The IBA interviewed Mark Mendelsohn, Former Deputy Head of the Fraud Section of the US Department of Justice, at the IBA Annual Conference 2010.
JL James Lewis (IBA interviewer)
MM Mark Mendelsohn
JL I’m James Lewis. I’m at the IBA’s Annual Conference in Vancouver. With me is Mark Mendelsohn. He’s the former Deputy Head of the Fraud Section of the Department of Justice. He’s recognised by many as the architect of the DOJ’s Modern Foreign Corrupt Practices Act Enforcement Programme. He recently moved into private practice, where he’s a defence lawyer on white collar crime matters. Mark Mendelsohn, welcome to Vancouver.
MM Thank you for having me.
JL Earlier this year, the IBA, the OECD and the United Nations launched their project to fight corruption in the legal profession. What’s the significance of the project and why has it been launched now?
MM The significance of the project is that it symbolises a recognition that corruption is a topic for the legal profession, itself, to deal with, not just in advising their clients, but also for the profession to look inward and look at the role that lawyers play, both helpful and harmful, in connection with the corruption problem.
Why now? Now, I think, is the right time to be looking at this issue, as the level of enforcement, not just in the US, but on the global stage, has begun to increase. We’re seeing more and more countries actively involved in investigating and prosecuting overseas corruption.
We’re seeing the OECD, and the UN, and a number of international organisations pushing the agenda here, both the enforcement agenda as well as the compliance agenda. And, so, the time, in my view, is ripe now for lawyers to take stock, to understand their role, their professional obligations and what they can do, as a profession, to try to address this problem.
JL The initial survey, which is the first part of this project, revealed that over half of respondents felt that corruption is widespread in the profession. It sounds like you’re not surprised by that.
MM I am surprised, in a way, and I’m not surprised, in another way. We’ve seen, anecdotally, over the years, the role that lawyers have played in corruption in international businesses.
JL You’ve seen it in the cases you’ve fought?
MM Yes. We’ve seen it, exactly, from the Justice Department’s perspective, from a law enforcement perspective, but what was striking about the survey, is how widely acknowledged it is within the profession that corruption is an issue. If you practice law in the US, you may not have quite that same perspective and, so, I think, for a US practitioner to look at the results of this survey and recognise that on the global stage, when we’re advising clients about global business, you know, corruption is a real day-to-day issue within the legal profession.
JL The survey, actually, suggested it’s endemic. Is that your view?
MM I think it’s endemic in certain countries; it’s endemic in certain aspects of the legal profession, but I don’t mean to suggest that I think it’s a hopeless problem that can’t be addressed.
JL Yes, and yet, many lawyers would say that they lose business to corrupt law firms. There’s a danger that that suggests corruption pays and is, therefore, self-perpetuating. And how do you deal with that?
MM Well, I would dispute the premise. I think, maybe, in the short term, there may be business that is being lost to lawyers or firms that are prepared to engage in corruption, but I think the longer term view is that there are lots of clients who want lawyers who are going to advise them in a prudent and ethical fashion, who are going to steer them clear of these kinds of problems.
And, so, I think beyond the professional obligations and the potential exposure that lawyers themselves may have, there is a business case to be made that lawyers should operate on the right side of the law, should operate ethically, should be serving their clients’ best interests by counselling them on these issues even when the client is not necessarily aware, or well informed, of the corruption risk.
Part of the value that lawyers can bring in advising clients, is bringing a sensitivity to these issues, bringing their experience and judgement to bear and helping their clients avoid these problems. I think from a business perspective, lawyers and firms will be better served in the long term by advising their clients in a proper fashion.
JL Right. It seems that many lawyers have never heard of the major international instruments that make up the international anti-corruption framework. Should this be made a mandatory requirement for any legal professional retaining and practising their certificate?
MM It was quite shocking, I must say, the relative lack of awareness of the international framework here, including among OECD countries, where laws have been on the books now for more than a decade. It is mandatory, for example, among those OECD countries, to raise awareness within their own home countries. And they’re not necessarily living up to their obligations, or they’re making efforts, but perhaps more needs to be done. As you may well know, the OECD itself has begun an awareness raising campaign, which they kicked off at the end of 2009 with a high-level conference which involved remarks from a number of high-profile speakers.
Secretary of State Clinton and Secretary of Commerce Lock from the US, and the OECD Secretary General, Angel Gurria, all spoke about the importance of awareness raising within our different countries. The process began with that conference, but it’s not over, it’s going to be continuing over the coming years, and I think that’s absolutely critical.
