On 5 April 2016, the United States Department of Justice (DOJ) launched a new one-year pilot program to encourage companies to self-report possible FCPA violations and to fully cooperate in DOJ investigations. To provide that encouragement, the pilot program attaches specific mitigation credits that a company can earn if it self-reports, cooperates and remediates according to the requirements specified by the program. Our colleagues in the United States have prepared a thorough overview of the pilot program, which you can find here.
Offering mitigation credit is not new. The United States Sentencing Guidelines, which are used to calculate recommended criminal fine ranges, offer specific credits if a company cooperates, remediates and self-reports. The DOJ also retains the discretion to further discount the fine recommended by the Sentencing Guidelines. The U.S. Attorneys' Manual notes that such discretion can be exercised if a company has self-reported, cooperated in the investigation and remediated.
What is new about the pilot program is that the DOJ identifies percentages by which fines can be reduced for self-reporting, cooperating and remediating. There are other quantifiable and non-quantifiable factors that can reduce a fine or even result in a declination to prosecute. But under the pilot program, companies can more concretely calculate their risk exposure when investigating potential FCPA violations and strategizing about how to interface with the DOJ.
To understand how the new pilot program might work, and the impact it may have on a company’s risk exposure, we sharpened our pencils and ran some sample calculations. What we found is that the credits offered by the DOJ create a significant incentive for companies to promptly self-report, fully cooperate, including by disclosing all relevant information about individuals as required by the Yates Memorandum, and expeditiously resolve FCPA violations.
The intention of the program is to promote self-reporting and cooperation; the opportunity is to receive up to an 85% discount on FCPA fines.
What credit can a company earn?
The basis for calculating criminal fines starts with the recommended fine range calculated according to the Sentencing Guidelines. Broadly speaking, the Guidelines calculate a fine range based on gravity of misconduct at issue, which sets a “base fine”, multiplied by minimum and maximum culpability multipliers. The culpability multipliers are set by looking at aggravating and mitigating factors. Aggravating factors increase the multipliers. Mitigating factors, such as self-reporting, cooperating, or remediating, decrease the multipliers. The fine range is then set by multiplying the base fine by the minimum and maximum culpability multipliers.
The pilot program does not affect the Sentencing Guidelines calculation but offers additional reduction of fines if the company meets the conditions specified in the program. If so, then the DOJ will likely adopt the minimum fine recommended by the Sentencing Guidelines and will apply further discounts from that minimum fine. The potential further discounts are as follows:
- for full cooperation but no self-reporting: up to 25% discount.
- for full cooperation, appropriately remediating, and promptly self-reporting: up to 50% discount.
Note that the FCPA Unit may also consider additional mitigation, including with respect to the appointment of compliance monitors or potential declination to prosecute at all. These are based on additional factors specified by the pilot program and the U.S. Attorneys’ Manual and are not explored in detail here.
Case Study – how does the pilot program work?
To demonstrate the effect of the pilot program mitigation credits, we developed a case study extrapolated from some recent settlements. In our case study, Company A, a large company with 30,000 employees, has settled charges that it violated the FCPA. Company A did not self-report, but provided substantial cooperation, including by granting access to foreign-based evidence and employees. The company also moved quickly to resolve the FCPA charges. In its settlement, the DOJ granted Company A the following additional credits:
- 25% reduction from the minimum fine for substantial cooperation; and
- 20% reduction for promptly acknowledging wrongdoing and agreeing to a quick resolution.
Below we compare four potential scenarios. Please note that the Sentencing Guidelines calculation is complex and has been much simplified here for demonstration purposes. For example, we do not review how the Guidelines might calculate the base fine and we do not assess the potential impact of other aggravating or mitigating factors. We also do not include in this assessment any calculation of forfeiture or disgorgement of ill-gotten profits, which play a role in some FCPA settlements. This is a demonstrative case study and is not intended to be a guide for any particular situation, which will require detailed assessment. The four hypothetical scenarios for Company A are as follows:
- Base Case: company does not cooperate and receives no credit for acknowledgment of wrongdoing or expeditious settlement
- Cooperation Only: company cooperates fully, receiving a credit under the pilot program
- Cooperation Plus: company cooperates fully, receiving a credit under the pilot program, promptly acknowledges wrongdoing and expeditiously settles
- Self-Report: company receives maximum reduction under the pilot program by cooperating and self-reporting, and promptly acknowledges wrongdoing and expeditiously settles
Click here to view table.
This chart demonstrates how the DOJ is seeking to incentivize companies to self-report, cooperate and expeditiously resolve FCPA violations. Had Company A not cooperated or self-reported, the company could have been fined $1 billion, which would represent the highest FCPA fine on record. By applying the additional discounts, Company A was able to reduce its fine significantly:
- by cooperating, the fine could be reduced to $600 million, which would represent the third largest FCPA fine to-date;
- by cooperating and expeditiously settling, the fine could be reduced to $440 million, which would represent the fourth largest FCPA fine to date; and
- by cooperating, expeditiously settling and self-reporting, the fine could be reduced to $150 million, which is still high but represents an 85% reduction from the base case.
By gaining full credit under the pilot program and an additional bonus for moving rather quickly, Company A could achieve up to an 85% reduction in what could have been a $1 billion fine. It would also mean, in our hypothetical where the base fine is very high (much higher than most FCPA settlements), that Company A would no longer be included on the Top Ten List for FCPA fines. Since such lists are frequently reported, Company A could also potentially reduce its reputational risk exposure.
There are many more elements to FCPA settlements, and there are other factors a company should consider when deciding whether to self-report and whether and how to cooperate, including but not limited to the strength of the evidence, the seriousness of the potential violations, the impact on parallel investigations and proceedings by foreign regulators, jurisdictional issues and, practically, the potential fees and costs associated with doing both. But this case study demonstrates that the mitigation credits in the new pilot program have teeth and can have a significant impact on a company’s risk exposure.