On April 5, the DOJ issued a Pilot Program1 that provides its latest answer to a critical question in FCPA practice: What benefits does a company receive for self-reporting potential FCPA violations? As explained below, companies and their counsel will still need to evaluate carefully whether DOJ’s answer is compelling. But the Department has now elaborated on its recent pronouncements and made a fresh effort to encourage corporate disclosures that facilitate individual prosecutions.2The Pilot Program is applicable to organizations that voluntarily self-disclose or cooperate in FCPA matters during the next year. The Pilot Program will be re-evaluated and may be made permanent after this initial trial period.
The Pilot Program provides credit in FCPA matters “above and beyond any fine reduction provided for under the [United States] Sentencing Guidelines.” However, “to receive this additional credit under the pilot program, organizations must meet the standards described [in the Pilot Program], which are more exacting than those required under the Sentencing Guidelines.” The Pilot Program provides for the possibility of a declination or a 50% reduction off the bottom end of the Sentencing Guidelines fine range for companies that voluntarily self-disclose, fully cooperate, and engage in timely and appropriate remediation. It also establishes “stringent [cooperation] requirements” for companies seeking such treatment. In particular, it requires companies to disclose the locations in which overseas documents were found and to identify the individuals who found them. To the extent consistent with the attorney client privilege, it also requires that all relevant facts gathered during an internal investigation be attributed to specific sources. A company claiming that any requirement for cooperation credit is impossible to meet bears the burden of proving impossibility. For companies that earn cooperation and remediation credit but do not voluntarily self-disclose, the Pilot Program provides for a maximum 25% reduction off the bottom of the Sentencing Guidelines fine range.
Credit for Self-Disclosure, Cooperation, and Remediation Becomes More Transparent
- The Pilot Program clarifies Department expectations about remediation without signaling a significant shift in policy. The Program establishes the following remediation requirements: Implementation of an effective compliance and ethics program, the criteria for which will be periodically updated and which may vary based on the size and resources of the organization, but will include:
- Whether the company has established a culture of compliance, including an awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated;
- Whether the company dedicates sufficient resources to the compliance function;
- The quality and experience of the compliance personnel such that they can understand and identify the transactions identified as posing a potential risk;
- The independence of the compliance function;
- Whether the company’s compliance program has performed an effective risk assessment and tailored the compliance program based on that assessment;
- How a company’s compliance personnel are compensated and promoted compared to other employees;
- The auditing of the compliance program to assure its effectiveness; and
- The reporting structure of compliance personnel within the company.
- Appropriate discipline of employees, including those identified by the corporation as responsible for the misconduct, and a system that provides for the possibility of disciplining others with oversight of the responsible individuals, and considers how compensation is affected by both disciplinary infractions and failure to supervise adequately; and
- Any additional steps that demonstrate recognition of the seriousness of the corporation’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.
FCPA practitioners have long sought to provide clients with greater certainty regarding the benefits of voluntary disclosures, cooperation, and remediation. The Fraud Division’s Pilot Program is a step in the right direction. Companies and their decision-making bodies and counsel can now better quantify the benefit of self-disclosure, cooperation, and remediation, understanding clearly that these efforts could reduce a company’s fine up to 50%.3
Despite this new measure of transparency, some points of uncertainty remain. For instance, although the Pilot Program offers the potential of more declinations in the future, typically the DOJ does not announce declinations to the public, making it difficult for companies and their counsel to assess their chances of obtaining such a favorable outcome.
Ultimate DOJ Penalties Remain Uncertain
Three significant sources of uncertainty about DOJ penalties remain. First, the Pilot Program caps credit for voluntary disclosure, cooperation, and remediation without setting a floor, allowing prosecutors discretion in reducing a company’s fines. Second, DOJ prosecutors retain substantial discretion in the scope of the alleged misconduct to be addressed and the charges to be brought, which may dramatically impact the magnitude of the Sentencing Guidelines fine from which the ultimate penalty is calculated. Third, the Program requires a company to disgorge all profits obtained through FCPA violations in order to qualify for any mitigation credit, but provides no guidance on how the historically uncertain and large disgorgement figure will be calculated. Prosecutorial discretion in awarding credit, making charging decisions, and calculating disgorgement make it possible for the DOJ to take away with one hand what it gives with the other. Although the DOJ will likely continue rewarding self-disclosure, cooperation, and remediation, the exact value of the reward will remain unclear.
