The guidance issued by the DOJ in connection with the Pilot Program and recent declinations state that disclosure, remediation and cooperation are essential to any favorable resolution with the government.
Six months ago, the Department of Justice Criminal Division’s Fraud Section (the DOJ) announced the start of a yearlong enforcement initiative for Foreign Corrupt Practices Act (FCPA) cases. Under this initiative, known as the “Pilot Program,” the government committed to offer reduced monetary sanctions or decline prosecutions if companies took specific actions in response to potential violations of the FCPA. We outlined the contours of this program in an earlier Client Alert. The government intended the Pilot Program to incentivize companies to disclose, remediate and cooperate with the government’s investigation of suspected FCPA violations. As the Pilot Program’s midpoint approaches, the DOJ has released a number of declination letters that have been issued to companies under the Pilot Program. While this public disclosure is a step in the right direction in terms of providing some transparency in the process the government undertakes when deciding how to move forward in specific cases, there are still many open questions about exactly what a company must do to receive reduced monetary sanctions or avoid prosecution.
Since announcing the initiative, the DOJ has publicly declined prosecution under the FCPA in five cases: three in June 2016 involving Nortek, Inc., Akami Technologies, Inc., and Johnson Controls, Inc. and two on September 29, 2016 involving NCH Corp. and HMT LLC. The DOJ’s announcements about the three investigations resolved in June provide no specifics about the alleged misconduct that violated the FCPA other than that employees of a China-based subsidiary engaged in the misconduct. The two declination letters the DOJ issued on September 29 provide significant details about when and how the companies transgressed the FCPA.
The DOJ’s announcements in these five declined cases do not shed much light on the specific actions the companies took after uncovering the FCPA violations in order to earn the declination under the Pilot Program, particularly as to the types of compliance enhancements undertaken. Even so, the five declination letters demonstrate that the DOJ is focusing on a consistent set of factors that track the contours of the Pilot Program. The DOJ’s declinations emphasize that the companies voluntarily disclosed the conduct, and, in the Nortek, Akami Technologies and HMT cases, the DOJ added that the disclosure was “prompt” or “timely.” The declinations uniformly highlight that the company conducted a “thorough” investigation and provided “full” or “fulsome” cooperation. In all five cases, the DOJ commented that the company’s cooperation included identifying the individuals involved in or responsible for the misconduct. In each declination, the DOJ observed that the company had enhanced or was enhancing both its internal compliance programs and its internal accounting controls to prevent a recurrence. Each letter also explained that the company would be disgorging profits from the illegal behavior. In Nortek, Akami Technologies and Johnson Controls, the amount of disgorgement was an amount to be determined by the Securities and Exchange Commission (SEC). In HMT and NCH — neither of which are issuers — the amount of disgorgement was agreed to between the companies and the DOJ and added to the declination letter as a condition of the DOJ’s declining to prosecute the companies.
Consistent with the recent guidance contained in the Yates Memo, which we outlined in a previous article, all five letters comment on the consequences for the individuals who engaged in the misconduct as part of the companies’ remediation efforts. The government emphasized that Nortek, Johnson Controls, HMT and NCH terminated the employees responsible for the violation and that Nortek, Johnson Controls and NCH fired at least one “high-level executive” in the United States or China. In the Akami Technologies case, the DOJ observed that the company suspended an individual who subsequently resigned, disciplined five other employees and terminated its relationship with a supplier. In the letter pertaining to HMT, the DOJ provided a detailed accounting of the consequences for the responsible individuals. According to the DOJ, the company remediated the FCPA violation by “terminating eight employees — including two regional managers and a director of business development — involved in the conduct, sanctioning ten employees through suspensions, pay freezes, bonus suspensions, and reductions of responsibilities, and severing business relationships with the Venezuela agent and the China distributor who were involved in the conduct.” Notably, four of the five letters identify the specific number of employees that each company terminated or disciplined. Thus, a disclosing company’s willingness to clean house after uncovering a violation as part of its remediation efforts clearly has the DOJ’s attention.
