidently hadn't been involved in the case very long. I don't blame Fish for any of this, by the way. I'm sure he's a highly capable and highly trusted Assistant US Attorney (after all, he was tapped to argue this in the 2nd circuit, QED, he's bright and trusted). And I've also been thrown into arguments by, (that is, filled in for) colleagues. I always say that on average and over time, the lawyer with the best command of the facts wins. When it's not your case, you simply don't have the depth of knowledge that fuels an ability to effectively argue an issue. Fish, through no fault of his own, didn't have command of those facts. Tigar did. And Tigar took the day.
I'm not sure if taking the day is going to be enough. Scheindlin was within her rights to deny the hearing, and I think that's the way the 2nd Circuit will hold. Bourke's “new” evidence hasn't been bought into yet, and it shouldn't be.
Thanks to Mary Jones via Tom's FCPA Compliance & Ethics Blog. She came up with this list of ways companies have described illicit payments in their books and records:
*Local/Special/Customs Processing Fee
*Interventions (Special Intervention or Customs Intervention)
*Expediting Fee (including Expedited Release)
*Express Fee (including Express Clearance)
*Local Government Agency Charge
*Foreign Charge
*Special Handling Fee
*Special Operation
*Urgent Dispatch or Processing Fee
*Additional or Special Assessment
*Additional or Special Transit Fee
*Customs Overtime
*Government or Other Outlay
*Fine or Penalty
*Maritime Fee
*Impound Charge
*Customs Evacuation
*Preclearance Fee
*Temporary Extension
*Emergency Release Fee or Payment
*Safe Passage Fee
*Community Fee
*Operation Fee
I just read about an interesting new app called Snapchat. As a consumer, it sounds fantastic. Secure, fast chatting capability, with pictures and text. According to All Things D, it's a fast-growing service, with 20 million “snaps” sent per day, and over 1 billion since last September. It launches for Android today.
Here's the description of the service that's on All Things D. Tell me if you see the problem. I saw it in about 10 nanoseconds.
It allows users to take a photo with their phone, overlay a little bit of text, and send it to another user. The recipient can view the photo message for a set amount of time between one second and 10 seconds. Then it’s deleted forever from both people’s phones, and from Snapchat’s servers.
See the problem? Originally, the app “gained notoriety” for being a teen sexting app. I don't see the main issue being teens sending racy pictures.
Drug dealers, on the other hand…. Terrorists. Enemy spy rings. Is it me or is this a covert-action nightmare? The perfect way for people who are up to no good to communicate.
In my eDiscovery world, this would also pose significant challenges. Granted that there's no requirement for companies to keep data outside of litigation holds, and that holds are generally backward-looking, but I still see issues. Sometimes there's an ongoing preservation requirement. What do you do for this kind of software? Do you prohibit its use by workers under a litigation hold?
Lots of issues. I see this as an ongoing risk, and one which is going to only get bigger. Not the app itself, but the development of apps which push the border of privacy, ability to preserve, and—I know this sounds a little self-important—but of national security. I don't know how we're going to adapt as compliance folk, but adapt we must.
Once again returning to my contrarian roots, I'm not going to talk about “tone at the top” anymore. Why? Because it's become more jargon than substance. Same with it's kissin' cousin, “commitment from the top.” I've heard that latter phrase used when “tone” just isn't enough. The problem is, neither is “commitment.”
Instead, let's create a new umbrella idea called “demonstrated seriousness from the top.” The “serious” piece includes tone. The “demonstrated” piece is new, and in my opinion, is what's been missing from the old formulation.
A company's commitment to reducing instances of bribery and detecting when bribery occurs is a recognized requirement. I'm not arguing that. But “tone” is too often about words. Demonstrated seriousness is about action.
What kind of action do I mean? Here are two examples. A company I know appoints “compliance champions” in the ranks. These are influential employees who accept additional responsibility to serve as compliance touchpoints for other employees. Champions receive additional training and answer questions from other employees. That's great, and something a lot of companies do. The fact that the leaders in that company support the Champion program is good tone.
What distinguishes this company's program, however, is that Champions get stock. That's demonstrated seriousness. Senior Management putting their money where their mouths are. And these are employees who aren't at a level where they're normally eligible for restricted stock awards or option grants. But the company has demonstrated that it is serious about anti-corruption.
The second example is a company where the compliance rates the business on compliance at the end of the year. That rating impacts the bonus pool for that business division.
Demonstrated seriousness is how we know that anti-corruption compliance goes beyond lip service.
There's a qualitative difference, for example, between a CEO who creates a video on the company intranet scolding employees about his or her commitment to integrity, and a CEO who puts compliance on a high-performing employee's scorecard. That's a constant refrain of mine. Consistent messaging includes things like how a company treats high performers who, as one example, skip compliance training. Does the high-performer's boss request a waiver from compliance? Because even if Compliance says no, all the other employees have “gotten the message”: results are the only thing matters. What happens to that supervisor?
These are the important questions. Not whether the leader introduces the Code of Conduct training video.
It's also more in line with what the DOJ actually looks at. Every company says that it is against corruption, and all about integrity. Every one. The DOJ comes in and asks, “how have you shown that?” Prove it to me. Point to things you've done that show your commitment, especially in the face of revenue at risk. Think about the best possible hypothetical answer to that question: we've disciplined high performers, we've publicly rejected business because of compliance concerns, we've promoted someone because of good compliance, we metric compliance on salespeople's scorecards, we punished a supervisor for not detecting a violation by his or her employee. These are all excellent, and all are shortchanged if you just call them “setting the tone.”
Let's stop talking about tone, and start talking about “demonstrated seriousness.”