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FCPA Case Shows Benefit of Self-Disclosure

Melissa Klein Aguilar | October 30, 2007

Amid a flurry of recent enforcement actions, stiff fines and painful public scoldings, prosecutors recently settled a Foreign Corrupt Practices Act case that demonstrates self-disclosure of such offenses can indeed bring some benefits to a company.

The case involves a Dutch software company, Paradigm, that caters to the oil and gas industry. After the company relocated its principal place of business from Israel to Texas in 2005, it discovered it had either made or promised numerous bribes to officials in five nations. The company pre-emptively confessed to Justice Department prosecutors, instituted remedial compliance measures, and ultimately ended up with an 18-month non-prosecution agreement. After that, assuming no further trouble, the case will be closed.


Cassin

Such a settlement is soothing news to corporate executives. The Justice Department often touts the benefit of self-disclosure, but businesses have been somewhat skeptical of those words, given the stepped up enforcement and stinging fines prosecutors have pushed so far. The Paradigm case, however, signals that the government’s interest “is not in prosecution, but in compliance,” says Richard Cassin, founder of Cassin Law.

Paradigm avoided prosecution by agreeing to pay a $1 million penalty, implement rigorous internal controls, retain outside compliance counsel, and continue cooperating with the government. The company also acknowledged responsibility for the actions of its employees and agents who made or offered the payments.

Cassin says the terms of the agreement demonstrate that the DOJ is “encouraging more voluntary disclosure and self-directed remedial action … The message from prosecutors is clear: Be proactive with FCPA compliance.”

Similarly, Christopher Wall, of the Pillsbury Winthrop Shaw Pittman law firm, says the deal reflects “the value of the mitigation involved in voluntary self-disclosure.”


Wall

“They got a deal that’s significantly less than they could have faced, I think in large part because they handled this as a voluntary disclosure,” he says. The Paradigm agreement “shows Justice is doing what they’ve said they would: adapting enforcement to encourage compliance rather than just using the big stick of heavy penalties.”

Indeed, in a statement announcing the agreement, Assistant Attorney General Alice Fisher said Paradigm’s actions “are consistent with our view of responsible corporate conduct when FCPA violations are uncovered.”

Observers say the Paradigm agreement highlights another trend: In cases where companies voluntarily self-disclose, prosecutors appear increasingly willing to use non-prosecution or deferred prosecution agreements to resolve FCPA violations. (Deferred prosecution agreements allow the Justice Department to bring charges against the company later if prosecutors deem it necessary; non-prosecution agreements close the book on the case for good, after a probation period.)

“We’ve seen a real expansion of the range of tools the Department of Justice uses in the disposition of FCPA cases,” says Lucinda Low of Steptoe & Johnson.

Saul Pilchen, who represented Paradigm, agrees.

“Increasingly, the regulated community has seen the rise of deferred or non-prosecution agreements in the form of relatively informal agreement letters that are not filed in court,” he says.

Pilchen cites the case of Textron as another example; in August, the company entered into a non-prosecution agreement amid allegations that two of its French subsidiaries made kickbacks to Iraqi officials in exchange for contracts under the United Nations’ Oil for Food Program. He also notes comments by Mark Mendelsohn, deputy chief prosecutor at the Justice Department, who has publicly spoken about the wisdom of self-disclosure.

The Justice Department and Securities and Exchange Commission “have been vocal … regarding what they expect responsible companies to do if they uncover a problem,” he says. In Paradigm’s case, “The government showed it can provide very tangible benefits in response to the responsible conduct exhibited by the company in making the voluntary disclosure.”

Going Easy

Wall and others say Paradigm’s fine is relatively small compared to other recent cases. (Norwegian firm Statoil was whacked with a $21 million fine last year.) The 18-month term is “fairly short,” and the compliance obligations the company agreed to “are very plain vanilla,” Wall says. “There are no really onerous provisions like we’ve seen in some other agreements.”

Also notable: The Justice Department allowed Paradigm to use its outside counsel to serve as compliance counsel; typically in recent cases, companies have had to hire independent outside monitors. Letting outside counsel serve as compliance monitor is vital, Cassin says, because the company can maintain attorney-client privilege. No such privilege exists with outside compliance monitors.

Still, observers say factors beyond self-disclosure influenced the Paradigm settlement, and will influence any negotiations with prosecutors. Cassin says one “major influence” likely was that Paradigm’s current management was not involved in the unlawful conduct. Low also notes that Paradigm was a first-time offender, and had its primary place of business outside the United States for most of when the violations occurred.

Experts say Paradigm’s settlement holds another important lesson for companies: If you’re involved in an acquisition or initial public offering involving an international company, do your FCPA due diligence. Paradigm did exactly that while preparing for an IPO, and discovered the bribes.


Pilchen

Pilchen says the Paradigm case is the first instance of an FCPA issue emerging in the middle of IPO due diligence and is a reminder that companies must “build into their due diligence a very robust FCPA component.” If a problem comes to light after the acquisition or sale of stock to the public, he adds, the new ownership can find itself exposed to civil litigation and a more stern attitude from prosecutors.

By resolving the bribery issues before the IPO, Wall says, Paradigm avoided further enforcement by the SEC. “If they hadn’t done that, the consequences could’ve been a lot worse,” he says.

If a problem does emerge, Pilchen advises companies have “experienced counsel who can come in quickly, investigate the facts, and be in position to advise management on whether and under what circumstances to consider making a voluntary disclosure.”

Complicating the analysis of whether or not to self-disclose in the merger or IPO context, he notes, is that the company “is already in front of the SEC making representations” to the Division of Corporation Finance.

“In addition to worrying about any historical conduct, counsel and the company have to be concerned about whether representations made today to the SEC are true, accurate, and complete,” he says.