- FCPA Professor - http://fcpaprofessor.com -

Six Reasons Why The Corporate Community Should Take The DOJ’s “Pilot Program” With A Grain Of Salt

Numerous prior posts have highlighted various aspects of the DOJ’s Foreign Corrupt Practices Act “pilot program” [1]announced earlier this month.

To be clear, this post does not advocate or even imply that the corporate community should ignore the pilot program. After all, the DOJ has extreme leverage over business organizations subject to FCPA scrutiny and it is always wise to at least be cognizant of what an adversary possessing a big and sharp stick is saying.

Nevertheless, absent limited circumstances not often present in instances of FCPA scrutiny, how to respond to internal breaches of FCPA compliance policies is a business decision entrusted to those charged with managing the business organization. In exercising this business judgment, the corporate community should take the pilot program with a grain of salt for at least six reasons.

(1)

First, the pilot program is non-binding and commits the DOJ to absolutely nothing. Like prior DOJ guidance on the FCPA, such as the 2012 FCPA Guidance, the pilot program states: “This memorandum is for internal use only and does not create any privileges, benefits, or rights, substantive or procedural, enforceable by any individual, organization, party or witness in any administrative, civil, or criminal matter.”

Moreover, eligibility for the specific percentage reductions highlighted above is contingent upon a company meeting the DOJ’s definition of “voluntary self-disclosure,” “full cooperation,” and “timely and appropriate remediation.” As to these key concepts, the DOJ possesses absolute, unreviewable discretion in determining whether the concepts have been satisfied to its satisfaction. In addition, the specific percentage reductions are littered with qualifying discretionary terms such as “may” and “will consider.” As FCPA practitioners have rightly observed [2], the pilot program “is riddled with caveats that provide plenty of room for FCPA prosecutors to award something less than full mitigation credit to a cooperating company.”

Finally, the specific percentage thresholds in the pilot program only address the “final number” that results from the sentencing guidelines equation for determining a fine range. As knowledgeable observers recognize, the reality is that this “final number” is the product of and contingent upon several less than transparent discretionary calls made by the DOJ “earlier in the equation.” Indeed, as FCPA practitioners have rightly observed [3] even under the pilot program “prosecutors and agents continue to wield significant discretion, and factors such as the severity of the underlying conduct, the completeness of the disclosure, and the sufficiency of remediation efforts are still likely to play a major role in determining the disposition of the case.”

Related to the fact that the pilot program is non-binding and commits the DOJ to absolutely nothing, is the additional reality that it is an open question as to how long the pilot program is going to last. A disturbing dynamic of DOJ Fraud Section policy making is that it is largely driven by individuals – individual who stay at the DOJ relatively briefly. For example, prior to the 2015 “Yates Memo,” there was the 2008 “Filip Memo,” prior to that there was the 2006 “McNulty Memo,” prior to that there was the 2003 “Thompson Memo,” and prior to that there was the 1999 “Holder Memo.”

Regardless of who win the November Presidential election, the current crop of DOJ politicians are likely to be replaced with a new crop with their own policy ideas and objectives. As stated by FCPA practitioners [4], “the [pilot] program began on April 5. It may end on January 20 with the new administration.”

(2)

The second reason why the corporate community should take the pilot program with a grain of salt is perhaps obvious, but bears repeating: the DOJ is an adversary.

Imagine a business organization facing an adversary in other legal actions and the adversary states that it “may” or “will consider” a lower settlement amount should it prevail if the business organization acts according to the adversary’s discretionary commands.

It is doubtful that any business organization, and rightly so, would accede to the demands of this adversary. While the DOJ possesses bigger and sharper sticks than most legal adversaries, the fact remains: the DOJ is an adversary to a business organization under FCPA scrutiny and the business organization has no legal or moral obligation to assist the DOJ. As the pilot program correctly notes:

“Nothing in the [pilot program] is intended to suggest that the government can require business organizations to voluntarily self-disclose, cooperate, or remediate. Companies remain free to reject these options and forego the credit available under the pilot program.”

(3)

The third reason why the corporate community, at least so-called issuers under the FCPA, should take the pilot program with a grain of salt is that it is an incomplete program because issuers are subject to FCPA enforcement by both the DOJ and SEC but the pilot program is a DOJ program only.

