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NPAs, DPAs, and the FCPA

Too many acronyms? For the uninitiated, this post is about non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) in the context of the Foreign Corrupt Practices Act (FCPA).

The Government Accountability Office (GAO) recently released a report (here) regarding DOJ’s use of NPAs/DPAs. The report follows a prior GAO report on the use of corporate monitors in NPAs/DPAs (see here for the prior post).

The recent GAO report is not FCPA specific, although it does mention the FCPA as being one area where NPAs and DPAs are frequently utilized, and as readers well know, most FCPA enforcement actions against companies are resolved through DPAs or NPAs (see here for the UTStarcom, Inc. NPA, here for the Helmerich & Payne NPA etc.).

Thus, the GAO report is very much “on-point.”

While the report talks about other issues, this post will focus on judicial review of NPAs / DPAs – or more accurately the lack of judicial review.

GAO identified 152 NPAs/DPAs that DOJ prosecutors negotiated between 1993 (when the first two were signed) and September 2009.

Because NPAs are not filed with a court, there is absolutely no judicial review of NPAs. Thus, there is no independent review of whether factual evidence actually exists to support the essential elements of the crime “alleged” or whether valid and legitimate defenses exist. Thus, GAO had nothing to analyze in terms of judicial review of NPAs.

DPAs though are filed with a court, and as stated in the report, “the Speedy Trial Act grants a court the authority to approve the deferral of a prosecution pursuant to a written agreement between the government and the defendant.” (See 18 USC 3161(h)(2)).

“To assess what role the courts have played in the DPA process,” GAO “obtained written responses to structured interview questions from 12 of the 14 judges who had overseen DPAs in federal courts.”

The judicial responses were anonymous and safeguards were put in place to protect the confidentiality of the judges’ answers.

What did the responses reveal?

According to the GAO, “judges reported they were generally not involved” in the DPA process.

Specifcally, the GAO found that:

“Nine of the 12 judges stated that they did not hold a hearing to review the DPA or its terms, while the 3 remaining judges held hearings. One of these judges did so in the context of a plea hearing. Another judge held a hearing to arraign the company; at which time, the company and DOJ informed the judge to enter into a DPA. The judge then had a second hearing to approve the DPA. The third judge conducted a hearing to arraign the company and verify that the company’s decision to enter into the DPA was informed and voluntary. Ten of the 12 judges reported that they relayed their decision approving the DPA through a written order. One judge relayed the decisions orally at a hearing, and one judge did both.”

The GAO also interviewed DOJ officials about the role courts should play in the DPA process. Not one DOJ prosecutor who spoke to the GAO on this issue described any advantage to having a greater court role in reviewing DPAs. The report notes that “[a]ccording to DOJ officials, DOJ does not have a position on whether greater judicial involvement in the DPA process creates separation of powers issues; however, DOJ believes that judicial involvement in the NPA process would create concerns related to the separation of powers because no judicial review is involved for NPAs, as they typically do not involve court filings.”

It is clear from the above judicial responses (however limited they may be) that judges are routinely rubber-stamping DPAs without inquiring whether factual evidence actually exists to support the essential elements of the crime “alleged” or whether valid and legitimate defenses exist.

Why would a company agree to enter into an NPA/DPA if factual evidence did not exist to support the essential elements of the crime “alleged” or if valid and legitimate defenses did exist?

Quite simply, negotiating an NPA/DPA with the DOJ behind closed doors is easier, more cost effective, and provides more certainty to a company than mounting a defense based on the facts and the law.

Moreover, when a company agrees to resolve a potential criminal matter through a privately-negotiated NPA/DPA, it is a sign of cooperation and an acknowledgment of wrongdoing – both key factors the DOJ will consider when deciding how to resolve the matter and on what terms. See here for the DOJ’s Princplies of Federal Prosecution of Business Entities, here for the U.S. Sentencing Guidelines.

Why does this all matter, particularly in the FCPA context?

For the simple reason that law should not develop through privately negotiated agreements that are subject to little or no judicial review.

Yet that is exactly what is occuring in the FCPA context.

It is common knowledge within the FCPA bar and compliance community that FCPA NPAs/DPAs (and I will throw in settled SEC civil complaints as well) represent de facto case law and fill a void that exists because of the general lack of substantive FCPA case law, including case law to support many current enforcement theories.

Even worse, DOJ urges lawyers and companies to look to NPAs/DPAs as evidence of improper conduct and to act accordingly.

For instance, the GAO report includes a DOJ letter which explains, in DOJ’s view, why NPAs/DPAs “are beneficial.” Included in the DOJ’s response is this:

“DPAs and NPAs benefit the public and industries by providing guidance on what constitutes improper conduct.”

Wait a minute.

Is DOJ seriously suggesting that NPAs/DPAs evidence improper conduct?

While that may be true in some situations, the fact of the matter is that many NPAs/DPAs are agreed to by companies only after private negotiations with the DOJ. These negotiations covers a wide range of topics – from the facts which will be alleged in the NPA/DPA, to the actual charges alleged, to the form of the resolution.

