Introduction

To understand how the government will regulate companies in the future, it is important to understand the problems it is currently trying to solve. In its efforts to enforce the Foreign Corrupt Practices Act, the US Justice Department faces a particularly difficult problem: how to incentivise companies to volunteer information about their own illegal conduct while retaining its ability to punish those companies for breaking the law.

The Justice Department's problem arises from its pursuit of two very different goals. On one hand, the Justice Department wants businesses to come forward and voluntarily disclose potential violations of the act. Through voluntary disclosures, the Justice Department obtains a steady stream of cases, thus conserving its limited resources, increasing the likelihood of successful prosecutions of individuals and maximising the effectiveness of its enforcement actions against companies. The Justice Department has obtained many settlements and recovered billions of dollars in penalties because of voluntary disclosures. On the other hand, the Justice Department wants to retain as much discretion as possible to penalise companies for violating the act, including those which voluntarily disclose their problems. The Justice Department worries about sending the wrong message and failing to achieve a just result if it declines prosecution of a company in a case with egregious facts. If the Justice Department makes a blanket commitment to decline prosecution of any company making a voluntary disclosure, this may encourage such disclosures, but inhibit its own ability to enforce the law.

Why the problems have lingered

In the past, the Justice Department tried to solve this problem by promising more lenient treatment for companies with voluntary disclosures, but not committing to providing any specific benefits. That way, the Justice Department retained its full discretion while generally trying to reward companies that voluntarily disclosed their misconduct, provided full cooperation and improved their compliance programmes.

However, companies have become increasingly restless with the status quo and the resulting ambiguity. Many companies have questioned whether voluntary disclosures are worthwhile when there is no certainty that a company will receive any benefit at all. Others have argued about the unfairness of imposing criminal liability on companies that operate a strong compliance programme. The US Chamber of Commerce, for instance, has advocated for the adoption of a compliance defence to the act, which would allow companies to avoid criminal liability altogether if they had a strong compliance programme in place. If a significant number of companies decline to make voluntary disclosures in the future because of these or similar concerns, the Justice Department's enforcement efforts will be substantially hindered.

Pilot programme's proposed solutions

In speeches given by officials such as Assistant Attorney General Leslie Caldwell, the Justice Department has recognised the concerns of companies, promised more transparency about its enforcement decisions and announced its intent to publicise declinations where appropriate. In April, the Justice Department's Fraud Section announced a pilot programme governing the disclosure of potential Foreign Corrupt Practice Act violations. Because the programme was experimental, the Fraud Section limited it to disclosures concerning Foreign Corrupt Practice Act issues and limited its operation to one year.

Under the programme, the Fraud Section has tried to quantify the benefits that a company could receive by voluntarily disclosing potential violations of the act. For companies that make a voluntary disclosure, fully cooperate and adopt timely and appropriate remedial measures, the pilot programme offers the following benefits:

  • the potential of a 50% reduction of the fine off the bottom end of the US Sentencing Guidelines;
  • an understanding that the Justice Department generally will not require the appointment of a monitor; and
  • the promise that the Justice Department "will consider a declination of prosecution".

However, if the company does not voluntarily disclose, but later cooperates and remediates, the Justice Department will be willing to consider a maximum reduction of 25% off the bottom of the guidelines and will make no assurance about whether a monitor would be required.

Likely promotion of the programme

By itself, the pilot programme is unlikely to cause a significant increase in the number of voluntary disclosures. Indeed, it does not offer anything significantly different from what companies could have expected in previous years. The pilot programme makes no promise of declinations for companies that voluntarily disclose; and as before, the Justice Department has retained its full discretion to prosecute companies as it sees fit. The Justice Department has issued three declination letters since the pilot programme was announced, and those were cases that likely would have been declined even before the pilot programme was announced.

Moreover, companies may view the increased transparency of the pilot programme as negated by the Justice Department's aggressive rhetoric about the heightened standards that it expects companies to meet in cooperating with the government. The first seven pages of the pilot programme discuss all of the ways in which the Fraud Section might conclude that a company has not met the standards for voluntary disclosure, cooperation and remediation. The Yates Memorandum, issued last September by Deputy Attorney General Sally Yates, compounds that uncertainty by adding another hurdle for companies to meet in qualifying for cooperation credit. The Yates Memorandum instructs prosecutors to deny all cooperation credit if a company has not identified all relevant facts about culpable conduct by their employees.(1) The Justice Department is fully aware of the concerns raised by companies and defence counsel about whether the costs of cooperation outweigh the benefits.

That is why the Justice Department likely intends to promote the benefits of the pilot programme extensively over the next year, highlighting the declinations that it awards and the penalty reductions that it grants. At the same time, while exercising its discretion, the Justice Department is likely to seek harsher penalties from those companies that decide not to cooperate or that do not voluntarily disclose misconduct. Caldwell hinted at such a strategy in speeches in the past year when she predicted that there would be more declinations, more guilty pleas and fewer deferred prosecution agreements and non-prosecution agreements.

Comment

In considering how the Fraud Section is likely to react to internal investigations over the next year under the pilot programme, companies should carefully consider the problem that it is trying to solve. The pilot programme is not intended to dictate how the Fraud Section exercises its prosecutorial discretion in prosecutions of companies for Foreign Corrupt Practice Act violations; nor is it meant to provide blanket immunity to companies with strong compliance programmes. It does not even make any promises about the treatment that a company is necessarily entitled to receive if it voluntarily discloses information. The pilot programme is designed to preserve the government's exercise of prosecutorial discretion and to incentivise companies to disclose misconduct voluntarily. Companies should expect the Fraud Section to operate the pilot programme over the next year with these goals in mind.

For further information on this topic please contact Michael P Kelly or Christina L Murphy at Hogan Lovells US LLP by telephone (+1 202 637 5600) or email (michael.kelly@hoganlovells.com or christina.murphy@hoganlovells.com). The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.

Endnotes

(1) For further details please see "Impact of Yates Memorandum on document production in corporate investigations".

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