It’s been a long time coming, but companies finally have some much-needed transparency into how the Department of Justice measures and credits voluntary self-disclosure and cooperation in Foreign Corrupt Practices Act investigations.
Historically, companies that fully cooperate in an FCPA criminal investigation and remediate flaws in their internal controls and compliance program often receive a reduction below the low end of the U.S. Sentencing Guidelines fine range. These reductions and other incentives, however, have not previously been articulated in a written framework—until now.
Earlier this month, Andrew Weissman, chief of the Criminal Division’s Fraud section, issued a nine-page memo setting forth the details of a one-year FCPA enforcement pilot program initiated by the Fraud Section’s FCPA Unit. The pilot program, which takes effect immediately, does not apply to any other part of the Fraud Section, the Criminal Division, the U.S. Attorneys’ Offices, or any other part of the Justice Department.
“The principal goal of this program is to promote greater accountability for individuals and companies that engage in corporate crime by motivating companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs,” Weissman wrote in the memo.
The pilot program should come as a welcome development to companies that have been seeking greater clarity into the actual, quantifiable benefits of self-disclosure and cooperation. “Companies that uncover potential FCPA violations over the next year—especially toward the end of the year—will face an interesting and challenging quandary as to whether to take advantage of the pilot program while they can, because it may not be around next year,” says Eric Bruce, a partner at law firm Kobre & Kim.
Under the pilot program, if a criminal fine is still warranted in cases where a company self-discloses an FCPA violation, fully cooperates with the agency, and remediates compliance deficiencies, the company will be eligible to receive up to a 50 percent reduction off the bottom end of the U.S. Sentencing Guidelines fine range.
“Companies that uncover potential FCPA violations over the next year—especially toward the end of the year—will face an interesting and challenging quandary as to whether to take advantage of the pilot program while they can, because it may not be around next year.”
Eric Bruce, Partner, Kobre & Kim
To receive credit for voluntary disclosure under the pilot program, however, the company must meet a few stringent requirements. For example, the disclosure must qualify under Section 8C2.5(g)(1) of the Sentencing Guidelines as occurring “prior to an imminent threat of disclosure or government investigation.”
Secondly, the company must disclose the conduct “within a reasonably prompt time after becoming aware of the offense,” with the burden being on the company to demonstrate timeliness. Lastly, the company must disclose all relevant facts known to it, including all relevant facts related to involvement in the criminal activity by the company’s officers, employees, or agents—a policy more commonly known as the “Yates Memo,” issued by Deputy Attorney General Sally Yates in September.
Eric Sitarchuk, a partner at law firm Morgan Lewis, says there is one significant flaw in this approach: the Justice Department continues to say that it does not require a waiver of attorney-client privilege to grant cooperation credit, while at the same time expecting companies to hand over all of the facts they have gathered in their internal investigations.
“They’ve created this distinction between privilege and facts gathered during privileged interviews that simply doesn’t work,” Sitarchuk says. “It’s really bogged down the ability of companies to understand what is expected of them in cooperation.”
In cases where the company makes no self-disclosure but does fully cooperate and remediates the issue, it could still receive up to a 25 percent reduction. The Justice Department recognizes that companies aren’t always in a position to self-disclose, particularly when a whistleblower or the media unmasks the misconduct and the company is caught off-guard, says Matthew Queler, who joined Deloitte’s forensic and investigations group this month after serving four years as assistant chief in the FCPA unit. “Companies should not get disheartened if they don’t have the opportunity to self-report,” he says.
Moreover, to be eligible for mitigation credit, a company will be required to disgorge all profits resulting from the FCPA violation. This will apply to cases even when the Securities and Exchange Commission is not involved.
Another consideration for companies, as spelled out in the pilot program, is that the FCPA Unit said it “generally should not require” the appointment of a monitor if a company has, at the time of resolution, implemented an effective ethics and compliance program. Some of the criteria required is “more exacting than those required under the Sentencing Guidelines,” the memo stated.
FULL COOPERATION IN FCPA MATTERS
Below is a description of what the FCPA Unit considers “full cooperation” in FCPA matters.
In addition to the [Principles of Federal Prosecution of Business Organizations], the following items will be required for a company to receive credit for full cooperation under this pilot (beyond the credit available under the Sentencing Guidelines):
Disclosure on a timely basis of all facts relevant to the wrongdoing at issue, including all facts related to involvement in the criminal activity by the corporation's officers, employees, or agents;
Proactive cooperation, rather than reactive; that is, the company must disclose facts that are relevant to the investigation, even when not specifically asked to do so, and must identify opportunities for the government to obtain relevant evidence not in the company's possession and not otherwise known to the government;
Preservation, collection, and disclosure of relevant documents and information relating to their provenance;
Provision of timely updates on a company's internal investigation, including but not limited to rolling disclosures of information;
Where requested, de-confliction of an internal investigation with the government investigation;
Provision of all facts relevant to potential criminal conduct by all third-patty companies (including their officers or employees) and third-party individuals;
Upon request, making available for Department interviews those company officers and employees who possess relevant information; this includes, where appropriate and possible, officers and employees located overseas as well as former officers and employees (subject to the individuals' Fifth Amendment rights);
Disclosure of all relevant facts gathered during a company's independent investigation, including attribution of facts to specific sources where such attribution does not violate the attorney-client privilege, rather than a general narrative of the facts;
Disclosure of overseas documents, the location in which such documents were found, and who found the documents (except where such disclosure is impossible due to foreign law, including but not limited to foreign data privacy laws). Note: Where a company claims that disclosure is prohibited, the burden is on the company to establish the prohibition. Moreover, a company should work diligently to identify all available legal bases to provide such documents.
