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Harry Cassin
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Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Bill Steinman
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Richard L. Cassin
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Elizabeth K. Spahn
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Cody Worthington
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Julie DiMauro
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Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Russell A. Stamets
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Eric Carlson
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The princeling problem: In search of a legal theory (Part IV, conc.)

After introducing the princeling problem in Part I, developing a two-prong test in Part II, and showing the difficulty in applying that test to JP Morgan in Part III, we’re here considering the possibility that the government is contemplating a reversal of its prior guidance. Such things are momentous and, from a rule of law perspective, fraught; we should pause to carefully think this one through. 

Reversals do not in and of themselves violate the rule of law. As we have recently been reminded, the U.S. Supreme Court does this all the time. But with enforcement agencies (unlike the high court), shouldn’t the reversal occur before the commencement of an enforcement action? If the government has in fact reversed (whether knowingly or not) previously released guidance, it’s applying a new rule retroactively.

I’m just a humble law professor, but I thought we weren’t supposed to do that kind of thing. I thought it contrary to the rule of law on the most fundamental level. It’s certainly contrary to the notion of “guidance.”  And it suggests that opinion releases aren’t worth the paper they’re printed on. That’s not a message that our friends in the government wish to send. I hope and trust that they will not do so now.

But even if the government’s new position is inconsistent with that very early guidance, might it be consistent with more recent and closely related guidance and enforcement actions? That is, can we analogize the princeling problem to other, more current areas of FCPA enforcement? 

Maybe we can. I actually think the closest thing we have in modern FCPA enforcement to the princeling problem is charitable giving. Think about it: the foundation is otherwise financially independent of the official, but the official finds value (of an unspecified sort) in the contribution to the independent entity. This is very closely analogous to the princeling problem, so let’s run with it for a moment.

The FCPA Guidance makes clear that the FCPA does not prohibit donating money to charity, but companies cannot use such donations “as a way to funnel bribes to government officials.” It cites In the Matter of Schering-Plough Corp., SEC Release No. 49838 (2004), in which the public official was also the president of a charitable foundation. The official solicited contributions to the foundation in exchange for favorable treatment. 

This sort of thing certainly feels like it should violate the anti-bribery provisions. But that brings us back to the original question: how? That is, exactly how does a contribution to an official’s preferred foundation constitute a thing of value to the official himself? Was the official previously giving his own money to the foundation? Probably not, and if not, what exactly is the “value” of the company’s contribution in the eyes of the official?

It’s not a counter-intuitive proposition, but it requires some explaining. And analogizing the princeling problem to charitable giving puts the government in fairly safe territory — certainly safer territory than the opinion releases. But we still need a legal theory.  

The SEC’s Schering-Plough opinion does not provide that theory, and for a very interesting reason: Schering-Plough is not a bribery case. It’s a books and records case. The opinion does not specify how the charitable contribution satisfied each of the elements of the bribery provisions because it did not need to; it did not find that Schering-Plough violated the FCPA’s bribery provisions. Again, the Guidance may be just a bit misleading here, using the decision to say more than it really does.  

So again, I would encourage the government to make this point clearer: how exactly does hiring a princeling violate the bribery provisions of the FCPA?

Much is at stake. I recently participated in an anti-corruption conference with a number of Russia’s leading public intellectuals. It was both fascinating and troubling to hear the Russians explain that they have never known the rule of law, and do not now. The American delegation of course believed strongly in the idea, but I asked myself, “do we believe in the rule of law because we actually have it? Or because we aspire to it?  Is the U.S. today, in practice, a model of the rule of law to the world?” 

The princeling problem represents an opportunity to answer this question in the affirmative. Or not. It could go either way. Our government could articulate a clear theory of precisely how JP Morgan’s hiring practices violate the FCPA as that statute is now written. It can lay down a clear rule for all to follow. Or, it can merely assert a violation without providing any meaningful theory to the public. And that’s not how our statute, or our system of government, are supposed to work.  

So to our friends at the DOJ and SEC, I say: prove to the world that the FCPA does indeed promote the rule of law. Articulate the rule we so badly need.


Andy Spalding is a senior editor of the FCPA Blog. He’s an Assistant Professor at the University of Richmond School of Law. He can be contacted here.

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1 Comment

  1. Maybe our individualism blinds us to the reality of these transactions. We just see the three parties to the transaction, and only see the consideration flowing through the system. A less individualistic person might see the network of client/patron relationships and intuitively grasp that pass-through benefits are recorded on the balance sheets tabulating benefits and obligations at each node of the network. The favor granted by A to B only occurs because of A's relationship to C, who acquires the debt owed by B to C, which is balanced by C's debt to A. Potentially such accounting could be applied to much more complex transactions.

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