(Pix © Larry Catá Backer 2017)
I am happy to report the posting of a new paper, currently titled "From a “Two Thrust Approach” to a “Two Sword One Thrust Strategy” to Combat Criminal Corruption: Corporate Compliance, Prosecutorial Discretion, and Sovereign Investor Oversight." The paper represents a bit of an experiment. It seeks to reconsider, in an unconventional way, the possibilities of building policy coherence (1) from among institutions of different jurisdictions and mandates, and (2) at the margins of regulatory governance.
The specific object is to think through the possibilities of multi-lateral and multi-institutional coherence in the specific context of corruption. To that end I have focused on the ways in which prosecutorial discretion has been institutionalized in the context of corruption investigations, especially with respect to the ways in which the standards for gauging discretion produce significant incentives to reform corporate governance (and especially the understanding and operation of compliance). I have also focused on the ways in which sovereign investors have begun to engage in a very similar practice in exercising their discretion to (1) invest in enterprises, (2) and exercise their shareholder power. I argue that in some states it may be possible to align both trends in rulemaking touching on discretion to the ends of coordinating regulatory governance that manages the scope and conduct of corporate compliance.
The final version of the paper will be published in Chinese
in the Jilin University Journal, social science edition 吉林大学学报社科版 (forthcoming 2017). The Abstract and introduction (in English) follow below. The paper (in English) may be accessed HERE.
From a “Two Thrust Approach” to a “Two Sword One Thrust Strategy” to Combat Criminal Corruption: Corporate Compliance, Prosecutorial Discretion, and Sovereign Investor Oversight
Larry Catá Backer[1]
ABSTRACT: The commitment of governments, international organizations and enterprises to combatting corruption appears to have intensified in recent years. The efforts of these institutions appear centered on a “Two Thrust Approach,” consisting of the simultaneous application of the development and enforcement of public legal regimes and the implementation and operation of private compliance systems. This system does not produce regulatory coherence between the law making by the government and the compliance systems created by business are not coordinated well. However, recent regulatory and compliance trends suggest the emergence of a “Two Swords, On Thrust Strategy” as a supplemental approach to the enforcement of anti-corruption rules and norms. The Two Swords-One Thrust Strategy combines the power of state officials to exercise discretion in managing anti-corruption laws and the authority of financial institutions to control the access of enterprises to their investment universe or to exercise their shareholder authority to influence corporate behavior. The essay examines the possibility of developing this strategy. To that end, the essay first considers the emerging efforts to institutionalize rules for the exercise of prosecutorial discretion in criminal investigations to compel corporate governance reform. It then considers the “second sword”, the use of market power by sovereign investors to influence compliance oriented corporate governance reform that parallels those advanced by prosecutors. The essay ends by suggesting the utility of this strategy for Chinese anti-corruption efforts by considering the possibility of coordinating the work of the procuratorate with the financial power of Chinese sovereign wealth finds in the exercise of their shareholder power and their power to limit access to investment markets. The Chinese language version of this essay will appear in the Jilin University Journal, social science edition 吉林大学学报社科版 (forthcoming 2017).
I. Introduction
Who cares about corruption?[2] In September 2017 news media reported that parliamentarians at the Council of Europe had been bribed by Azerbaijan to mute criticism of their government within this human rights organs of the Council of Europe.[3] Also in September 2017 France’s financial prosecutor announced the commencement of a corruption investigation against the son of the former president of the International Association of Athletics Federations for payments to influence the choice of host cities for the largest global sporting events.[4] At the same time, authorities in Brazil launched a probe into vote buying for the 2016 Olympics, a criminal offense.[5] In August, 2017, Vietnam reported that it had sentenced bankers to death in connection with the embezzlement from a state owned bank.[6]
“’It’s a message to those in this game to be less greedy and that business as usual is getting out of hand,’ said Adam McCarty, chief economist with the Hanoi-based consulting firm Mekong Economics. ‘The message to people in the system is this: Your chances of getting caught are increasing,’ McCarty said. ‘Don’t just rely on big people above you. Because some of these [perpetrators] would’ve had big people above them. And it didn’t help them.’”[7]
It is noteworthy that Columbia, shortly after the peace settlement ending fifty years of civil war turned its attention to the control of criminal corruption, in response to corruption scandals involving transnational corporations that reached to the office of the president of the republic.[8] “Already seven people have been jailed in the case, including a former senator and an ex-vice minister of transport. The attorney general also asked the Supreme Court of Justice to investigate five other members of congress.”[9] In China, Ding Ning, the chairman of Yucheng Group, was recently sentenced to life in prison for his role in an online lending fraud scheme.[10] In August, 2017, “The Supreme People’s Procuratorate said China would strictly crack down on any crimes that seriously damaged financial security and that destroyed financial orders.”[11]
