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Brandon L. Garrett

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Don't Believe the Hype on Corporate Bribery

Posted: 05/ 2/2012 8:52 am

In a rousing speech last fall in Washington, D.C., Assistant Attorney General Lanny Breuer called "fighting corruption around the world" a current "top priority" of the Department of Justice. He described how the Justice Department uses the Foreign Corrupt Practices Act, which criminalizes bribes to foreign officials and shoddy records and controls, as a crucial weapon in that mission. He spoke movingly about how festering small-time corruption caused a young Tunisian man to set himself on fire, igniting the protests that led to the Arab Spring.

Back at home, tales of foreign corruption and bribery have dominated the business pages. This past week, the New York Times broke the story about how executives at Wal-Mart shut down an internal investigation into bribes in Mexico. Prosecutors are now investigating the retail giant, and it may have taken a hit to its reputation already, but how seriously do prosecutors take corporate malfeasance? This week, News Corp was said to exhibit "willful blindness" by British lawmakers reporting on the phone hacking scandal, and since that conduct allegedly involved British journalists paying bribes to British officials for tips on stories, it could violate the FCPA. News Corp. is currently under investigation for FCPA violations.

Corporations are persons, and as the Supreme Court in Citizens United reminded us, they have rights. With those rights come some responsibilities. Corporations can be prosecuted as criminals and every year some corporations get convicted of crimes, even some big ones. However, over the past decade, in the wake of one financial scandal and crisis after another, the government has not stepped up corporate crime enforcement. In fact, the evidence is to the contrary. There are good reasons to think that corporate crimes committed closer to home need more attention -- and more resources for prosecutors -- if we expect prosecutors to do more than slap corporations on the wrist.

At first, foreign bribery prosecutions may seem big and brash and the farthest thing from a wrist-slap. Major multi-million dollar FCPA settlements have been announced in the past few months, with corporations like Alcatel-Lucent paying $137 million, medical device maker Biomet paying over $20 million, and BizJet International paying almost $12 million in penalties. The record still goes to Siemens, which paid $800 million in fines paid to the DOJ and SEC in 2008. In general, some of the biggest corporate fines are in FCPA prosecutions. Avon and News Corp. and scores of other major corporations are reportedly also under investigation. Some have asked whether prosecutors are going too far, whether prosecutions can be the death penalty for a firm, or whether American companies can compete if they cannot pay bribes around the world without suffering criminal consequences.

Don't believe the hype. While it is hard to imagine a bigger corporate target than Wal-Mart, the nation's largest private employer, looks can be deceiving. These prosecutions can be smaller than they appear. Even if the retailer did hide serious foreign bribery, because Wal-Mart says it made top-to-bottom changes to prevent bribery, prosecutors may offer the company a common type of leniency deal known as a deferred prosecution. In a deferred prosecution or a non-prosecution, the firm has to agree to cooperate fully, admit wrongdoing, implement compliance reforms and pay fines. Wal-Mart cannot go to jail, of course. But deferred prosecutions allow a firm to avoid the embarrassment and legal consequences of an indictment and a conviction -- and maybe the fines they would get at a trial as well.

These agreements have become common over the last decade, during the same time that FCPA enforcement ramped up. By my count, there have now been almost 230 such deferred prosecution agreements since 2001. Almost two-thirds were public corporations. Almost a third were major Fortune 500 or Global 500 firms. The FCPA has played a big part in this story of a more lenient approach to prosecuting major corporations. More than one-fourth of the deferred prosecution agreements were in FCPA cases. Even more companies have been convicted of FCPA violations. (But few individual employees have been convicted -- another complaint about the way DOJ has handled these cases -- although the employees may be hard to find abroad and they may be sympathetic if they were doing what they were told or what they thought had to be done where corruption was rampant). All told, there have been 94 corporations prosecuted under the FCPA, with average fines of almost $30 million.

Although fines averaging in the tens of millions sound truly massive, look again -- they may be fairly trivial in comparison to the corporate profits. When Biomet recently paid its $17 million fine, prosecutors said that it received a 20 percent reduction from the very "the bottom of the fine range," as a reward for "extensive" cooperation and compliance. Yet Biomet may have gained over $4 million from its scheme. The record fines paid by Siemens were no question really big, but the guilty plea cited a fine range of $1.35 to $2.7 billion, while the fine Siemens paid was $800 million (of which almost half was civil and paid to the SEC). Siemens had admitting to paying multi-million dollar bribes to secure lucrative contracts around the world -- entire mass transit systems, for example. Siemens also avoided collateral consequences, like, for example, being debarred from contracting with the U.S. Government. And that was in the biggest FCPA case of all time. How serious are these punishments then -- particularly if many corporations never get caught? One reason companies may get off light is that they say they have reformed, by creating good new compliance programs. That is what Wal-Mart and News Corp. both say they have done already. But how sure can we be that compliance is real and not "cosmetic"? Some recidivist firms have been prosecuted repeatedly. Big firms have also pushed back by calling for Congress to amend the FCPA. It could happen. Foreign corruption was not always a priority; after it was passed in 1977, the FCPA was hardly enforced for two decades.

In the lingering aftermath of the last financial crisis, many have asked why Wall Street has not faced more significant prosecutions. Investigations take time and more prosecutions may be still in the works, but corporate criminals are also harder to catch than street criminals. Currently, there are far more prosecutions of corporations for foreign bribery than for securities or mortgage fraud. Even big investigations of companies like Wal-Mart may be the low-hanging fruit. Most of these FCPA cases are self-reported by the corporation itself -- not uncovered by intrepid police-work. They should not make us think prosecutors now have enough resources to take on major corporations. After all, corporations routinely spend hundreds of millions of dollars on FCPA investigations and defense costs; prosecutors can hardly command such resources. Foreign corporations now pay the largest FCPA fines, and my data from the past decade shows that foreign corporations pay larger fines across a whole range of crimes. Maybe the foreign companies that are prosecuted really are the worst violators out there.

Or maybe we need to make it more of a priority to investigate corporate crime here at home.

Brandon L. Garrett, the Roy L. and Rosamund Woodruff Morgan Professor of Law at the University of Virginia School of Law, is under contract with Harvard University Press to write a book about corporate prosecutions, and recently wrote Convicting the Innocent: Where Criminal Prosecutions Go Wrong.

 
 
 
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