The SEC recently took a page out of the Justice Department’s playbook and announced its first-ever non-prosecution agreement (“NPA”) for an FCPA violation. On April 22, 2013, the SEC and DOJ both agreed not to charge Ralph Lauren Corporation with bribing Argentine customs officials in return for $593,000 in disgorgement plus about $142,000 in pre-judgment interest to the SEC, as well as $882,000 in penalties to the DOJ. Ralph Lauren’s settlement is significant because it signifies what the SEC now considers its “gold standard” for handling an FCPA matter, and because it identifies specific compliance measures that other companies can and should seek to replicate.
- The SEC’s Enforcement Cooperation Initiative
The Ralph Lauren settlement is the first NPA—but the second FCPA settlement—under the SEC’s Enforcement Cooperation Initiative, which began in 2010. Designed to encourage individuals and companies to come forward with evidence of misconduct in the hope of favorable treatment, that initiative introduced two “cooperation tools” more typically found in the criminal context: the deferred-prosecution agreement (“DPA”) and the NPA. Under either agreement, the SEC agrees to forgo an enforcement action in exchange for cooperation. The most significant difference between the two tends to be that under a DPA, a putative charge is filed in court, while under an NPA, nothing is filed.
The SEC identified four eligibility criteria for these settlement agreements.
- Effective self-policing by the company prior to discovery of the misconduct;
- Prompt and thorough self-reporting of misconduct when discovered;
- Remediation of the wrongdoing; and
- Cooperation with law enforcement authorities.
- The Ralph Lauren Case
The Ralph Lauren case offers useful insight into the SEC’s view of “ideal compliance” under the four eligibility criteria. The case involved four years of illicit payments by the company’s wholly owned Argentine subsidiary, through a customs broker, to secure the importation of goods into Argentina. The broker allegedly created invoices falsely describing the payments as “Loading and Delivery Expenses” and “Stamp Tax/Label Tax” payments, which in turn also violated the FCPA’s record-keeping provision.
This misconduct was discovered in 2010, when Ralph Lauren’s Board of Directors adopted a sweeping new FCPA policy and disseminated it on its intranet (Factor 1). The company received employee tips regarding the customs broker’s behavior and conducted an investigation that uncovered the wrongdoing.
Within two weeks of discovering the wrongdoing, Ralph Lauren reported it to the SEC and DOJ (Factor 2).
Ralph Lauren took substantial remedial measures, including further strengthening its compliance program and even shutting down its retail operations in Argentina (Factor 3).
And Ralph Lauren provided extraordinary cooperation with investigators (Factor 4). It voluntarily produced all requested documents with English translations. It made witnesses available for interviews and summarized its own witness interviews for the government. And it conducted and shared with the government a world-wide assessment of its compliance program, which in fact yielded evidence that the program was working (one of its employees turned down a bribe solicitation).
- What Put Ralph Lauren Over the Top?
Though Ralph Lauren is the SEC’s first NPA since its Enforcement Cooperation Initiative began in 2010, it is actually the second case settled under that initiative, the first being the SEC’s 2011 case against Tenaris, S.A. for bid-rigging in Uzbekistan, which it settled with a DPA. This of course raises the question why Ralph Lauren got an NPA while Tenaris got a DPA. Some clues can be found by comparing the cases with respect to the SEC’s cooperation factors.
First, regarding effective self-policing, the wrongdoing in Ralph Lauren was discovered as a result of new compliance initiatives by the company, which led to an internal employee tip. In Tenaris, however, the wrongdoing was discovered when a third party disclosed the problem to the company.
Second, regarding self-reporting, both parties responded to tips regarding possible wrongdoing with appropriate seriousness, conducting full investigations. But Ralph Lauren informed the SEC and DOJ of the problem just two weeks after its discovery, whereas Tenaris took about three months to disclose its issue.
Third, regarding remediation, both companies worked closely with the SEC and DOJ to strengthen their controls. But Ralph Lauren took things a step further by shutting down the company’s retail operations in-country. Whether or not this closure was related to the investigation, it seems to have made an impact on the SEC.
Fourth, regarding cooperation, both companies cooperated extensively with investigators by not only turning over documents, but also disclosing fully the results of their internal investigations. But in Ralph Lauren’s case, the SEC highlighted the company’s translation of documents into English and its making witnesses available to investigators.
While worth exploring, in many respects, the differences between Tenaris and Ralph Lauren are akin to those between an A- and an A. By almost any measure, an FCPA case that concludes with either a DPA or an NPA should be considered a successful one. And both Tenaris and Ralph Lauren make clear that, to obtain either outcome, a company will need to demonstrate a robust ongoing compliance program, a prompt disclosure of allegations of wrongdoing, a serious effort at strengthening controls to prevent future problems, and total cooperation with investigators.