Corruption, and especially bribery, has become a matter of international concern. The UN Global Compact, a voluntary initiative between large enterprises under the leadership of the United Nations built around commitments to implement universal sustainability principles and to take steps to support UN goals, is built around ten principles.[12] Its 10th Principle states that “Businesses should work against corruption in all its forms, including extortion and bribery.” The U.N. Global Compact has expressed the view that “Corruption is a considerable obstacle to economic and social development around the world. It has negative impacts on sustainable development and particularly affects poor communities.”[13] In that respect the U.N. Global Compact highlights a “two thrust” attack on corruption. “New and tougher anti-corruption regulations continue to emerge worldwide. All companies need robust anti-corruption measures and practices to protect their reputations and the interests of their stakeholders.”[14]
These “two thrusts”—the first consisting of national legislation (criminal and civil) and the second consisting of corporate self-regulation against corruption—has become the foundation of contemporary measures to combat corruption, especially when committed by individuals within the largest public or private enterprises. The extent of national legislation, and international efforts to make national legislation coherent, is well known.[15] National efforts continue to develop. For example in 2017 the government of the United Kingdom adopted the U.K. Criminal Finances Act.[16] In addition, the range of international agreements respecting corruption touches virtually every country on earth.[17] The international community has also adopted some soft law instruments with some influence in developing customary standards of conduct and expectations in economic relations.[18] In the United States, the Foreign Corrupt Practices Act has served as a model, variations of which have been adopted elsewhere.[19] In China, The PRC Criminal Law prohibits “official bribery”, which applies to state officials and state entities, as well as “commercial bribery”, which applies to virtually everyone else.[20] A great number of other states have enacted anti-bribery and corruption law. As well.[21]
Recent reports from the global financial sector have highlighted the way in which this “two thrusts” strategy has also begun to be felt by actors in financial markets—especially those firms that are in the business of investing in or lending to operating companies worldwide. In one recent case:
An American mutual fund manager said in an SEC filing today that it sold all shares it held in Petrofac because of an ongoing corruption investigation by the UK's Serious Fraud Office. That SFO investigation is focused on Petrofac's past relationship with Unaoil. Ohio National Fund, Inc. said the "escalating fraud investigation seems to us a thesis changer."[22]
The U.S. S.E.C. has noted the priority to which it has given corruption cases under the FCPA; it enforcement actions suggest the preference for civil penalties as punishment for violations of the act.[23] The complex nature of extra territorial effects of anti-corruption measures and the weaknesses of arguments against such efforts have also been noted.[24] Indeed, financial institutions, and most notably, sovereign wealth funds, have begun to more vigorously defend against corruption by building anti-corruption measures and requirements into their investment strategies as well as in their shareholding policies.
Related to these emerging trends is another—the increasing emphasis on monitoring and compliance programs imposed formally and informally on and by enterprises.[25] This obligation is given great incentives by the willingness of governments to enforce cooperation agreements with enterprises facing corruption probes in order to avoid criminal sanction.[26] These have been advanced in the United States,[27] and in the United Kingdom.[28] What makes this interesting is the way that governments, having created a strong tradition of respecting the autonomy of corporations, even when they are subsidiaries, now seek to treat production chains as a single enterprise for purposes of corruption probes. Most interesting among these efforts is the so-called Pilot Program launched by the U.S. Justice Department in April 2016[29] designed to encourage company self-reporting and cooperation in order to avoid exercises of prosecutorial discretion to seek criminal penalties against companies or their employees.[30] Additional due diligence efforts may be required under provisions of the U.K. Criminal Finances Act of 2017.[31] Under this Act, an enterprise may well incur criminal and civil liability for acts attributable to it occurring within its supply chain if connected with torture involving public officials.[32] In Brazil, the Clean Companies Act[33] includes a leniency provision permitting state prosecutors to enter in a “deferred prosecution deal for companies willing to plead guilty and settle corruption charges.”[34] The effect is that the legal relationships among corporate enterprises or between corporations and their clients (with whom there may be no ownership relationship) are now treated as irrelevant for purposes of criminal investigation.
