The U.S. Department of Justice's Foreign Corrupt Practices Act Pilot Program reached its six-month anniversary on October 5, 2016. Since the program began, the DOJ has announced multiple corporate FCPA resolutions. While the U.S. Securities and Exchange Commission does not have an official FCPA Pilot Program, it too has been active in FCPA cases this year, often acting in concert with the DOJ on Pilot Program resolutions. With the first half-year of the Pilot Program in the books, it is useful to examine the FCPA enforcement activity undertaken by the DOJ and the SEC to see what lessons may be learned about how the program is working and what it means for practitioners and companies going forward.
DOJ FCPA Pilot Program
The DOJ's Pilot Program, announced on April 5, 2016, states that a company that voluntarily discloses FCPA misconduct, provides full cooperation (including as to all culpable individuals), and engages in appropriate remediation is eligible for up to a fifty percent reduction in the fine as calculated under the U.S. Sentencing Guidelines, and may also be considered for a declination. Any declination that is issued will be conditioned on the company disgorging all profits from the alleged misconduct. A company that does not voluntarily disclose, but does fully cooperate and appropriately remediate, is eligible for up to a twenty-five percent reduction in its fine. The Pilot Program will last for one year, at which time the DOJ will evaluate whether to continue it.
Since the Pilot Program began, the DOJ and the SEC have announced fourteen corporate FCPA enforcement actions, including resolutions with four companies that received formal declinations from the DOJ but were obligated to disgorge the profits reaped as a result of the alleged misconduct. In addition, one company - Harris Corporation - received a declination from the SEC that, combined with a prior declination from the DOJ, meant that the company avoided prosecution entirely. On the same day that the SEC announced its declination as to Harris, the SEC published an Administrative Order in which a former Harris employee consented to findings that he had violated the FCPA and agreed to pay a civil penalty. The SEC also obtained agreed Administrative Orders and civil penalties from individual employees involved in three other investigations.
Below are ten lessons to be learned from this flurry of enforcement activity.
FCPA Enforcement Surge Continues: The enforcement actions announced to date mean that 2016 is already the top year in terms of number of corporate FCPA enforcement actions resolved, and we still have three months to go. It appears that any pronouncement that the FCPA enforcement surge is waning may be premature.
DOJ and SEC Are Working Together To Promote Transparency And Encourage Cooperation: The DOJ has been explicit in stating that, by better explaining its decisions, it seeks to encourage corporate compliance and cooperation, especially as it relates to culpable individuals. The DOJ's actions since the announcement of the Pilot Program, although far from perfect in transparency, have been a substantial step toward that goal - we can better see how the fate of a company rises and falls with its commitment to compliance, voluntary disclosure, remediation and cooperation. The SEC has not made as many public statements about its goals, but its actions show that it is working together with the DOJ to achieve the same objectives. One example is the SEC's cooperation with the DOJ's declinations-with-disgorgement. In the two such cases that involved a public company, on the same day that the DOJ announced a declination, the SEC announced a Non-Prosecution Agreement with the company that required the payment of disgorgement. Another example is the SEC's public statement regarding the Harris declination, in which the agency made clear the importance to it of pre-acquisition due diligence, post-closing integration, voluntary disclosure and substantial cooperation as to individuals.
Declinations With Disgorgement Are A Reality: One of the most controversial elements of the Pilot Program was the DOJ's statement that a company could possibly obtain a declination, but even if it did, it may have to disgorge the profits of the alleged misconduct. We now see how this will work - if the company is an issuer, the SEC will collect the disgorgement through an NPA; if the company is private (and thus the SEC has no jurisdiction), the DOJ will obtain a promise to pay the disgorgement in the declination letter. It remains to be seen whether a complete declination is still available for a company under any circumstances if the facts are sufficient to establish corporate FCPA liability. The Harris case provides some hope that such a resolution is still possible. Through compliance and cooperation, Harris avoided paying anything even though the SEC's enforcement action against its former employee included factual allegations that established clear potential liability for the company. Granted, Harris obtained its DOJ declination before the Pilot Program was announced, but the SEC did not issue its declination until September 2016, five months after the program was implemented and the DOJ and the SEC had started to work together to implement its goals.
Declinations Will Include Public Allegations Of Misconduct: The days of the private, one-sentence declination letter are in the past, at least for corporate FCPA cases where the evidence is sufficient to establish corporate liability. All of the declination letters issued by the DOJ under the Pilot Program, as well as the SEC's declination as to Harris, were made public and included explicit allegations of misconduct. Perhaps in response to criticisms that corporate declinations have not constituted genuine leniency because the public evidence did not demonstrate that the company could be proved liable, the declinations issued toward the end of the six-month period included detailed factual recitations that showed that the companies, at least in the government's eyes, were very much liable. In cases where the government believes that corporate liability exists, companies should expect that declinations will continue to include public, detailed descriptions of misconduct. Among other things, these findings of misconduct in the context of declinations create potential debarment risk for companies who do business with government agencies and other public institutions.