And then when you get beyond the OECD member countries, I think it’s equally important that more be done to raise awareness. The UN convention is the newest international instrument in this area and also the broadest.
So I think in some way, it’s a hopeful sign that a significant number of people, actually, had heard of the UN Convention. It’s still not a majority. There’s still a long way to go, but it’s also quite new.
JL So, zooming in on the legal profession, a lot of firms, according to the survey, feel that there isn’t a clear anti-corruption strategy, or partners within the firm, lawyers within the firm, feel their firm doesn’t have a clear strategy.
For myself, having spoken to a lot of senior and managing partners, I’d put it stronger than that. I’d say that they feel that a lot of the regulations and frameworks surround [?] your business.
MM I would disagree with that as well.
JL Do you think it’s their perception or the [overtalking?]?
MM Well, that’s the reality, which is not to say that there aren’t a lot of business challenges. But I think if you talk to business leaders, to CEOs, who have taken a strong line against corruption, who have emphasised the importance of business integrity within their organisations, one of the things that you’re beginning to hear is the fact that good business and clean business can also be quite a profitable business.
Companies are finding that by investing by compliance, by making sure that their processes are clean and that they’re involved tender processes in a proper way, that they’re actually benefitting from that, which is not to say that they may not lose the occasional piece of business. I think that’s the reality of the world, but I also think, again, taking a long-term perspective, that there are governments, that there are customers, and that there are companies that only want to do business with credible business partners who have integrity. I think that’s the trend of the future. Again, that’s not to say that the world is a perfect place. There are some very challenging places to operate.
JL It’s interesting. We have Bob Woodward here, as the keynote speaker in Vancouver and, of course, money laundering wasn’t really a concept until Bob Woodward’s reporting of Watergate, and a lot of the anti-corruption effort has flown there, but you spoke, quite compellingly, about that. Just talk me through the development of the anti-corruption movement since that time.
MM I like to think of the anti-corruption movement, at least from a US perspective, as having three broad periods. The first period dates from the enactment of the FCPA in 1977, coming out of the Watergate scandal in the US, a domestic corruption scandal, and continuing for the following, roughly, ten year period.
During that period, in many ways, the US was alone in regulating its companies, in enforcing restriction on overseas bribery. In many countries, where competitors were headquartered, it was lawful and tax subsidised, and, so, American companies, I think, took the view that they were at a competitive disadvantage.
They organised themselves and, through their trade associations and commercial associations, went to congress and, in many ways, lobbied for a watering down of the FCPA; complained about the uneven playing field. And what congress did was quite extraordinary. Rather than doing just that, they instead said let’s internationalise this movement, let’s make sure that our trade partners are also restricting their trade companies. Go and try to negotiate an international treaty which will regulate this area and criminalise this conduct around the globe, not just in the US.
That process took almost ten years, and it was not until 1998 at the OECD in Paris, that a treaty was finally ratified, which required other major exporting economies of the world to have a law like the FCPA. So, that carries you to 1998.
For a few years there, the OECD countries were implementing national legislation and taking steps to comply with their obligations under the treaty, and then you had a period of enforcement in the US, some investigative activity outside the US, but not a lot going on.
Fast forward to just about four or five years ago – two things happened in that period. In the US, you see enforcement take off in a dramatic fashion. You see the number of cases go up dramatically. You see individuals being prosecuted. You see a commitment of real resources. You see high-level US government leaders, both in the Department of Justice and outside the Department of Justice, emphasising how important it is to fight foreign bribery.
Outside the US, you see, finally, the effects of the OECD convention coming into force. You see awareness going up, although, as we noted before, not, perhaps, to where we’d like it to be. You see law enforcement getting active. You see investigations underway, and you’re now, finally, beginning to see prosecutions coming out of Germany, out of the UK, out of some other jurisdictions.
You’re seeing countries that have, perhaps, not done as much as they could making more efforts. You see, for example in the UK, the new bribery act being passed and coming into force this coming year. Here in Canada, you see the RCMP setting up specialised units just to investigate and prosecute overseas corruption cases involving Canadian companies. And, so, you’re beginning to see momentum behind this effort. And I think, you know, across the border, really, entering into a new phase of this effort to combat overseas corruption. This focus on corruption in the legal profession, I think, is just one more part of that.
JL It’s an important part of it.
MM Absolutely essential.
