Distilling lessons from the FCPA Pilot Program

One year after implementation of the FCPA pilot program, compliance and legal counsel are starting to receive greater transparency and consistency around how the Criminal Division’s Fraud Section measures and credits voluntary self-disclosure and cooperation in corporate resolutions.

Last year, the Criminal Division’s Fraud Section implemented the FCPA pilot program, which delineates specified mitigation credit a company can receive if it acts in accordance with standards of self-disclosure, cooperation, and remediation—each of which are carefully defined as part of the roll out of the program.

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. 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.

In cases in which the company has fully satisfied all its obligations, the Department of Justice might decide not to bring a prosecution altogether. It then publishes on its website cases it has declined to prosecute.

The publication of these declinations is a departure from past practice. Historically, a company would announce in a filing with the Securities and Exchange Commission that it has been notified by the government that it was closing its investigation without bringing an enforcement action, but the government itself doesn’t typically make these announcements. Of course, one notable exception was the Morgan Stanley declination announced by the government in 2012.

“The Pilot Program is a game-changer in terms of what may constitute a declination,” says Andrew Levine, a partner at law firm Debevoise & Plimpton. “Traditionally, a declination has involved the Department of Justice exercising its discretion not to prosecute a case that it otherwise had a reasonable basis to bring.” Under the Pilot Program, a declination looks more like a non-prosecution agreement, with a public resolution, statement of relevant facts, and the disgorgement of profits, he says.

To date, seven companies have received declinations attributed to the pilot program alone. “Of course, this number does not include the many cases we routinely decline for various reasons, including insufficient evidence of corporate criminal misconduct,” Acting Principal Deputy Assistant Attorney General Trevor McFadden said in May, during a keynote address he gave at the American Conference Institute’s 7th Brazil Summit on Anti-Corruption.

The initial trial period of the pilot program ended April 5. The Justice Department is now in the process of evaluating its efficacy, whether to extend it, and what revisions, if any, need to be made to it. “At this point, the program continues as we evaluate it and reach a final decision regarding its permanence,” McFadden said.

Declinations explained. “It’s not explicitly mentioned in the pilot program, but one factor the DoJ has considered in making declination decisions is whether the SEC intends to pursue a related civil action,” says Marc Bohn, counsel at law firm Miller & Chevalier. So far, in three declinations under the pilot program—Nortek, Akamai Technologies, and Johnson Controls—the Justice Department said that it had considered favorably the SEC’s parallel enforcement actions in which disgorgement was required.

The Justice Department’s willingness to decline bringing a criminal prosecution where an SEC action is sufficient is nothing new. The pilot program is groundbreaking, however, in the sense that it created a whole new category of declinations—one in which “even a company that voluntarily self-discloses, fully cooperates, and remediates will be required to disgorge all profits resulting from the FCPA violation,” the pilot program states.

“At this point, the program continues as we evaluate it and reach a final decision regarding its permanence.”
Acting Principal Deputy Assistant Attorney General Trevor McFadden

“That’s been the biggest shift in terms of how the Department views declinations,” says Ryan Rohlfsen, a partner at law firm Ropes & Gray. “If there is a reasonable determination of a crime and of some gain, in some way or another the company is going to have to disgorge that money.”

This development was first announced in September 2016, when the Justice Department announced separate resolutions with two private companies—HMT, a storage-tank provider for the oil and gas industry; and NCH, an industrial supply and maintenance company. In those cases, the Justice Department declined to prosecute, but required the companies to disgorge their ill-gotten gains.

In the HMT case, the Department’s investigation found that HMT, through its employees and agents, paid approximately $500,000 in bribes to government officials in Venezuela and China to influence those officials’ current and future purchasing decisions and thereby secure $2.7 million in net profits. In the NCH case, the Department’s investigation found that from to 2011 until mid-2013, NCH’s subsidiary in China illegally provided things of value worth approximately $44,545 to Chinese government officials connected with sales that generated profits to NCH of approximately $335,342.