These trends tend to challenge the traditional legal and societal principles for the organization of business and its responsibilities. It also points to a new and heightened importance of corruption for both states and financial institutions. The trends suggest some of the ways in which legal systems and the practices of large institutions in global markets have also been contributing to changes in the frameworks within which corruption is detected, controlled and punished. This short essay examines two less well known elements of the “Two Thrusts” approach to corruption that focus on corporate compliance programs. The first is the use of sovereign investing as a tool for the correction of corruption and the supervision of institutional reform to avoid future corruption. The second is one the use of prosecutorial discretion to use legal regimes to manage corporate compliance programs. In the former case state officials use private power to aid corporate self-regulation; in the second case state officials use public authority to devolve supervision to corporate surveillance mechanisms. In the next section the essay considers the way in which sovereign wealth funds are emerging as potentially useful instruments of corruption management. The section that follows briefly considers the utility of government policies that favor settlement and cooperation agreements to manage company efforts at corruption self-regulation in the context of sovereign lending practices that aid in anti-corruption efforts. The effect, though little publicized, can be quite potent—a “Two Swords One Thrust” can serve as another effective strategy in governmental and private efforts to combat corruption. The Two Swords-One Thrust Strategy combines the power of state officials to exercise discretion in managing anti-corruption laws and the authority of financial institutions to control the access of enterprises to their investment universe or to exercise their shareholder authority to influence corporate behavior. The essay suggests briefly the utility of this strategy for Chinese anti-corruption efforts. Within China it may be possible to coordinate compliance efforts by the procuratorate with that of the Chinese sovereign wealth funds through the medium of social credit systems currently being developed.
NOTES
[1] 白轲 W. Richard and Mary Eshelman Faculty Scholar Professor of Law and International Affairs, Pennsylvania State University, University Park, Pennsylvania. My great thanks to Zhang Lei 张磊 of Beijing Normal University who has been an inspiration for this essay. Great appreciation to my research assistant GAO Shan 高山 for his usual excellent work and for the Chinese translation of the essay.
[2] See, Alvaro Cuervo-Cazurra, Who Cares About Corruption, 37(6) Journal of International Business Studies 807-822 (2006) (arguing that anti-bribery laws abroad may act as a deterrent against engaging in corruption in foreign countries but that corruption results in relatively higher FDI from countries with high levels of corruption).
[3] See, “Azerbaijan revelations spark ‘great concern’ at Council of Europe: News of country’s $2.9bn lobbying and money-laundering scheme could herald shake-up at rights body,” The Guardian Sept. 5, 2017, available https://www.theguardian.com/world/2017/sep/05/azerbaijan-revelations-could-herald-shake-up-at-council-of-europe?CMP=share_btn_fb (“The details of the payments came as an independent panel began confidential hearings into alleged corruption at [the Parliamentary Assembly of the Council of Europe]Pace in Strasbourg, one of the world’s oldest human rights bodies.” Id.).
[4] See, French prosecutor pins corruption in IAAF on son of ex-president, France 24 Sept. 5, 2017, available http://www.france24.com/en/20170905-france-french-prosecutor-pins-corruption-iaaf-son-ex-president?ref=fb.
[5] See, “Brazil police launch raid to probe vote-buying for 2016 Olympics,” France 24 (Sept. 5, 2017), available http://www.france24.com/en/20170905-brazil-police-launch-raid-probe-vote-buying-2016-olympics?ref=fb.
[6] See, “Vietnam is Sentencing Corrupt Bankers To DEATH, by firing squad,” Underground Journalist (Aug. 7, 2017), available http://undergroundjournalist.org/2017/08/07/vietnam-sentencing-corrupt-bankers-death-firing-squad/ (“In March, a 57-year-old former regional boss from Vietnam Development Bank, another government-run bank, was sentenced to death over a $93-million swindling job”),
[7] Ibid.
[8] Juan Manuel Bedoya-Palacio, “Columbia Enters the Age of Enforcement,” The FCPA Blog (Aug. 31, 2017), available http://www.fcpablog.com/blog/2017/8/31/juan-manuel-bedoya-palacio-colombia-enters-the-era-of-enforc.html
[9] Ibid.
[10] See, “Ding Ning: China’s biggest Ponzi scheme mastermind sentenced to life in prison,” The Independent (12 Sept. 2017), available http://www.independent.co.uk/news/business/news/china-ponzi-scheme-ding-ning-yucheng-group-prison-sentence-ezubo-beijing-a7941811.html.