JL During your time at the DOJ and, really, enforcing the Foreign Corrupt Practices Act, I think you took prosecutions against about 80 individuals.
MM That sounds about right. There were a number of lawyers among them.
JL What were the lessons we learnt from that?
MM Great question. One of the lessons we learned is the various ways in which lawyers get involved in corruption schemes.
In some case they end up being retained as consultants, as government relations advisers, as external experts, and, in that capacity, end up being a conduit for corrupt payments.
We see lawyers giving advice to clients in connection with corruption issues, corruptions schemes. So, for example, we had one lawyer who was prosecuted, who played a critical role in drafting the cover-up for a corruption scheme in opening overseas bank accounts for foreign government officials who were going to receive improper payments in handling cash and transporting it from one country to another to promote the corruption scheme, so, really being, in some ways, the bag man for the bribe payers.
So, you see lawyers playing all kinds of roles.
Another thing that we see, quite frankly, is efforts by lawyers to put a stop to corruption. We had a number of cases in which it was lawyers, often in-house lawyers at companies, who are the ones who raised the flag, who said there’s a problem here, and sometimes they were listened to and their warning was heeded, and in other cases they were overruled.
JL They lost their jobs?
MM They weren’t sufficiently empowered. They may or may not have lost their jobs, but they didn’t necessarily have the support of senior management in putting a stop to it. And those were tragic situations.
JL Yes. There’s a similar situation regarding big banks in the UK, where whistle blowers get pushed out.
JL Now, the OECD has looked at this and they’ve brought in provisions to protect whistle blowers, and this is very important. But do you think there are special measures needed for the legal profession? I mean, secrecy, confidentiality, privileges is core to the legal profession, so we’re in special territory here.
MM It is, and it’s what makes this area so difficult, because, of course, the attorney-client privilege is sacrosanct, it’s essential for lawyers to be able to advise their clients.
JL And yet it could be a veil for corruption?
MM That’s exactly right. It also can serve to conceal and cover up corrupt relationships. And, so, it makes this area quite difficult. You know, there are only a small number of jurisdictions where the privilege ends up being set aside in favour of reporting obligations that lawyers may have in respect to their clients.
JL With respect to that, how can we cut through this seeming impasse?
MM Yes. Well, there a couple of ideas which have come out of this IBA paper, which I think are quite meritorious and worth pursuing. I think it begins with education within the legal profession, when lawyers are in law school, when they’re first being trained about the importance of the international anti-corruption framework and the laws in this area and exactly what their ethical duties and obligations are.
I think this lack of awareness has at its root a failure to educate young lawyers about their obligations. And, so, one of the things that I hope will come out of this is an effort to address corruption in the law school curriculum around the world in law schools.
The same thing can be said for business schools and business education. For future business leaders, it’s absolutely critical that they understand where the lines are, the corrosive effects that corruption has, why it’s not good business to pursue global business through corruption. And, so, it begins with the training. Beyond that, I think it’s important for lawyers, again, to just understand the ways that corruption can arise in their representations of clients. You know, sometimes it’s not the case that lawyers intend to do something improper. There’s just a failure to recognise the issue, a failure to ask the necessary questions, to shed light on what’s going on and then to properly advise the client. Sometimes, I think, lawyers take a narrow view of what their engagement is, what their assignment is for a client.
JL Yes. I mean, I’ve reported on this are a lot, and the comment that’s made to me, when people are being sympathetic with lawyers being drawn into corruption, is that they focus excessively on the technical detail, that they get very engaged with a specific deal or element of it, and that’s their role, and don’t zoom out, look at the bigger picture.
MM I think that’s exactly the point and lawyers, I think, need to pull back and, in the best sense of the word, serve as a counsellor to their clients to help them steer clear of regulatory and criminal issues to help them address these issues, not simply say, you know... throw up their hands and say you’ve got an insurmountable problem here, but to serve as counsellors and advisers and help them manage these issues, because often these issues can be dealt with. There are some deals that are tainted, and problematic, and corrupt, and the advice needs to be you need to walk away from it. But more often it’s the case that these issues can be negotiated and you can achieve your business objectives, as a company, with advice from your lawyers, while staying on the right side of the law.
JL You’ve said certain deals are clearly tainted.
MM They are.
JL They’re red flags. As a lawyer you see them. You know your clients. You’ve done your due diligence. You know what the deal is about, where the money’s come from, and you should take it and walk away. I mean, everyone knows that.
