Just Say Yes To The Compliance Defense

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Ed. Note – this week, I am pleased to join my colleagues David Simon, partner at Foley & Lardner LLP, and William ‘Bill’ C. Athanas, partner at Waller Lansden Dortch & Davis, LLP, in a tripartite debate on the efficacy of the affirmative defense of a compliance program to the Foreign Corrupt Practices Act (FCPA). Yesterday, I presented my views, from the perspective of a former in-house counsel, on why a compliance defense would not help to create greater compliance with the FCPA. Today, Simon will discuss his views, from the perspective a white collar defense practitioner, on why a compliance defense under the FCPA would foster greater compliance with the Act. Tomorrow, Athanas will present his views as a former Department of Justice (DOJ) prosecutor. I hope that you will enjoy our debate.

I believe the FCPA should be amended to include an affirmative defense to corporate FCPA criminal liability based on an effective corporate compliance program.  Here’s why:

1.         A compliance defense would be fair.  It would recognize the challenges faced by global companies operating in far-flung places.  Sometimes our enforcers assume a lot more control than actually exists or can exist in the real world.  Even very good, very ethical companies operating in good faith have trouble preventing, for example, a mid-level manager in Kuala Lumpur from violating company anti-bribery policies, even where those policies had been clearly and directly communicated to him.  This dynamic is perhaps best illustrated by the fact that a significant number of companies recognized as “Most Ethical” have had publicized FCPA problems.  See the FCPA Professor’s blog post entitled, “Oracle – Another World’s Most Ethical FCPA Violator?“.  By including a compliance defense to FCPA liability, we would recognize the reality that the world is a complicated and not easily navigated place and that strong compliance efforts undertaken in good faith sometimes fail.

Moreover, U.S. companies currently operate under what is effectively a strict liability regime:  they have to assume that any violation of the FCPA by any employee of any subsidiary anywhere in the world will create corporate liability.  This distinguishes the FCPA from other corporate criminal offenses that are not extra-territorial, and answers the question of why we should enact a compliance defense in just this one area of U.S. criminal law.

An effective compliance defense would represent a fair and reasonable counterbalance to those realities.  Note that the UK made a similar trade-off in its Bribery Act – both the strict liability aspect and the affirmative defense are made explicit.  Further, other OECD countries also maintain some kind of defense based upon corporate compliance.  The idea that corporate compliance should be rewarded in this way is hardly a novel one within the context of anticorruption law – for good reason.

2.         An effective corporate compliance defense would not undermine anti-corruption enforcement.  Those opposed to a compliance defense sometimes claim that it would seriously undermine the enforcement regime.  They contend that such a defense would result in a race to the bottom, where companies would do the least they could get away with to preserve the defense.

But an affirmative defense to corporate FCPA liability would not give a free pass to any company that has an anti-corruption policy.  Or to one that simply checked a training box by sending around an off-the-shelf web-based training module to employees around the world.  Instead, by explicitly making clear that only a tailored and effective compliance program qualifies, such an affirmative defense would encourage companies to work hard to implement appropriate compliance measures, thereby aiding the cause of ensuring that less bribery occurs.  Since a company invoking the defense would bear the burden of showing that it had an effective program and that any violation occurred in spite of that otherwise effective program, only companies that implemented carefully thought out and well functioning programs would qualify.

The contours of this would obviously need to be sorted out, but I would expect the standards of “effectiveness” would be similar to those articulated in the DOJ/SEC Guidance.  A company would likely bear the burden of showing adequate training and communication, incentives and discipline resulting from compliance failures, third-party due diligence, a confidential reporting system and a process for investigating red flags that arise, periodic testing and auditing, and due diligence and integration of acquisitions.  That burden would not be light; the showing required would be significant.

Some would argue that DOJ already gives credit for an effective compliance program, in that its corporate charging guidelines instruct that prosecutors should take into account the existence and adequacy of the corporation’s compliance program when deciding whether to bring charges.  But the reality is that it is only in the rarest circumstances, if at all, that the existence of even a top-of-the-line compliance program leads to a declination.  Further, once the decision is made to proceed with an investigation, or in the context of settlement discussions, it is unclear that any credit is given for compliance at all.  Putting in place an explicit affirmative defense would be consistent with the recognition in the DOJ guidelines that corporate compliance is an important factor in determining culpability and would further that goal by encouraging compliance.

It is very hard to see merit to the argument that the objectives of the FCPA will be undermined by a policy that promotes better and more effective compliance. Don’t we want to incentivize exactly that behavior?  I simply don’t see how this results in a race to the bottom.

3.         Finally, perhaps the most significant benefit to enacting a compliance defense would be to provide much clearer guidance to companies on what actually constitutes an effective compliance programEnacting an effective compliance affirmative defense will help develop a body of law on what constitutes an effective compliance program.  As we have learned from the individual FCPA prosecutions of the past couple of years, there is no better way to develop the law than through actual litigation.  Formalizing an effective compliance program affirmative defense would create an incentive for companies to fight FCPA charges.  And by doing so, we might actually get cases assessing the effectiveness of actual corporate compliance programs.  This would be an unqualifiedly good thing:  it would help clarify what is required of companies and would give compliance practitioners specific guidance for formulating good programs.

This is how law usually develops in our system.  In my view, it is the best way to address a nuanced, fact-specific world like anti-corruption compliance.  Rather than forcing companies to try to divine the intentions of the FCPA regulator mandarins, they can compare their facts and circumstances to litigated cases, determine where they fit, and make a better judgment of what they need to do to make their compliance program one likely to be deemed effective.

David Simon, a partner at Foley & Lardner, defends corporations in government enforcement actions, conducts internal investigations, and provides compliance advice and counseling.  He specializes in the FCPA and other anti-corruption laws. He can be reached at DSimon@foley.com

Episode 5 of the FCPA Compliance and Ethics Report is up and available to review. In this Episode I, discuss the evolution of transaction monitoring in FCPA compliance programs. You can check it out by clicking here.