For years, China has featured prominently in the US Department of Justice’s investigations under the Foreign Corrupt Practices Act, or FCPA. That’s not news to the readers of this blog, who can refresh their memories here, here and definitely here. But as a colleague recently reminded me, there is a big difference between settling an FCPA case, and actually having to investigate it—especially in China. This is a distinction that too few lawyers appreciate, but they should.
To make sense of this distinction, one has to understand a little bit about how the DOJ typically approaches FCPA investigations. After receiving a tip or other indication of wrongdoing, DOJ lawyers will typically ask a company to investigate itself and turn over the evidence. If there is enough evidence of guilt, the DOJ will initiate settlement discussions, which can result in eight-figure penalties or more.
The DOJ can be a tough negotiator. To encourage settlement, they hold out the possibility—usually implicitly—that they may bring formal charges against a company that refuses to “cooperate.” Meanwhile, the DOJ shrouds its own investigative efforts in secrecy, leaving the company to wonder whether personal emails have been searched or if the FBI has an informant on the inside. In short, the DOJ negotiates by emphasizing downside risk, while maximizing the ambiguity around that risk. It’s a smart strategy and, judging by its increasingly large FCPA settlements, an effective one, too.
But how strong is this negotiating position, really? If a company does not volunteer overseas evidence to the DOJ, then what can the DOJ actually do? The DOJ claims they can do quite a lot. Deputy Assistant Attorney General Mashall Miller says the DOJ benefits from “deepening relationships with foreign governments.” And, “when corporations engaged in wrongdoing choose not to cooperate — which, of course, they have every right to do — the criminal division will make the cases on our own.”
When I was a federal prosecutor, I spent a lot of time worrying about what evidence I could, and could not, pull out of China. As I am sure Miller would acknowledge, the DOJ is actually quite limited in obtaining evidence from within countries that are not traditionally geopolitical allies, like China. So, for example, though the US has bilateral treaties governing evidence-sharing with many European and Central and South American countries, it has no such treaties with China. The DOJ can and does (and when I was a prosecutor, I did) make requests to China for information, but such inquiries are dealt with on a notoriously slow track, subject to China’s diplomatic judgment.
The US maintains an informal treaty-like process with Hong Kong, but Beijing supervises Hong Kong’s response and is known to intercede at the faintest whiff of national interest. Meanwhile, the very techniques that have made the DOJ’s recent crackdown on white-collar crime so successful—wiretaps, body wires, physical surveillance—are unavailable to US enforcement authorities on China’s soil.
Last Fall, Miller cited the conviction of a French citizen who was recorded on a body wire directing a would-be conspirator, who in fact was a cooperating witness, to “destroy everything, everything, everything.” That’s good evidence, if you can get it. And in China, you probably cannot. China generally does not allow the FBI to interview witnesses or search Chinese servers, offices and homes — let alone induce cooperating informants to wear a wire. In short, when it comes to China, the DOJ cannot do much without a company’s cooperation.
Why does this matter? Certainly, this does not mean that US companies should now rebuff the DOJ wholesale in all requests for cooperation in China. Not at all: Most companies still recognize there can be substantial benefits to cooperating with the authorities, both in the present, and in anticipation of what might be coming round the bend. Yet a clear understanding of the DOJ’s investigative limits can—and should—affect the negotiations over the nature and terms of any settlement. After all, where the DOJ’s investigative capacity is limited, should that not reduce its negotiating advantage?
In other words, when the DOJ demands an FCPA settlement, or else “the criminal division will make the cases on [its] own,” there may just be cases where it is better to call their bluff.
* This is a guest post from Tim Perry, counsel in WilmerHale’s Los Angeles office and a member of the firm’s Securities and Litigation/Controversy departments. Tim’s practice focuses on white collar matters, internal corporate investigations of all types, and the defense of government enforcement actions related to securities.