JL And yet, you would know that law firms will be paid a lot of money by certain individuals to do deals, and that money is just too difficult to say no to when you’ve got to keep your revenues high, and your profitability high. There are examples. I mean, one of the biggest listings on the London Stock Exchange recently came from a part of the world where corruption is rife. Some of the biggest law firms in the world are advising on that. But the regulator eventually said that deal is tainted. Now, that seems to me to flag up a fundamental problem here... money talks. And how do you deal with that?
MM I think the way to deal with that is to recognise that the pursuit of revenue, the pursuit of money, is not the ultimate and only goal for lawyers.
JL Can you put caps on revenue? Can you put caps on what any partner should be billing in one year or what one firm should be billing? I mean, how do we do that?
MM I don’t think that’s a solution. I think, quite frankly, that perhaps, excessive focus on lawyer compensation profits per partner at major firms is fuelling this pursuit of revenue.
JL It’s going to bring partners into difficulty, isn’t it?
MM Yes. Exactly. And I think that’s short sighted. I think lawyers and firms need to, again, take a longer term view of the health of their profession, of their source of revenues. I think the only answer for those types of deals is you must say no, no matter what revenue is associated with it. If it’s tainted to the core, if it’s a transaction that can’t be remediated in a proper way, I think the only course for a law firm is to say that’s business that we just won’t accept.
JL And yet they’re not doing that. They’re waiting for the Financial Services Authority to step in and say, no, that is not going to the London Stock Exchange.
MM In some cases, yes.
JL It doesn’t smell right, is what they’re saying.
MM In some cases, law firms are doing exactly that. I mean, I can think of a number of cases where law firms have thrown up the flag, and sometimes their advice is taken, sometimes they’re ignored.
JL This is the problem, though, isn’t it? One law firm will say no, and there’s another one all too ready to step in and take the billings.
MM I think that’s right. I think that’s the problem.
JL They use it for the enforcement authorities. That’s actually a very difficult situation, really.
MM But, again, I come back to the point that there are plenty of clients who don’t want a lawyer in a law firm, who will just tell them yes. It’s easy to find those. What they want is a lawyer in a law firm that will flag up the risks for them.
JL But those aren’t the corrupt businesses, are they? That’s not what the anti-corruption movement is tackling. The anti-corruption movement is tackling those clients from certain jurisdictions that want a lawyer with a respectable law firm to give a veneer of respectability while setting up that cake structure for them so that they can conduct their business as usual, as they see it. And that is going on. And you’ve said, you know, in your 80 prosecutions against individuals, there were lawyers in there who were doing that sort of thing.
MM There are.
JL And this is what this project is all about, isn’t it? I just wanted to ask a specific question on the US State Department. I mean, it has the power to take away visas from prominent figures...
MM It does.
JL ... when it has good reason to suspect corruption. They won’t do it lightly, I suspect. I mean, should a commercial law firm accept an instruction from such a person?
MM I think it would be extremely risky for a law firm to take instruction from an individual who’s been denied a visa, who’s been, say, subjected to corruption prosecution, a notorious 'pep' in the parlance of the money laundering world, a politically exposed person. I think that would be an extremely risky proposition for a law firm.
JL Now, lawyers say it a lot, you’ll have heard it, that everyone deserves legal representation. I don’t know that it ought to apply to commercial lawyers. I mean, it applies to defence lawyers, barristers, in the UK. What’s your view on that?
MM I agree with you. I was going to make exactly the same point. It’s one thing to say that every defendant, let’s say, in a criminal or regulatory inquiry is entitled to a lawyer. It’s a wholly different proposition to say that, in a commercial context, people or companies that engage in corruption, and money laundering, and fraud, ought to be able to retain the very best lawyers and law firms around the world. I think, to the contrary, that those lawyers and firms are to steer clear of clients who don’t have a reputation for integrity, who may, knowingly or unknowingly, involve the lawyers and the law firms in corrupt deals. One of my fellow panellists made the comment, and I completely agree with this, that lawyers have, really, two things to sell; they’ve got their brains and they’ve got their integrity. And if they only have the brains, they don’t have the integrity, that’s not a successful business model. So, lawyers have an inherent interest in protecting their reputation, protecting their integrity, and for that reason, I think those kinds of assignments are assignments that you simply can’t take.
JL You’ve spoken compellingly about international co-operation in combatting corruption. Are there lessons that can be learnt that can be applied to regulation enforcement in relation to preventing the financial crisis in the future? There’s a resistance, in the financial world, to regulation at the moment. There’s a big debate. But you’re talking about successes that are, sort of, global and international. I’m just wondering whether there are lessons learnt that would apply.
