THE ORIGINS OF THE FCPA: LESSONS FOR EFFECTIVE COMPLIANCE AND ENFORCEMENT – PART FIVE
This is the fifth part of an occasional series. The first is available here, the second here, the third here and the fourth here. The entire paper will be published by Securities Regulation Law Journal early next year.
The Congressional debates
The revelations from the Watergate hearings and the Commission’s investigations and enforcement actions sparked two years of Congressional hearings. Those revelations also spawned a widespread debate in the United States and abroad regarding the corporate conduct, the Commission’s actions and what, if anything, should be done.
In some quarters the revelations engendered reform efforts. “In the business community many companies initiated reform efforts, separate and apart from those organizations involved in the volunteer program. In a number of instances the disclosures “prompted outside directors to increase their involvement in and knowledge of corporate affairs. In many cases, these outside directors reportedly have been instrumental in initiating internal investigations and requiring more stringent auditing controls.” Id. at 44-45. The boards of directors at many companies issued orders directing that the kind of conduct identified in the Commission’s cases be halted. Id. Many companies adopted or reformed their corporate code of conduct. Many of those policies prohibit the use of corporate funds or assets for unlawful or improper purposes. A number of firms also included provisions regarding the documentation of payments. The new or revised policies were typically distributed to employees. SEC Report at 48-49.
The accounting profession also instituted reforms keyed to the type of conduct identified in the SEC’s actions. Many firms digested the Commission’s cases and related news articles, distributing the material throughout the firm. The major accounting firms instituted a series of specific steps which included: 1) Establishing procedures to ensure that information relating to questionable payments is brought to the attention of senior personnel; 2) Establishing policies to assure that questionable or sensitive transactions are brought to the attention of the board of directors, preferably the audit committee; 3) Preparing educational materials for clients which encourage the adoption of policies relating to ethics in business transactions; 4) Adopting policies that encouraged clients to voluntarily disclose information regarding questionable payments to the Commission; 5) Extending audit procedures in appropriate circumstances; and 6) Modifying representation letters to include statements about questionable or illegal payments. Id. at 52.
The Auditing Standards Executive Committee of the American Institute of Certified Public Accountants also considered reform and the SEC urged the Exchanges to consider new listing requirements. The former prepared an exposure draft on “Illegal Acts by Clients.” Id. at Exhibit C. As to the latter, SEC Chairman Roderick Hills wrote a letter to the Chairman of the New York Stock Exchange suggesting that the Exchange consider adopting a requirement that firms have an audit committee composed of independent directors as part of its listing standards. The Commission had been seeking to have boards establish an audit committee composed of independent directors since 1940. Letter of SEC Chairman Roderick Hills to William Batten dated May 11, 1976, discussed in SEC Report, Exhibit D.
Many were highly critical of the actions taken by the Commission. Some thought the cases should not have been brought. Others claimed that the sums involved were not material. Still others argued that since many of the transactions took place in foreign countries the issue was one of local law in the particular country. Then SEC Chairman Roderick Hills summarized many of these points in a speech delivered at Yale Law School in 1976:
· One commentator stated that the questionable payments cases were just another experiment doomed to fail, comparing the cases to prohibition: “’America’s unlamented noble experiment with prohibition in the 1920’s made more sense than this new crackdown. Back then, the do-good arguments for banning booze worked out as a bonanza for crime, corruption, and conspiracy. Now the SEC’s new experiment in righteousness is about to backfire too. It will register more laughter abroad than sales. Washington’s cleanup code for corporations under pressure to pay off abroad is reducing America to a role of ‘a pitiful, helpless giant’ . . .’”
· Another comment from a distinguished Washington lawyer and former SEC staff member noted: “‘What function remains for the SEC here? I submit; none. The Commission is plainly out of its ballpark . . . ‘”
· A state court judge wrote: “‘I read your bureaucratic blurb in the Wall Street Journal today (about foreign payment cases). You are out of your mind. Stockholders don’t give a good damn.’” Hills at Yale at 2.
Throughout the Congressional hearings there was a significant debate regarding how to address the question. Opinions ranged from doing nothing to drafting additional disclosure requirements or to criminalizing foreign bribery. The SEC considered its existing authority adequate. At the same time the Commission favored adding additional provisions focused on disclosure and internal controls. The agency did not advocate anti-bribery legislation as the topic was out of its traditional disclosure role and such a provision could be difficult to enforce. As Director Sporkin later noted: “we were a disclosure agency . . . Our concept was to get the information to the shareholders and let the shareholders make decisions on what they wanted to do.” Transcript at 14. It also sidestepped suggestions that the agency be given authority to bring criminal prosecutions as an unnecessary consideration at the time.
