Loopholes in Public Corruption Laws Benefit Swamp Dwellers

Editor’s Note: This is the first in a series on potential legal gaps exposed by events related to the 2016 election.

Draining the swamp has grown ever more difficult for prosecutors.

News that President Donald Trump’s personal attorney, Michael Cohen, was paid almost $3 million by large companies – both American and foreign —  has sparked discussion about influence peddling and pay-to-play schemes. But decisions by the U.S. Supreme Court have made it harder in recent years for prosecutors to bring charges against corrupt public officials and their associates. If we are to deter corruption and hold accountable officials who breach the public’s trust, some changes in the law are needed.

First, some background on the Supreme Court opinions that have made the swamp even swampier. In a series of cases, the Court has scaled back honest services fraud and narrowed what counts as bribery.

The trend began in 1987, with McNally v. United States, when the Supreme Court held that the deprivation of honest services could not serve as the basis of a fraud scheme. Historically, the honest services doctrine was based on the theory that if an official takes action for a corrupt purpose, say personal profit, then members of the public suffer because the official has deprived them of a decision that is in their best interest, free from corruption, even if the public suffers no monetary loss. In McNally, a Kentucky official awarded a government contract to an insurance agency on the condition that it share its commissions with another agency in which the official had an undisclosed financial interest. The official was convicted of mail fraud because he had deprived citizens of their right to have their affairs conducted honestly, but there was no allegation that the state had paid a higher rate for the insurance, so the state had suffered no monetary loss. The Court reversed the convictions, holding that the mail fraud statute was limited to money or property loss, and could not be extended to intangible honest services. That is, self-dealing in breach of one’s fiduciary duty could not constitute fraud unless it caused monetary loss to the government.

Congress quickly responded by passing a new statute, which stated that the federal fraud statutes prohibited a “scheme or artifice to deprive another of the intangible right of honest services.” 18 U.S.C. Section 1346.  Back in business, right?

Wrong. Despite the legislative fix, the Supreme Court ruled against honest services fraud again in 2010, when it reversed the conviction of former Enron CEO Jeffrey Skilling in a corporate fraud case. Skilling and others were charged with engaging in a scheme to deceive investors about the performance of Enron’s business by manipulating financial reports and fraudulently enriching themselves in the process. Skilling was charged with a number of crimes, including conspiracy to commit honest services fraud, on the theory that he deprived shareholders of the intangible right of his honest services. The government’s theory of prosecution was that Skilling, a private employee, had engaged in “undisclosed self-dealing by taking action that furthered his own undisclosed financial interests while purporting to act in the interests of those to whom he owed a fiduciary duty.”

The Court reversed Skilling’s conviction, holding that honest services fraud could be used only in bribery and kickback schemes, and that a broader interpretation would violate due process as impermissibly vague. Because Skilling did not accept bribes or kickbacks, the Court reasoned, his conduct did not constitute honest services fraud. Instead, Skilling allegedly conspired to defraud Enron’s shareholders by misrepresenting the company’s finances, causing its stock price to increase artificially. Skilling earned $89 million in salary, bonuses and sale of stock. This, the Court concluded, could not constitute honest services fraud.

The result of Skilling is that conflicts of interest, misrepresentations or undisclosed self-dealing cannot constitute honest services fraud in the absence of bribery or kickbacks. That means that if a public official is awarding contracts, advocating for tariffs, or even posting messages on Twitter for the purpose of private gain over public benefit, that conduct cannot constitute a crime unless he receives a bribe or a kickback.

