For decades, the government has been trying to incentivize companies to self-report illegal activity by dangling the carrot of reduced punishment. The Justice Department’s one-year Foreign Corrupt Practices Act “pilot program,” announced on April 5, 2016, is the latest iteration of this enforcement technique. Although a valiant effort to formalize a practice known to white collar practitioners, the program does not address some of the more significant variables that are of importance to corporate decision makers.
The underlying problem with the FCPA pilot program, and perhaps all of the government’s attempts to convince the corporate community that it is better to come clean than to be found out, is its omission of the key factor that determines the severity of punishment: the base fine amount. The government touts a percentage reduction from the recommended Guideline sentence (which in the case of corporations means fine range) for self-reporting, cooperation, and remedial measures. The implied suggestion that the sentence imposed on a company depends exclusively on the company’s level of cooperation with the government overlooks the reality that the primary driver of fine amount under the Sentencing Guidelines in fraud cases is the calculation of either the loss or the unlawful gain—the number reached before cooperation credits are even considered.
The Pilot Program
The FCPA makes it unlawful for certain persons and entities to bribe foreign government officials to assist in obtaining or retaining business. The pilot program is one part of a three-part plan being rolled out by the Justice Department to combat FCPA violations. The first two steps include increasing the number of attorneys investigating and prosecuting FCPA cases by 50%, and strengthening coordination with foreign counterparts, measures that likely will result in more and effective prosecutions.
The government has issued a memorandum containing “Guidance” on the pilot program to ensure a clear and consistent understanding of the program by both prosecutors and corporate America. Participating companies are required to: (1) voluntarily self-disclose FCPA matters; (2) fully cooperate with the government; and (3) timely and appropriately remediate. Companies that successfully meet these requirements may be entitled to a 50% reduction off the bottom end of their Sentencing Guideline fine range and even a declination of prosecution. Companies that do not voluntarily self-disclose, but satisfy the second and third requirements, may be entitled to a 25% reduction off the bottom end of the Sentencing Guideline fine range. To be eligible for either of these credits, corporations also will be required to disgorge all FCPA-related profits.
At first blush the potential reductions offered under the pilot program seem significant. Certainly a 25–50% reduction off the bottom-end calculation can have big impact on a troubled company’s balance sheet. Before the parties even reach this point, however, the appropriate applicable Sentencing Guideline fine range—the number from which the reduction will begin—has to be negotiated. This is a complex task in this era of “broken” fraud Guidelines driven by loss calculations that frequently are untethered to reality.