Rather than evidence improper conduct, these NPAs/DPAs (and settled SEC civil complaints) in the FCPA context represent nothing more, in most instances, than a prviately negotiated agreement subject to no judicial review executed under circumstances in which one of the signatories wields a massive and sharp stick.

What would happen if an FCPA NPA/DPA (or settled SEC civil complaint) were actually subjected to judicial review?

How would a judge react to the uninformative, bare-bones nature of these privately negotiated agreements?

What legal authority would the enforcement agencies cite to support the assertion that employees of state-owned or state-controlled entities are “foreign officials” under the FCPA?

What would the enforcement agencies’ arguments be as to why the numerous post-Kay enforcement actions concerning foreign licenses, permits, applications etc. fit within the equivocal ruling in that case, but not the facilitating payment exception to the FCPA (an exception debated and passed by Congress)?

These are just some of the many unanswered FCPA questions which currently exist and these questions are the direct result of an area of law largely developing through privately negotiated agreements subject to little or no judicial scrutiny.

If the above is disconcerting to you, just wait, it is about to get worse as the SEC has announced (see here) plans to also utilize NPAs/DPAs in its enforcement of the securities laws – including the FCPA.

“Game-Changing” Day at the SEC

In August 2009, Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC will be creating five “national specialized units dedicated to particular highly specialized and complex areas of securities law” – including an FCPA unit. (see here).

Khuzami also announced that the SEC was working on other initiatives of interest to FCPA followers including creation of “a public policy statement that will set forth standards to evaluate cooperation by individuals in enforcement actions” as well as “recommend[ation] to the Commission that the SEC enter into Deferred Prosecution Agreements, in which the [Division of Enforcement] agree[s] in the appropriate case to forego an enforcement action against an individual or entity subject to certain terms, including full cooperation, a waiver of statutes of limitations, and compliance with certain undertakings.”

Yesterday, there were developments on each of these issues.

First, the SEC (see here) announced that Cheryl J. Scarboro will lead the FCPA unit. As indicated in the release, Scarboro is an SEC veteran having served as Associate Director, Assistant Director, Deputy Assistant Director, and Staff Attorney in the Division of Enforcement. For many years, Scarboro has been a primary SEC voice on FCPA issues and an active participant at many FCPA conferences.

Second, the SEC (see here) announced a series of measures “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”

“New cooperation tools” not previously available to the SEC, will now include, among other things:

* “Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.”

* “Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.”

and

* “Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.”

The SEC release notes that “similar cooperation tools have been regularly and successfully used by the Justice Department in its criminal investigations and prosecutions.”

More details about these measures can be found in a revised and newly issued version of the SEC’s enforcement manual beginning at pg. 119 (see here).

The SEC news conference announcing these appointments and initiatives is available on the SEC’s website.

While not FCPA specific, these measures as applied to FCPA enforcement are likely to lead to even less judicial scrutiny (not that there is much judicial scrutiny at present) as to SEC interpretations of the FCPA and as to whether factual evidence actually exists to support each element of an FCPA charge.

In fact, as set forth in the manual (p. 130) “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

For those anxious to see FCPA enforcement actions contested in an open, transparent, and adversary proceeding, yesterday’s announcements will be a blow as I expect FCPA enforcement to become even more opaque in the future.

Stay tuned as much is surely to be written about these new measures in the coming weeks and months.

Monitors

Most FCPA enforcement actions against companies are resolved through a non-prosecution or deferred prosecution agreement (NPA’s / DPA’s).

Many NPA’s / DPA’s require the company to engage a compliance monitor for a set time period (generally 2-4 years).

Although monitors are not the “rage” they used to be a few years ago, recent FCPA enforcement actions against Control Components, Inc., KBR/Halliburton, and Siemens have included some form of a compliance monitor.

In a recent speech to an FCPA audience, Assistant AG Breuer (see here) indicated that:

“In appropriate cases, [DOJ] will also continue to insist on a corporate monitor, mindful that monitors can be costly and disruptive to a business, and are not necessary in every case. That said, corporate monitors continue to play a crucial role and responsibility in ensuring the proper implementation of effective compliance measures and in deterring and detecting future violations.”

Those interested in corporate monitors (whether in the FCPA context or otherwise) will want to review a recent report on monitors from the Government Accountability Office. (see here).

Among other interesting numbers are the following:

Since 1993 through September 2009, DOJ has entered into 152 NPA’s or DPA’s.

Of the 152 agreements, 48 required the appointment of a compliance monitor.

What does it take to become a monitor? A DOJ background certainly doesn’t hurt. GAO found that of the 48 NPA’s or DPA’s that required the appointment of a monitor, 42 different individuals were selected. Of those 42, 23 (approximately 55%) were former DOJ officials, something many find controversial in that a prior DOJ position could affect the monitor’s independence and impartiality.