As a point of comparison, on September 29, when the DOJ announced its decision not to pursue FCPA charges against NCH and HMT, the DOJ also announced it would enter into a deferred prosecution agreement with Och-Ziff Capital Management Group LLC, a publicly traded hedge fund, for conduct involving a subsidiary that allegedly bribed numerous African officials. According to the agreement, Och-Ziff performed a “thorough and comprehensive internal investigation,” significantly improved its compliance program and internal controls, and cooperated with the government’s investigation by providing regular updates, making witnesses available for interviews, and collecting and producing voluminous records. The agreement also states, however, that Och-Ziff did not voluntarily self-report the FCPA violation to the government, and, consequently, “was not eligible for a more significant discount on the fine amount or the form of resolution.” Och-Ziff further failed to produce certain “important, responsive documents” to the government until the government requested their production, causing the government’s investigation to be delayed at an early stage.
In another recent FCPA case that also resulted in a deferred prosecution agreement rather than a declination, the agreement stated that, although the defendant company, Latam Airlines Group S.A., fully cooperated with the government, it disclosed the violation four years after press reports about the criminal conduct surfaced abroad. The agreement further noted that the company had an inadequate compliance program. Finally, Latam Airlines failed to remediate the conduct by disciplining any of the individuals involved.
Although the Pilot Program does not govern the SEC, a recent SEC decision not to pursue FCPA charges against global telecommunications company Harris Corporation suggests that the SEC is giving weight to many of the same factors as the DOJ does under the Pilot Program. On September 12, 2016, the SEC announced that it would not charge Harris Corporation with FCPA violations relating to bribes that the former CEO of a Chinese subsidiary paid to foreign officials to induce purchases of the subsidiary’s products. The official and his subordinates created phony receipts to generate cash to pay the bribes and then recorded the phony expenses in the subsidiary’s books. Following “limited pre-acquisition due diligence,” Harris acquired the subsidiary and consolidated the subsidiary’s books and records into its own. After the acquisition, Harris conducted compliance training with its Chinese personnel and integrated the subsidiary into Harris’s accounting controls, leading Harris to discover the phony expenses within five months. Although the SEC charged the offending executive with an FCPA violation, the SEC announced that it would not charge Harris because the company discovered the problem quickly, promptly reported it, made a “thorough remediation” and cooperated with the SEC’s investigation. This case represents one of the rare instances where an individual faced charges when his FCPA violations benefited the company, yet the company was spared an enforcement action.
As the halfway point of the FCPA Pilot Program approaches, the DOJ’s public statements about the cases in which it has declined to bring FCPA charges leave open significant questions about exactly how much companies must do to obtain reduced monetary sanctions or avoid prosecution. Whether the DOJ will provide more detailed information about the actions that warrant a declination in the second six months of the initiative remains to be seen. What is clear, however, is that if a company satisfies the government that it has made a prompt and voluntary disclosure; taken appropriate remedial steps, including terminating or disciplining responsible employees where appropriate; and cooperated fully with the government’s investigation, then the government is prepared to reward the company with a lighter fine and possibly even a declination.
Based on the government’s actions in recent cases, companies uncovering conduct that might run afoul of the FCPA should, in consultation with counsel, immediately begin the process of ascertaining the relevant facts through an internal review or investigation; promptly identify those involved in the conduct; ascertain whether there were any compliance failures that allowed the issues to go undetected; and adequately address the failure. Companies must also, from the outset, consider self-reporting and cooperating with the relevant authorities to best position themselves to receive the most favorable treatment from the government. The guidance issued by the DOJ in connection with the Pilot Program and these recent declinations state that disclosure, remediation and cooperation are essential to any favorable resolution with the government. The key is to do so in a way that satisfies the government, which requires a thoughtful and nuanced approach in dealing with the various moving parts that almost always arise in these types of investigations.