FCPA enforcement expansion built on unstable funds

Part three of a three-part series. Read part one here, and part two here.

The US Department of Justice has been rapidly expanding its Foreign Corrupt Practices Act unit with money from the Three Percent Fund, an unstable financial source that faces an uncertain future.

According to internal DOJ memos obtained by GIR Just Anti-Corruption under the Freedom of Information Act, the department gave the Criminal Division an extra $2.4 million in October 2015 to hire 10 new prosecutors for its FCPA unit.

The money came from an obscure financial source called the Three Percent Fund, which under an amended 1994 statute authorises the DOJ to take a 3% cut of civil fines and use the money to cover the costs of collecting civil and criminal fines, and related activities. The DOJ has interepreted "related activities" to mean costs associated with investigating its cases. 

Within days of securing the funds to hire 10 new full-time prosecutors, the Criminal Division chief at the time, Leslie Caldwell, announced with some fanfare that FCPA unit staffing would increase by half, from around 20 to 30 prosecutors.

Since then, the fraud section’s FCPA unit embarked on a hiring spree, snatching up associates at big law firms and attorneys from other parts of the DOJ. 

The $2.4 million was allocated to the Criminal Division by a separate team in the DOJ known as the CRAB, or Collection Resources Allocation Board. The committee, comprised of three senior department finance officials, decides how money collected from civil debts, the bulk of which comes from corporate penalties, are redistributed to the different divisions within the DOJ.

The DOJ’s FCPA unit wasn’t the only foreign bribery team to benefit from the fund in recent years. According to internal DOJ documents, the FBI’s international corruption unit was given $7.9 million in 2016 to fund 27 new full-time staff to specifically handle FCPA cases, as well as a further $2.5 million to finance other matters tied to international corruption investigations.

And before that, the Criminal Division was given $2.4 million in 2013 to pay for 15 full-time staff to join its FCPA and securities and financial fraud units. 

The Criminal Division’s decision to invest corporate fines in financing new FCPA staff members comes with a catch: the money for these prosecutors can only be guaranteed for a short period. In memos to the various DOJ divisions, the CRAB warns that any money allocated for staff in a given year cannot be guaranteed in the future, and has consequently been cautious in approving requests for prosecutors. 

Hence why the DOJ's recent FCPA job postings have advertised two-year terms rather than permanent positions. At the end of the terms, the DOJ can either renew, or not renew, the contracts or move the prosecutors on to permanent government jobs financed out of the division’s annual appropriated budget. The FCPA unit can also fill the positions with prosecutors on detail from other areas of the DOJ, but then has to foot the bill for any relocation and accommodation costs.

Congressional Republicans say it isn't clear the DOJ can legally spend the money on FCPA or other investigations. According to a 2016 report by the GOP majority on the Senate Homeland Security and Governmental Affairs Committee, the department is operating in a "gray area" when it uses Three Percent Fund money for anything other than collecting fines and other debts.

The decision to reinvest corporate fines into foreign bribery enforcement isn’t what a bipartisan group of senators intended in 2011. 

In May of that year, Judiciary Committee Chairman Charles Grassley (R-Iowa) and the panel’s ranking member Patrick Leahy (D-Vermont) introduced The Fighting Fraud to Protect Taxpayers Act of 2011. The bill proposed giving the department an additional 0.5% of civil debts collected, on top of the existing 3%, to finance fraud investigations – except those involving foreign bribery. 

Grassley requested the exception for the FCPA because he did not want controversy over any kind of perceived self-funding mechanism for foreign bribery enforcement to affect the bill’s chances of passing, according to a GIR Just Anti-Corruption report at the time. Leahy, however, had no objection to the extra 0.5% being spent on the FCPA.

Senators, including some Democrats, felt uneasy about the DOJ’s FCPA enforcement programme in 2011. Early that year, at a Senate Judiciary Committee hearing about increasing funds for white-collar enforcement, Sen. Amy Klobuchar, a Minnesota Democrat whose constituents included executives of medical device makers and other multi-national corporations under FCPA scrutiny, said: “It is just that the investigations that are taking place often times, I am sure, find nothing wrong that are wreaking havoc in terms of companies trying to do business”.

Despite a rise in contributions to the fund from FCPA settlements since 2009, the Criminal Division struggled for several years to obtain extra money for foreign bribery enforcement.

The CRAB rejected requests to boost FCPA funding – as well as other white-collar crime investigations – for several years until 2013. 

It was only after the Criminal Division, under the guidance of then Assistant Attorney General Lanny Breuer and fraud section chief Denis McInerney, began regularly classifying DPAs and NPAs as civil penalties subject to a 3% scrape that it started receiving more cash from the Three Percent Fund. 

Since fiscal year 2009, FCPA resolutions have contributed almost $40 million to the Three Percent Fund, records show.

Of the foreign bribery cases that contributed to the fund, the largest were VimpelCom, Weatherford International, Total, Magyar Telekom and Deutsche Telekom, Alcatel-Lucent Technologies, and Snamprogetti Netherlands.

The DOJ did not skim 3% from a few major FCPA settlements, including Alstom and Avon Products – both of which involved criminal guilty pleas either from the parent or subsidiary, thus making it hard to make the argument that the fines levied were civil in nature.

Agency funding sources taken from fines and spent outside of the congressional appropriations process have become a target of some Republicans, who in 2016 introduced the Agency Accountability Act. 

The bill would require “any agency that receives a fee, fine, penalty, or proceeds from a settlement to deposit the amount in the general fund of the Treasury. The funds may not be used unless the funding is provided in advance in an appropriations bill.”

The bill is aimed at self-funding mechanisms for law enforcement across the US government. 

Nevertheless, the DOJ’s self-funding mechanisms have caught the attention of the House, Federalist Society chair David McIntosh told an audience in May during a discussion at the conservative lawyers association. 

"Congress needs to reassert its power of the purse in being able to direct these agencies how they spend monies that come into the Treasury," he said.

If the bill is enacted, it would not necessarily end the Three Percent Fund, but it would give control of its spending to lawmakers.

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