[11] “China's top prosecutor to intensify crackdown on financial crimes,” Reuters, available https://www.reuters.com/article/china-finance-crime/chinas-top-prosecutor-to-intensify-crackdown-on-financial-crimes-idUSL4N1L841V (“This year, high profile regulators who have been caught up in President Xi Jinping’s anti-corruption drive include the former head of the insurance regulator, former vice chairman of the securities regulator and former assistant chairman of banking regulator.” Ibid)
[12] The Ten Principles of the UN Global Compact, available https://www.unglobalcompact.org/what-is-gc/mission/principles. The ten principles are derived from: the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption. Ibid.
[13] U.N. Global Compact, Anti-Corruption, available https://www.unglobalcompact.org/what-is-gc/our-work/governance/anti-corruption.
[14] Ibid.
[15] See, e.g., Dimitri Vlassis, The United Nations Convention Against Corruption Origins And Negotiation Process, in United Nations Asia and Far East Institute for the Prevention of Crime and the Treatment of Offenders (UNAFEI), Annual Report For 2004 and Resource Material Series No. 66 (available http://www.unafei.or.jp/english/pdf/PDF_rms/no66/H_p126-p131.pdf.
[16] U.K. Criminal Finances Act of 2017, ch. 22, available http://www.legislation.gov.uk/ukpga/2017/22/pdfs/ukpga_20170022_en.pdf. The Act make provision in connection with terrorist property; create corporate offences for cases where a person associated with a body corporate or partnership facilitates the commission by another person of a tax evasion offence.
[17] See, e.g., African Union Convention on Preventing and Combating Corruption, adopted in Algiers, Algeria, 14th of July 1999, and entered into force on 6th of December 2002; Civil Law Convention on Corruption, adopted in Strasbourg, France, 4th of November 1999, and entered into force 1st of November 2003 (also open to non-member states); Criminal Law Convention on Corruption, adopted in Strasbourg, France on 27th of January 1999, and entered into force 1st of July 2002 (open to non-member states; an Additional Protocol to the Criminal Law Convention on Corruption (adopted in Strasbourg, France on the 15th of May 2003, and entered into force on 1st of February 2005) provides that adhering states embed in their national criminal law the criminalization of active and passive bribery in both the public and private sectors, including bribery of members of foreign and domestic parliamentary assemblies and of officials of international organizations); Inter-American Convention Against Corruption, adopted in Caracas, Venezuela, in March 1996 ( The Mechanism for Follow-Up on the Implementation of the Inter-American Convention against Corruption(MESICIC) is crafted in the form of an intergovernmental organization); OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed on the 17th of December 1997 and entered into force on the 15th of February 1999 ( open to all OECD countries and some non-member countries); United Nations Convention against Corruption, entered into force on the 14th of December 2005 by resolution 58/4.; United Nations Convention against Transnational Organized Crime and the Protocols, entered into force on the 29th of September 2003, by resolution 55/25).
[18] See, e.g., United Nations Declaration Against Corruption and Bribery in International Commercial Transactions, adopted on December 1996. For a review of how this declaration fits into the broader context of the fight against corruption, see, e.g., Vlassis, The United Nations Convention Against Corruption Origins And Negotiation Process, supra.
[19] Foreign Corrupt Practices Act of 1977 (FCPA) (15 U.S.C. § 78dd-1, et seq.). See, D. Michael Crites, “The Foreign Corrupt Practices Act at Thirty-Five: A Practitioner's Guide,” 73 Ohio St. L.J. 1049 (2012).
[20] Discussed in China: Bribery and Corruption 2017, Global Legal Insights, available https://www.globallegalinsights.com/practice-areas/bribery-and-corruption/global-legal-insights---bribery-and-corruption/china. See, Ron Cheng, “Why US Companies Should be Paying Attention to China’s New Anti-Corruption Laws, Forbes (July 27, 2016), available https://www.forbes.com/sites/roncheng/2016/07/27/why-us-companies-should-be-paying-attention-to-chinas-new-anti-corruption-laws/#6905e4a41db1.