The Commission advanced proposed legislation to strengthen reporting requirements and internal controls. It had three key components: A prohibition against the falsification of corporate accounting records; a prohibition against making false statements to auditors; and a requirement that the company maintain a system of internal accounting controls. A draft bill reflected these points: 1) A proposed new Section 13(b) had two primary subcomponents: a) proposed 13(b)(2)(A) would require that every issuer “make and keep books, records and accounts, which accurately and fairly reflect the transactions and dispositions of the assets of the issuer. . .” ; b) A new proposed Section 13(b)(2)(B) would require every issuer to “devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurances that . . .” transactions were executed as authorized and in accord with GAAP; 2) A proposed Section 13(b)(3) would make it unlawful to falsify records required to be maintained, for an accounting purpose; and 3) A proposed new Section 13(b)(4) would prohibit the making of false statements to the auditors. SEC Report at 63-64.
The Business Roundtable stated that it was opposed to the kind of conduct uncovered in the Commission’s investigations. At the same time it argued that existing authority was sufficient to deal with the questions. Accordingly, no additional legislation was required. Koehler at 949. Other commentators thought that the passage of anti-bribery laws would strengthen the position of U.S. corporations doing business abroad who could then resist requests for the payment of bribes and gratuities as illegal. Id. at 944.
Departments within the Government took divergent views. The Department of State strongly opposed U.S. corporations making such payments. Such acts could interfere with and weaken U.S. foreign policy. Id. at 965. For example, some thought that payments made by Lockheed Corporation in Italy and Japan may well have damaged U.S. relationships. Indeed, in August 1976 the former Prime Minister of Japan was indicted for accepting $1.7 million from Lockheed. The Netherlands was rocked by the Lockheed scandal. Id. at 941.
The State Department, however, opposed legislation that would directly prohibit and criminalize such actions when undertaken in foreign countries. Id. at 965. The Department also expressed concern that the disclosure of such transactions might make it more difficult for the U.S. Government to assist American firms in pursuit of their legitimate business interest with friendly government. Id. See also, Statement of the Chairman of the House Subcommittee on Int. Econ. Pol., 94th Cong. At 1-2 (1975) (Disclosure of these types of transactions could have ramifications not just for the country involved but also for the business enterprise in other countries. For example, the Republic of Peru expropriated the property of Gulf Corporation. Other Latin American countries were also considering expropriation legislation based on what the disclosures about corporate payments potentially impacting foreign elections).
The Department of Defense was in a difficult position. It produced a series of documents as well as witnesses. Later, Senator Proxmire, a leading proponent of the legislation that ultimately became the FCPA, summarized his views regarding the Defense Department noting: “One of the most disturbing aspects of this is the role the Defense Department has played, especially with respect to defense contractors who sold abroad. We have a document which indicates that at one point a top official in the Defense Department had counseled defense contractors on paying bribes and urged them to do so under circumstances where it was necessary.” Foreign and Corporate Bribes: Hearings Before the Senate Comm. On Banking, Housing and Urban Affairs, 94th Cong. 46 (1976) (statement of Senator William Proxmire, Chairman, Senate Committee on Banking, Housing and Urban Affairs at 110). The questionable payments by corporations also had ramifications under other statutes and government programs such as the Internal Revenue Code, the antitrust laws, the role of the Overseas Private Investment Corporation in overseas investments and the Civil Aeronautics Board. See Herlihy & Levine beginning at 595; Koehler at 950-61.
Over the two years that Congress debated the foreign payments issues approximately twenty different bills were introduced. Koehler at 980. By the second year, a rough consensus developed that some form of legislation was required. The critical question became the approach – disclosure or criminalization. The SEC favored the former, concluding that criminal anti-bribery provisions would prove difficult to enforce and unworkable. Others thought the disclosure approach would prove ineffective.
Two key legislative proposals emerged. In March 1976 Senator Proxmire introduced S,3133 in the Senate. It combined the two approaches using both disclosure and criminalization. S.3133 contained a criminal payment provision and disclosure requirements. The bill was unique since it included both approaches. In May 1976 Senator Church, another leading proponent of legislation, introduced S.3418. This bill used the disclosure approach for a variety of payments. In June 1976 Representative Solarz, another leader on this issue, introduced H.R. 1434. It essentially used the approach of Senator Church’s bill. Koehler at 985.