SEC and Non-U.S. Penalties Remain Unaffected
Aside from uncertainty about the ultimate penalties that DOJ may exact, companies will continue to face uncertainty about penalties and disgorgement sought by the SEC and by non-U.S. authorities. The DOJ’s Pilot Program states that it applies only to the Fraud Section’s FCPA Unit and does not bind U.S. Attorneys’ Offices or other agencies. While it is to be hoped that the DOJ and the SEC coordinate their settlement practices in order to reward voluntary disclosure, cooperation, and remediation, the SEC has not yet followed the DOJ’s example in clarifying its policies. In addition, of course, the Pilot Program does not bind non-U.S. authorities, which have become increasingly active in enforcing anti-corruption laws. Although the DOJ has historically worked with the SEC and with non-U.S. authorities in calculating the overall amount being paid to resolve cross-border anti-corruption cases, companies considering disclosure will still need to evaluate carefully their SEC and non-U.S. liabilities.
Companies That Miss the Opportunity to Self-Disclose Face Harsher Treatment
The Pilot Program may signal increased headwinds in negotiations for companies that do not make voluntary self-disclosures, even if a company’s failure to disclose is not an indication of bad faith, such as when a whistleblower reports undiscovered misconduct directly to the DOJ or when a company is legally or contractually obligated to self-disclose misconduct:
- The Pilot Program eliminates what major, recent settlements show was a real possibility of obtaining more than a 25% fine reduction after missing the opportunity to self-disclose.
- The Pilot Program provides that monitorships will generally not be imposed on companies that make voluntary self-disclosures and that have implemented an effective compliance program by the time of the resolution. We would hope that this does not imply an increase in monitorships for companies that have missed the opportunity to self-disclose but have otherwise fully cooperated and remediated.
Reaffirmation of Other DOJ Policies
Finally, we note that the Pilot Program reaffirms the current legal framework for resolving FCPA cases. The Pilot Program expressly notes that it does not supplant the Principles of Federal Prosecution of Business Organizations, and that it augments the Sentencing Guidelines by design. Further, the Program reaffirms the DOJ’s increased focus on individual prosecutions, expressly conditioning cooperation credit on timely disclosure of all facts relevant to the wrongdoing as was first required by the Memorandum of the Deputy Attorney General, Individual Accountability for Corporate Wrongdoing, dated September 9, 2015 (the “Yates Memorandum”). Finally, the increased importance placed by the DOJ on the effectiveness of compliance programs, reflected in the DOJ’s 2015 hiring of a compliance expert, is only magnified by the fact that the Pilot Program conditions remediation credit on implementation of an effective compliance program.
Decisions to Make in Light of the FCPA Pilot Program
The new DOJ Pilot Program underscores the importance of decisions about self-disclosure and decisions about improving compliance programs. It increases the pressure on companies to self-disclose quickly so as to ensure they are eligible for full credit, even though this means the company will be unlikely to know the full extent or implications of the potential misconduct. Because the Pilot Program links the DOJ’s decisions about imposing a corporate monitor to the effectiveness of a company’s compliance program, it also makes it important for compliance officers and in-house counsel to evaluate their companies’ compliance programs in light of each of the criteria identified in the Program well in advance of any compliance issues.
The Pilot Program is a step forward in providing companies and their counsel with more transparent and predictable benefits for self-reporting, cooperating, and remediating FCPA misconduct. The significance of these benefits, and indeed the overall success of the Pilot Program, will be affected by factors established under and factors existing outside of the Pilot Program. Only time will tell whether a new era of FCPA enforcement has truly arrived.