[21] The International Bar Association has created a data base with the relevant anti-bribery laws from fifty-six (56) states, as well as international conventions. See, International Bar Association, Anti-Corruption Committee - anti-bribery conventions and legislation, available https://www.ibanet.org/LPD/Criminal_Law_Section/AntiCorruption_Committee/Resources.aspx (“texts of international anti-bribery conventions as well as the anti-bribery legislation of a number of countries. . . . accurate as of 1 December 2014”)
[22] Richard L. Cassin, Fund dumps Petrofac shares on SFO probe concerns, The FCPA Blog (8 Sept. 2017), available http://www.fcpablog.com/blog/2017/9/8/fund-dumps-petrofac-shares-on-sfo-probe-concerns.html. Petrofac designs, builds, operates, and maintains oil and gas facilities worldwide. Petrofac, Our Story, available https://www.petrofac.com/en-gb/about-us/our-story/. Unaoil provides “industrial solutions to the energy sector in the Middle East, Central Asia and Africa. These include green and brownfield Engineering and Construction, Workforce Solutions, Operations and Maintenance, and the provision of niche equipment and products, such as production chemicals.” Unaoil, Chairman’s Message, available http://www.unaoil.com/about/chairman-s-message/. On 19 July 2016 the U.K. Serious Frauds Office (SFO) issued a Press Release in which they announced that the SFO “conducting a criminal investigation into the activities of Unaoil, its officers, its employees and its agents in connection with suspected offences of bribery, corruption and money laundering.” SFO Press Release 19 July 2016 available https://www.sfo.gov.uk/2016/07/19/unaoil-investigation/. See generally SFO Unaoil Investigation, available https://www.sfo.gov.uk/cases/unaoil/.
[23] U.S. Securities and Exchange Commission, “SEC Enforcement Actions: FCPA Cases,” available https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml (listing companies and amounts of civil penalties from 2017 back to 1978).
[24] See, Larry Catá Backer, “Soft Extra Territorialism and Anti-Corruption Campaigns: On the Perverse Folly of Corrupt States,” Law at the End of the Day, (Sept. 15, 2006), available http://lcbackerblog.blogspot.com/2006/09/soft-extra-territorialism-and-anti.html.
[25] See, Alun Milford on Deferred Prosecution Agreements, Remarks delivered at the Cambridge Symposium on Economic Crime 2017, Jesus College, Cambridge, available https://www.sfo.gov.uk/2017/09/05/alun-milford-on-deferred-prosecution-agreements/.
[26] On U.S., Canadian, and U.K. government’s view of what constitutes an effective compliance program, see, U.S. at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf, Canada, available at http://www.international.gc.ca/crime/corruption.aspx, and U.K., available at http://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf.
[27] See, U.S. Department of Justice Criminal Division Fraud Section, Evaluation of Corporate Compliance Programs (Feb. 2017), available https://www.justice.gov/criminal-fraud/page/file/937501/download. See generally, United States Department of Justice, 9-28.000 - Principles of Federal Prosecution Of Business Organizations, available https://www.justice.gov/usam/usam-9-28000-principles-federal-prosecution-business-organizations.
[28] See, e.g., U.K. Bribery Act 2010, c. 23, § 7.
[29] See, See, United States Department of Justice, The Fraud Section's Foreign Corrupt Practices Act Enforcement Plan and Guidance, April 5, 2016, available https://www.justice.gov/criminal-fraud/file/838416/download;
[30] See, See, United States Department of Justice, The Fraud Section's Foreign Corrupt Practices Act Enforcement Plan and Guidance, supra. The Press Release explained that the Pilot Program was in part “designed to motivate companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs” U.S. Dept. of Justice Press Release, Criminal Division Launches New FCPA Pilot Program (April 5, 2016), available https://www.justice.gov/archives/opa/blog/criminal-division-launches-new-fcpa-pilot-program.
[31] See U.K. Criminal Finances Act of 2017, supra., see also Richard J. Rogers and Sasho Todorov, Compliance Alert: Due Diligence Under the U.K.’s Critical Finances Act of 2017, The FCPA Blog (Sept. 7, 2017), available http://www.fcpablog.com/blog/2017/9/7/compliance-alert-due-diligence-under-the-uks-criminal-financ.html.
[32] Rogers and Todorov, supra. (“if a company is unfortunate enough to identity a Gross Human Rights Abuse with which it is connected, it may wish to consider proactively investigating the allegations. This will help the company beat civil society to the punch, and will demonstrate a good faith effort to mitigate any potential violations.”).
[33] Clean Companies Act or CCA (Law No. 12,846/13).
[34] Felipe Rocha dos Santos, New Guidance for Brazil Anti-Corruption Settlements, The FCPA Blog (Sept. 7, 2017), available http://www.fcpablog.com/blog/2017/9/7/felipe-rocha-dos-santos-new-guidance-for-brazil-anti-corrupt.html. The settlements have proven controversial, and have sometimes been blocked by the Brazilian Federal Prosecutor’s Office for excessive leniency. Ibid.
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