Although the GAO report does not specifically discuss (or identify) the monitors in FCPA enforcement actions, a May 2008 DOJ letter to the House Judiciary Committee (see here) does list corporate entities along with the monitor appointed. To my knowledge, the following were FCPA enforcement actions: Aibel Group/Vetco Ltd., Baker Hughes, Ingersoll Rand, InVision Technologies, Micrus, Monsanto, Paradigm, Schnitzer Steel, Statoil, and York.

To see what one of those “FCPA monitors” has to say (here) is the excerpt from the Corporate Crime Reporter interview.

Benchmarking FCPA Compliance

Over at the White Collar Crime Prof Blog (see here), Professor Ellen Podgor has posted her essay titled “Educating Compliance” (see here) in which she argues that the U.S. government should more actively participate in “promoting compliance with the law.”

In discussing some examples of where the government does pro-actively educate compliance with the law, Profesor Podgor refers to the DOJ’s Lay-Person’s Guide to the FCPA (see here) and the DOJ’s Opinion Procedure Regulations (see here).

While perhaps lacking the “pro-active” label Professor Podgor advocates, an additional resource for companies seeking guidance on FCPA “best practices” is the actual FCPA non-prosecution and deferred prosecution agreements themselves. More often than that, these agreements will contain an appendix that contains the minimum elements of an FCPA compliance program that the DOJ has “signed off on” as part of the settlement process.

Reviewing these agreements, one will find, virtually verbatim, the same elements. For instance, see the Novo Nordisk agreement (here – pgs. 19-21), the Fiat agreement (here pgs. 34-36) and the Faro Technologies agreement (here pgs. 14-16).

While these minimum elements are not the “be-all and end-all” of FCPA compliance, and while any FCPA corporate compliance policy should be specifically calibrated to a company’s risk profile, these elements consistently included by DOJ in resolution agreements are certainly a good initial benchmark for any company’s FCPA compliance policies and procedures.

FCPA Aches and “Payne”s

Helmerich & Payne Inc. (“H&P”) is an international drilling contractor headquartered in Tulsa. It has land and offshore operations in South America. To operate in that region, H&P must import and export equipment and materials. According to the DOJ and SEC, therein lies the problem.

H&P recently settled a DOJ and SEC FCPA enforcement action based on the conduct of two wholly-owned second tier subsidiaries, Helmerich & Payne (Argentina) Drilling Company (“H&P Argentina”) and Helmerich & Payne de Venezuela, C.A. (“H&P Venezuela”).

Pursuant to a two-year DOJ non-prosecution agreement, H&P acknowledged responsibility for the conduct of H&P Argentina and H&P Venezuela in making various improper payments to officials of the Argentine and Venezuelan customs services. According to a DOJ release (see here), the payments “were made in order to import and export goods that were not within regulations, to import good that could not lawfully be imported, and to evade higher duties and taxes on the goods.” Pursuant to the agreement, H&P will pay a $1 million penalty.

In a parallel action, H&P agreed to an SEC settlement under which it agreed to pay approximately $375,000. The SEC cease-and-desist order (“Order”) (see here) finds that: (i) “H&P Argentina paid Argentine customs officials approximately $166,000 to permit the importation and exportation of equipment and materials without required certifications, to expedite the importation of equipment and materials, and to allow the importation of materials that could not imported under Argentine law; and (ii) “H&P Venezuela paid Venezuelan customs officials approximately 19,673 either to permit the importation and exportation of equipment and materials that were not in compliance with Venezuelan importation and exportation regulations or to secure a partial inspection, rather than a full inspection, of the goods being imported.”

According to the Order, the payments were “falsely, or at least misleadingly” described as “additional assessments,” “extra costs,” “extraordinary expenses,” “urgent processing,” “urgent dispatch,” or “customs processing.” The SEC found that as a result of the payments, H&P avoided approximately $320,000 in expenses it would have otherwise incurred had it properly imported and exported the equipment and materials. The subsidiaries’ financial results were included in H&P’s filings with the SEC and, based on the above conduct, the SEC found that H&P violated the FCPA books and records and internal control provisions.

The Order is silent as to H&P’s knowledge of or involvement in the above described payments.

No doubt H&P received an SEC cease and desist order (the least harsh SEC sanction) and a DOJ non-prosecution agreement because of its conduct upon learning of the payments. As described in the Order, during an FCPA training session, an employee voluntarily disclosed some potentially problematic payments, through a customs broker, in Argentina to customs officials. Thereafter, H&P hired FCPA counsel, conducted an internal investigation, and voluntarily reported the conduct at issue to the government.

According to H&P’s Form 8-K filed on July 30, 2009 (see here), “[t]here are no criminal charges involved in the settlements and disciplinary action has been taken by the company with respect to certain employees involved in the matter, including in some cases, termination of employment.” The 8-K also notes that both settlements “recognize the company’s voluntary disclosure, cooperation with both agencies, and its proactive remedial efforts.”

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