Companies Under Investigation Need To Focus On Disgorgement: The enforcement activity under the Pilot Program shows that there are certain categories of cases in which a declination with only disgorgement as a sanction is a potential resolution. Based on the DOJ declinations issued so far, these categories include private companies with up to $2,700,000 in profits to disgorge, and public companies with profits up to $650,000 to disgorge. The authorities' increased focus on disgorgement (and relatively less on amount of bribes paid) means that companies under investigation, from the outset, also need to focus on calculating disgorgement. In more complex commercial situations, there are often legitimate arguments that can be made as to how to properly calculate profit, which may be best developed by an accounting expert. Paying for such analyses may be money well spent.
Prosecutorial Guidelines Are Starting To Come Into Focus: Although one hesitates to make definite conclusions, the constellation of enforcement activity since the announcement of the Pilot Program provides some insight as to how the authorities view different categories of cases. Putting aside the private company declination-with-disgorgement cases where the DOJ was the only enforcement authority with jurisdiction, the DOJ initiated an enforcement action against a company only in three situations, which were three of the four largest cases in terms of total corporate payment. The smallest case in which the DOJ initiated an enforcement action involved a total corporate payment of $14,882,962. In all cases involving total penalties less than this, the SEC was the only enforcement authority to seek payment from the company (again putting aside the private company declination-with-disgorgement cases). This suggests that the DOJ and SEC are moving further toward a more-defined allocation of resources. In addition, we continue to see each agency using the various tools in its enforcement toolbox - guilty pleas, Deferred Prosecution Agreements, Non-Prosecution Agreements, disgorgement, penalties, ongoing reporting, monitors, declinations - depending on the severity of the alleged misconduct.
Authorities' Focus On Individuals Affects Scope Of Investigations: In September 2015 the DOJ explicitly declared its continuing focus on prosecuting individuals in corporate crime cases by issuing the Yates memorandum, which conditions a company's receipt of any cooperation credit on the company producing to the DOJ all evidence regarding all culpable individuals. Although the Yates memorandum does not formally apply to the SEC, the SEC gave notice this year of its ongoing commitment to prosecuting individuals by initiating four enforcement actions against individuals for FCPA violations. All of the recent FCPA actions against individuals involved accounting provisions violations. Given the continuing focus of the DOJ and the SEC on prosecuting individuals, and the evidentiary challenges associated with prosecuting an individual for a FCPA violation, companies seeking cooperation credit should be sure to preserve, and to present to the authorities, all relevant evidence regarding the company's accounting systems and internal controls, and how the identified misconduct undermined those systems and controls.
China Continues To Be Challenging: Of the fifteen investigations resolved since the program began, ten involved allegations of corruption in China. No other country was mentioned more than once. This demonstrates the continuing challenges faced by companies that do business in China. On a related point, there was no evidence of any focus on any particular industry in the enforcement actions brought since the advent of the Pilot Program.
Third Parties Continue To Be The Largest Risk: The vast majority of FCPA matters resolved in the last six months involved alleged bribes paid through third parties. As in the past, there were many kinds of third parties that created problems, including channel partners, sales agents, distributors, consultants, business partners and vendors. All companies doing business outside the U.S. should have a robust, risk-based process for vetting all third parties that create corruption risk.
Compliance Programs Provide Real Benefits: The DOJ and the SEC routinely state in announcing corporate FCPA resolutions that the company received leniency because its compliance program was strong and/or it responded to allegations of misconduct by voluntarily disclosing, cooperating and/or remediating. As in most years, there also were occasional assertions that a company was punished in some way for not having disclosed or cooperated appropriately, or for having a weak compliance program. Still, there has been justifiable doubt as to the extent of the benefit received by companies for compliance and cooperation, given the negotiated nature of the resolutions and the historical dearth of public allegations that would support corporate FCPA liability when leniency is granted. The Harris resolution provides some comfort on this point. Harris was able to obtain a complete declination even though its former employee was charged with a bribe scheme that allegedly involved up to $1,000,000 in improper gifts and resulted in Harris' China subsidiary receiving $9,600,000 in contracts from Chinese health agencies. This is the first time that a public company has received a complete declination in an FCPA case where corporate liability was clear from the public allegations against the employee and there was no allegation that the employee, in the course of violating the FCPA, also stole from the company. The SEC publicly stated that Harris achieved this result by having a robust compliance program and by responding appropriately to the discovered misconduct. This is a clear message that compliance programs yield real benefits.