MM Yes. I think there are lessons to be learnt, both from the anti-money laundering regime, which has grown and taken root, especially in the financial services industry, and also from the anti-corruption world. I do think that there are lessons to be learnt. I think they largely relate to becoming better informed about risk and about tailoring compliance and regulation to high risk areas, whether we’re talking about corruption in business, or whether we’re talking about regulating the financial sector. I think that properly understanding risk lies at the heart of coming up with a regulatory scheme that’s going to be effective. The same thing is true within corporate organisations as well as within governments in a tendering process. Understanding what your risk profile is, where the perils lie, I think that is the beginning of coming up with a solution.
And I think we’re now in the process, in the corruption arena, of appreciating in a more sophisticated way where the risks lie. I mean, we’ve done a lot of work lately, for example, around the use of third parties in international business, just to pick one example. And, you know, I think now there’s a much greater awareness of the risks that are presented, and companies are now empowered to put diligence around those third party relationships to understand them better and to control them better, and that has a positive effect on the fight against corruption.
JL In cases of proven wrongdoing, when you were at the DOJ, they were big name companies like Siemens and BAE, and they are in the spotlight, they get the headlines. What I’m wondering is, in the case of those companies, if you were aware of whether legal advisers should have come into the spotlight, whether they should have been the focus and, indeed, whether they were the focus?
MM From the public record in those cases, one of the things that you see is that, in some instances, there were lawyers who raised issues, who expressed concern, who tried to put in place more robust compliance mechanisms and procedures within companies, and their message was not received well. Their advice was not taken and, I think the lesson from that is that some of these disasters probably could have been avoided.
The world is changing around us, the business context is changing. There’s a growing consensus that corruption won’t be tolerated. And I think some of what you’re seeing is a recognition, finally, in the business community, that the world has changed and they need to take steps, but it took a while.
Lawyers in some cases have been sounding the alarm for a while and, finally, the business leaders are hearing that warning and are now beginning to take steps, and I think that’s despite the tragedies, in some way, reflected in those prosecutions. I think the good news is that that example has served as a cautionary note to other companies that they need to really recognise that the world has changed around them and change their business practices.
JL Very briefly on that, speaking to Dimitri Vlassis from the United Nations, he was saying that what needs to happen, specifically in terms of the legal profession, is for there to be a high profile prosecution that makes the professions sit up and take notice, and say this needs to change. Is that going to happen?
MM There are examples of that, that have already happened. There’s a British solicitor who played a critical role in a very high profile corruption scheme, called the TSKJ consortium. This was a multi-billion dollar investment in a liquefied natural gas plant on Bonny Island, Nigeria, involving Halliburton and KBR in the US in a number of very well documented prosecutions, and there’s a British solicitor who’s been charged, in the US, with facilitating very high level corruption in the scheme and is currently facing extradition from the UK.
JL It doesn’t seem to get the headlines in the way that BAE does, or Siemens does. Ought it to? Would it change things significantly if it did?
MM I think it helps. I mean, to Dimitri’s point, I think that Dimitri is right that high profile prosecutions which drive home the personal risk that lawyers face if they get involved in this type of corruption serve as a useful purpose, and I think we’re going to see more prosecutions like that. I think we’re going to see that in the future.
JL Final question, I did some reporting on a person called David Mills, who advised Silvio Berlusconi, and this is about as high profile a case as there has been in the legal profession. What was said in the profession, at the time when I was reporting on this, was that he’s a black sheep, he’s a one-off. It seems to me that this survey is suggesting quite the reverse. Would you agree with that?
MM I would agree with that. I mean, you look at the survey results and you see that among legal professionals in certain jurisdictions, there is almost an acceptance that the profession is involved in corruption. There’s a perspective that even if the survey respondents, themselves, are not involved in corruption, they’re seeing their peers and their competitors involved in corruption. They’re seeing themselves lose business to some of those people. And, so, yes, I think the level of involvement in corrupt activities is unacceptable. It’s something that needs to be addressed.
There’s an awareness raising and training that’s associated with this project at the IBA, which I think is a wonderful exercise and, I think, is going to be important in the future.
JL It should be transformative, shouldn’t it?
MM Well, let’s hope so.
JL Mark Mendelsohn, thank you very much for your time.
MM Thank you so much. I appreciate it.