Most recently, the Justice Department in a June 21 declination letter said it was closing its investigation against engineering and construction firm CDM Smith. In that case, the Department’s investigation found that, from approximately 2011 until approximately 2015, employees of CDM Smith’s division responsible for India operations and its subsidiary, CDM India, illegally paid about $1.2 million in bribes to officials in the National Highways Authority of India (NHAI), India’s state-owned highway management agency and an “instrumentality” under the FCPA to receive contracts from NHAI. Under the agreement, CDM will disgorge the $4 million in net profits it illegally obtained.

In a fourth declination with disgorgement, the Justice Department, in a June 16 letter agreement, said it was closing its investigation against industrial-gas supplier Linde. In that case, the Department’s investigation found that from November 2006 to December 2009 a Linde unit, Spectra Gases, made corrupt payments to high-level officials at the National High Technology Center of the Republic of Georgia, a state-owned and state-controlled entity. In total, Spectra Gases received $6.4 million from the corrupt conduct, while Linde received $1.43 million. Linde agreed to disgorge and forfeit a total of $11.2 million ($7.8 million in disgorgement and forfeit $3.4 million forfeiture).

As far as overall trends, in all four declination letters—HMT, NCH, Linde, and CDM Smith—the Justice Department listed the following six factors for its declinations:

Voluntary self-disclosure;

Thorough and comprehensive internal investigation;

Full cooperation, including the disclosure of all known relevant facts about the individuals involved;

Agreement to disgorge profits from the allegedly improper conduct;

Enhancements made to the compliance program and internal controls; and

Full remediation.

What distinguishes HMT, NCH, and CDM Smith from other disclosed declinations under the pilot program is that they are privately held companies, whereas Linde is publicly listed in Germany. Thus, none of these declinations were accompanied by SEC enforcement actions.

TREVOR MCFADDEN REMARKS

Below is a partial text of remarks made by Acting Principal Deputy Assistant Attorney General Trevor McFadden at the American Conference Institute’s 7th Brazil Summit on Anti-Corruption.
The Fraud Section’s “Pilot Program” is an example of an effort to provide more transparency and consistency for our corporate resolutions. Last year, we began the program, which delineates specified mitigation credit a company can receive if it acts in accordance with standards of self-disclosure, cooperation, and remediation. Each of these concepts—self-disclosure, cooperation, and remediation—were carefully defined as part of the roll out of the program. The Fraud Section publishes information on our website on cases we have declined to prosecute, where we would have otherwise brought criminal cases. There have already been five such cases. Of course, this number does not include the many cases we routinely decline for various reasons, including insufficient evidence of corporate criminal misconduct.
Indeed, we have found that offering leniency to companies that self-report has led to more companies coming forward with information. In the Pilot Program’s first year, 22 companies have voluntarily disclosed violations, which is an increase from 13 during the previous year. At this point, the program continues as we evaluate it and reach a final decision regarding its permanence.
We are certainly far from seeing an end to the global problem of corruption, but I think it is safe to say that we are headed in the right direction.  Increasingly, multinational companies are voluntarily complying with anti-corruption laws not simply to avoid prosecution. Corruption introduces significant uncertainty into business transactions, and it actually increases the cost of doing business. Bribery has destructive effects within a business as well, undermining employee confidence in a company’s management and fostering a permissive atmosphere for other kinds of corporate misconduct, such as employee self-dealing, embezzlement, financial fraud and anti-competitive behavior. Companies that pay bribes to win business ultimately undermine their own long-term interests and the best interests of their investors.
That is not to say that companies that reach a resolution with the Department are “bad companies,” or that they don’t care about corporate compliance.  Indeed, many of our resolutions are with companies that voluntarily self-disclose past mistakes, and I know from having been on both sides of this process that companies that reach a resolution with us typically work hard to improve their compliance systems to ensure their compliance failures are not repeated.
Fighting corruption leads to a robust and transparent marketplace. I also hope that the work to root out corruption in Brazil, as well as the Justice Department’s efforts, ultimately serve to create an even playing field for honest businesses. Indeed, the Department of Justice takes a robust attitude towards the jurisdictional reach of the FCPA primarily to help ensure there is an even playing field for honest businesses everywhere.
In closing, the Criminal Division will continue to do its part to punish and deter crime, including corruption, with international implications. Increasing our commitment to international collaboration, we hope, will ultimately have the effect of safeguarding our countries, our markets and our citizens.
Source: Department of Justice