In addition to limiting honest services fraud to cases of kickbacks or bribery, the Supreme Court also narrowed what may constitute the basis for bribery when it overturned the conviction of former Virginia Governor Bob McDonnell in 2016. At trial, prosecutors had proved that McDonnell and his wife accepted $170,000 in gifts from a business owner who was promoting a dietary supplement. Prosecutors showed a “quid pro quo” (this for that) arrangement:  In exchange for the gifts, McDonnell set up meetings and hosted a promotional event for the business owner at the governor’s mansion. The Supreme Court held that these acts were not the kinds of “official acts,” required for proving bribery because they did not amount to a formal exercise of government power. The Court stated, “To qualify as an ‘official act,’ the public official must make a decision or take an action on [a] question, matter, cause, suit, proceeding or controversy’ or agree to do so.” The Court reasoned that a broader interpretation of “official act” could permit the prosecution of routine interactions between politicians and their constituents, even if such conduct may be seen as “tawdry.”

The Court’s decision leaves the public without recourse when a public official accepts money, gifts or other things of value in exchange for using his public office in the absence of some “official act.” If, for example, President Trump were to open the doors of the Oval Office for a meeting with AT&T or one of the other companies who paid Cohen, knowing that his act would prompt a payout for Cohen or even himself, no crime could be charged unless he took official action as a result of the meeting.

One way to close these loopholes is through legislation. As the Court stated in McNally and Skilling, “If Congress desires to go further, it must speak more clearly than it has.” Congress could amend 18 U.S.C. Section 1346 to clarify that it applies to fraud schemes involving self-dealing by a public official in violation of his fiduciary duty. Even if no monetary or property loss results, self-dealing should be a crime if a public official profits by breaching his duty to act in the best interests of his constituents or if a private sector employee breaches a fiduciary duty to shareholders or others.

Congress could also amend the bribery statute, 18 U.S.C. Section 201, to expand the definition of “official act” beyond the current list of “question, matter, cause, suit, proceeding or controversy” to include the types of activities that occurred in McDonnell, such as arranging meetings and hosting events to promote the business interests of someone who is providing financial incentives to do so.

Another way to address these legal loopholes is through improved transparency. The problem of honest services fraud that results from self-dealing in the absence of bribery or kickbacks often arises when public officials have undisclosed business interests or affiliations. This problem could be reduced by requiring candidates for public office to disclose their income tax returns. While federal law requires high-level public officials to make financial disclosures, nothing requires presidential candidates to do so. Traditionally, presidential candidates have disclosed their tax returns as a show of good faith. Trump, notably broke with this practice and has declined to disclose his tax returns. Public disclosure of tax returns would help prevent self-dealing by public officials through undisclosed business affiliations and sources of income that existed before they held office. Any business dealings with the government by these affiliates and income sources would then draw extra scrutiny. Failure to disclose such sources on one’s tax returns could result in criminal charges for income tax violations.

Another way to improve transparency and reduce secret influence peddling is to revise the Lobbying Disclosure Act, which currently excludes from its registration requirements individuals who engage in just one lobbying contact, as well as individuals whose lobbying activities constitute less than 20 percent of their time working for a particular client. Such a change would require registration as a lobbyist by someone like Cohen if he made just one call to Trump to advocate on behalf of AT&T in favor of its merger with Time Warner, or if he spent less than 20 percent of his time for AT&T on lobbying activity.

Perhaps even those who don’t engage in lobbying but only consult for businesses on matters before the administration, as Cohen appears to have done, should be required to register. Such rules would permit greater transparency into influences on government decisions. Increased public scrutiny would help to reduce the likelihood that decisions would be made for private gain.

While legislative fixes to criminal statutes are one way to close some of the legal loopholes and facilitate prosecution, improving transparency might be the best way to prevent corruption even before it occurs. As Supreme Court Justice Louis Brandeis once said about cleaning up dirty practices, “Sunlight is said to be the best of disinfectants.”  His observations are true even for swamps.

Photo by Drew Angerer/Getty Images

 

About the Author(s)

Barbara McQuade

Professor from Practice at the University of Michigan Law School, Former United States Attorney for the Eastern District of Michigan (2010-2017), Co-Chair of the Terrorism and National Security Subcommittee of the Attorney General’s Advisory Committee in the Obama Administration Follow her on Twitter (@BarbMcQuade).