Unless legally prohibited, facilitation of the third-party production of documents and witnesses from foreign jurisdictions; and
Where requested and appropriate, provision of translations of relevant documents in foreign languages.
Cooperation comes in many forms. Once the threshold requirements of the [Yates Memo] have been met, the Fraud Section should assess the scope, quantity, quality, and timing of cooperation based on the circumstances of each case when assessing how to evaluate a company's cooperation under this pilot. For example, the Fraud Section does not expect a small company to conduct as expansive an investigation in as short a period of time as a Fortune 100 company. Nor do we generally expect a company to investigate matters unrelated in time or subject to the matter under investigation in order to qualify for full cooperation credit. An appropriately tailored investigation is what typically should be required to receive full cooperation credit; the company may, of course, for its own business reasons seek to conduct a broader investigation.
Source: Department of Justice
Specifically, the following criteria generally will be required for a company to receive credit for timely and appropriate remediation under the pilot program:
Whether the company has established a culture of compliance
Whether the company’s compliance program has performed an effective risk assessment and tailored the compliance program based on that assessment
The independence of the compliance function
The reporting structure of compliance personnel within the company
The quality and experience of the compliance personnel such that they can understand and identify the transactions identified as posing a potential risk
Whether the company dedicates sufficient resources to the compliance function
How a company’s compliance personnel are compensated and promoted compared to other employees
The auditing of the compliance program to assure its effectiveness
The FCPA Unit also will be paying attention to how companies discipline those responsible for the misconduct, including those with oversight of the responsible individuals. For example, FCPA prosecutors will be looking at how compensation is affected by both disciplinary infractions and failure to supervise adequately, according to the memo.
The emphasis on effective compliance programs is even more significant now that the Justice Department has a full-time compliance counsel. “The Fraud Section’s compliance counsel is assisting us in refining our benchmarks for assessing compliance programs and for thoroughly evaluating an organization’s remediation efforts,” Weissman wrote in the memo.
In cases in which the company has fully satisfied all of its obligations, the FCPA Unit will consider a declination of prosecution. In considering whether a declination may be warranted, Fraud Section prosecutors will take into account countervailing factors.
For example, a declination cannot be guaranteed in cases where:
FCPA misconduct involved executive management
The company gained significant profit from the misconduct in relation to its size
The company has a history of non-compliance
The company reached a prior resolution with Justice Department within the past five years
How successful the pilot program actually will be in incentivizing companies to voluntary self-disclose potential FCPA violations will depend on “how clearly and consistently the FCPA Unit provides declinations in response to good-faith voluntary disclosures, supported by full cooperation,” says Sitarchuk. “That will send a real signal to the industry that it means what it says here.”
Companies that are willing to take the FCPA unit to task may reap the greatest benefits. In order to stay true to the pilot program, “I think there will be an increase in declinations in terms of cases that may, prior to this point, not have received a declination,” says Queler.
Without any real results, the publication of the pilot program on its own still leaves the Justice Department with considerable discretion in how to prosecute FCPA cases, providing little comfort to companies. “I’m not sure it moves the needle that much,” says Charles Duross, former deputy chief of the Fraud Section and now a partner at law firm Morrison & Foerster.
On the other hand, expecting prosecutors to leave themselves with no discretion to appropriately address FCPA cases is not realistic. “They want the flexibility to make sure the resolution addresses whatever facts and circumstances they find in a particular case,” says Duross.
“To ask the Department to anticipate in advance every circumstance and bind itself to a particular resolution or a particular outcome,” Queler says, “doesn’t allow the Department to do what it needs to do and strike the right balance in terms of seeing a just result.”
To enhance its FCPA enforcement strategy, the Fraud Section is increasing its FCPA unit by adding 10 more prosecutors to its ranks. At the same time, the FBI has established three new squads of special agents devoted to FCPA investigations and prosecutions.
“This should send a powerful message that FCPA violations that might have gone uncovered in the past are now more likely to come to light,” Leslie Caldwell, assistant attorney general of the Justice Department’s Criminal Division, said in a statement announcing the pilot program.
Adding more prosecutors and more FBI agents “should send a message to wrongdoers that FCPA violations that might have gone uncovered in the past are now more likely to come to light,” Weissman warned in the memo.
Additionally, the Justice Department continues to strengthen its coordination with foreign counterparts in FCPA investigations, including the sharing of documents and witnesses. As Compliance Week previously reported, foreign governments are increasingly tipping off U.S. regulators about possible bribery and corruption cases.
Although the FCPA Unit is demonstrating its willingness to listen to the concerns of the compliance community by being more transparent about its enforcement-making decisions, it is not doing so without simultaneously increasing its enforcement efforts on a global scale. Compliance and legal teams that uncover potential FCPA violations over the next year, in particular, should continue to weigh carefully the extent to which the pilot program changes, if at all, the calculus of whether to self-disclose, and when.
To learn more about FCPA investigations, be sure to attend the Compliance Week 2016 conference on May 23-25, 2016, in Washington, D.C. Register today!