Self-disclosure benefits. At first blush, the pilot program appears to have changed the way companies think about voluntary self-disclosure. In the pilot program’s first year, 22 companies voluntarily disclosed violations, an increase from 13 during the previous year, McFadden noted.  “Indeed, we have found that offering leniency to companies that self-report has led to more companies coming forward with information,” he said.

“Whether to self-report to the Department of Justice is an incredibly fact-specific determination,” Levine says. “Such decision should not be made lightly or without advice from experienced counsel.”

Examples of factors a company must consider include:

The likelihood of the Justice Department learning of the relevant conduct;

The company’s willingness to cooperate, including providing evidence regarding culpable employees;

The strength of available defenses, including jurisdictional ones; and

The possible interests of other U.S. regulators, as well as other anti-corruption bodies throughout the world.

“Indeed, this growing web of anti-corruption enforcement can transform the questions of whether and, if so, how to self-report into a complex puzzle involving many interrelated decisions,” Levine says.    

Cooperation and remediation, without self-disclosure, also appears to have quantifiable benefits—albeit, with limited credit. For example, Las Vegas Sands, a gaming and resort company, in January 2017 agreed to pay a $6.96 million criminal penalty and entered into a non-prosecution agreement with the Justice Department to resolve an investigation into FCPA violations in connection with business transactions in the People’s Republic of China and Macao.

The Justice Department said the $6.96 million criminal penalty reflects a 25 percent reduction off the bottom of the applicable U.S. Sentencing Guidelines fine range for Sands’ full cooperation and full remediation.  The company received no voluntary disclosure credit, however, “because it did not voluntarily and timely disclose to the Fraud Section the conduct described,” the Justice Department stated.

Although the Justice Department would like to see more self-disclosures, the decision to self-disclose may not always be the right one for a company. “The big debate in the defense community is, ‘What’s the value of [self-disclosure]?’” Rohlfsen says. The reality is that companies must also take into consideration any potential fines, litigation, and the added cost of likely having to retain a corporate compliance monitor, which may exceed the value of any discount off the Sentencing Guidelines.

Of cases announced in the past year, most companies that have resolved with the Justice Department have been required to retain a corporate compliance monitor. “Although the possibility of declinations has gone up, so has the possibly of getting a monitor,” Rohlfsen says.

“My concern is that that’s going to be a little counter-intuitive and maybe countervailing to the purpose of the pilot program, which is to encourage companies to self-disclose and cooperate,” Rohlfsen says. “Having the possibility of a monitor at the end of the tunnel is a huge concern to companies.”

The compliance and legal community will “have to wait and see how this plays out,” Rohlfsen adds. They’ll want to be on the lookout for more favorable terms and conditions of resolutions and more information in how monitors are selected and under what circumstances, he says.

Another development has come into play as well: Given that the Justice Department announced that it’s now making a “concerted effort” to speed up the pace of FCPA investigations, that may have effect the way companies resolve their cases with the government. “We’re likely to see more DPAs, NPAs, and declinations for companies that are voluntarily disclosing, cooperating, and wrapping up their investigations quickly,” Bohn says.

At a high level, however, it’s encouraging that the Justice Department is sending a strong message that it wants to have a cooperative dialogue with the compliance community, Rohlfsen says. At the end of the day, if you can show that you have an effective, state-of-the art compliance program and the company did everything it reasonably could have done to prevent, detect, report, and remediate any misconduct, “then you have a good argument in front of the Department to get a declination.”