As these bills were being introduced, President Gerald Ford issued a memorandum to various federal agencies establishing a “Task Force on Questionable Corporate Payments Abroad.” Gerald R. Ford, Memorandum Establishing the Task Force on Questionable Corporate Payments Abroad, available at http://www.presidency.ucsb.edu/ws/?pid=5772. The Task Force was chaired by Secretary of Commerce Elliott Richardson. Subsequently, the views of the Task Force were summarized in a June 1976 letter to Senator Proxmire from its Chairman. The letter rejected the combined disclosure-criminal approach adopted by the Proxmire bill: “There are two principal competing general legislative approaches – a disclosure approach or a criminal approach. While it is possible to design legislation – as indeed is the case with S.3133 – which requires disclosure of foreign payments and makes certain payments criminal under U.S. law, the Task Force has unanimously rejected this approach. The disclosure-plus criminalization scheme would, by its very ambition, be ineffective. The existence of criminal penalties for certain questionable payments would deter their disclosure and thus the positive value of the disclosure provisions would be reduced. In our opinion, the two approaches cannot be compatibly joined.” Letter from Secretary of Commerce Richardson to Senator Proxmire, quoted in Koehler at 989-91.
The Task Force also rejected the criminalization approach, noting that while it would “represent the most forceful possible rhetorical assertion by the President and the Congress” on the issue it would “be very difficult if not impossible [to enforce]. Successful prosecution of offenses would typically depend upon witnesses and information beyond the reach of U.S. judicial process. Other nations, rather than assisting in such prosecutions, might resist cooperation because of considerations of national preference or sovereignty. Other nations might be especially offended if we sought to apply criminal sanctions to foreign-incorporated and/or foreign-managed subsidiaries of American corporations. The Task Force has concluded that unless reasonably enforceable criminal sanctions were devised, the criminal approach would represent poor public policy.” Id.
The Task Force adopted the disclosure approach, although it recognized that this might increase the paper work burden on American business. This approach is preferable because it “would supplement current SEC disclosure . . . [and] would provide protection for U.S. businessmen from extortion and other improper pressures, since would-be extorters would have to be willing to risk the pressures which would result from disclosure of their actions to the U.S. public and to their own governments . . .” Letter from Elliot Richardson, U.S. Secretary of Commerce to Senator William Proxmire, Chairman, Senate Committee on Banking, Housing and Urban Affairs, quoted in Koehler at 990-91. Subsequently, President Ford issued new initiatives based on the Task Force report. Id. at 992.
With the election of President Carter and the opening of the 95th Congress after the 1976 election, the Task Force proposals lost force. Id. at 995. Subsequently, bills were introduced in the House and Senate which eventually, after modification in committee, became the FCPA. In February 1977 Representative Eckhardt introduced H.R. 3815. The bill used the criminalization approach based on the notion that the disclosure approach would be burdensome for business. In May 1977, Senator Proxmire introduced S.305 which was substantially similar to his earlier bill which had passed unanimously in the Senate during the prior legislative term. By November both bills had passed in their respective Chambers. Differences were reconciled in conference. Id. at 998.
The criminalization approach was adopted. As the Committee report stated: “The prevailing view was that the criminalization approach embodied in S.305 and H.R. 3815, along with supplemental books and records and internal control provisions that were agreed to in conference, represented the best legislative response to the foreign corporate payments problem.” Id.
Nevertheless, there continued to be strong minority views as noted in the House Report: “We support, without reservation, the goal of H.R. 3815, which is the elimination of foreign bribery. We are concerned, however, that the approach adopted by H.R. 3815 is not the most effective to eliminate questionable foreign payments [for the reasons stated by the Task Force] . . . We believe that adoption of the disclosure approach would, in no way, imply that payoffs would be condoned as long as they are disclosed. Rather, we believe that this approach would prove ultimately to be a much more effective deterrent . . . “ Quoted in Koehler at 998-99.
In December 1977 President Carter signed the bill into law. The journey was summarized by one leading commentator: “After more than two years of investigation, deliberation and consideration of the foreign corporate payments problem and the policy ramifications of such payments, and despite divergent views as to the problem and the difficult and complex issues presented, Congress completed its pioneering journey and passed the first law in the world governing domestic business conduct with foreign government officials in foreign markets.” Id. at 1002 (emphasis added).
Next: The concluding segment to the series