To be sure, just like the DOJ, the SEC has long encouraged [5] voluntary disclosure of FCPA violations coupled with repeated assurances that voluntary disclosure will in meaningful credit. However, unless and until the SEC articulates a similar FCPA program (a program that will likely suffer from the same deficiencies as the DOJ’s program), the DOJ’s FCPA pilot program addresses only half of the enforcement landscape facing issuers.

(4)

The fourth reason why the corporate community should take the pilot program with a grain of salt is that the DOJ’s statement to perhaps reward voluntary disclosure with meaningful credit is nothing new. As extensively highlighted in this prior post [6], the DOJ has been saying the same thing for over a decade.

(5)

The fifth reason why the corporate community should take the pilot program with a grain of salt is that the DOJ’s statement to perhaps reward voluntary disclosure, cooperation and remediation through specific percentage reductions from the minimum amount suggested by the guidelines is also nothing new. This prior post [7] proves, using the DOJ’s own numbers, that there have been numerous instances, prior to the pilot program, in which the DOJ has resolved corporate FCPA enforcement actions using the same thresholds it “may” use going forward.

(6)

Sixth, and perhaps the biggest reason, why the corporate community should take the pilot program with a grain of salt is that it only addresses a relatively minor component of the overall financial consequences to a business organization the subject of FCPA scrutiny and enforcement.

For obvious reasons, settlement amounts in an FCPA enforcement action tend to get the most attention. After all, settlement amounts are mentioned in DOJ / SEC press releases, press releases generate media coverage, and the corporate community reads the media. However, knowledgeable observers recognize, as depicted in the below picture, that FCPA scrutiny and enforcement results in “three buckets” of financial exposure to a business organization. (To read more about this dynamic, read this article “FCPA Ripples.” [8]).

three buckets

 

 

 

 

 

 

 

 

 

In nearly every instance of FCPA scrutiny and enforcement, bucket #1 (pre-enforcement action professional fees and expenses) is the largest financial hit to a business organization. The reasons for this are both practical and potentially provocative. In term of the practical, all instances of FCPA scrutiny have a point of entry, for instance problematic conduct in China, that then results in the “where else” question from the enforcement agencies which often prompts the company under scrutiny to conduct a much broader review by the organization under scrutiny. In terms of the provocative, FCPA scrutiny can easily become a billing boondoggle for FCPA Inc. participants.

A couple of specific examples highlight how extensive pre-enforcement action professional fees and expenses can become. For instance, Avon resolved an FCPA enforcement action for $135 million in aggregate DOJ and SEC settlement amounts, but disclosed [9] approximately $550 million in pre-enforcement action professional fees and expenses (a 2.5:1 ratio compared to the settlement amount). Likewise, Bruker Corp. resolved an FCPA enforcement action for $2.2 million, but disclosed [10] approximately $22 million in pre-enforcement action professional fees and expenses (a 10:1 ratio). Perhaps most eye-popping, Hyperdynamics resolved an FCPA enforcement action for $375,000, but disclosed [11] approximately $12.7 million in pre-enforcement action professional fees and expenses (a 170:1 ratio).

Even if the pilot program was binding on the DOJ (which it is not), the fact is the pilot program only addresses bucket #2 (settlement amount) and does not address pre-enforcement action professional fees and expenses – the biggest financial hit to a business organization the subject of FCPA scrutiny. Sure, consistent with Assistant Attorney General Caldwell’s April 2015 speech [12] that the DOJ “does not expect companies to aimlessly boil the ocean” in FCPA investigations, the pilot program does contain the following footnote:

“[A]bsent facts to suggest a more widespread problem, evidence of criminality in one country, without more, would not lead to an expectation that an investigation would need to extend to other countries.”

Yet here again, the DOJ has been highlighting the excesses of FCPA internal investigations (and pointing the finger at FCPA Inc. and not itself as the root cause) for years prior to the pilot program with no observable impact.

For instance, in 2013 [13] then DOJ FCPA Unit Chief Charles Duross called out FCPA Inc. at an American Bar Association event. Duross suggested that company lawyers often seek to over-do-it through a global search of operations for FCPA issues and he discussed a case in which a company and its professional advisors came to a meeting with a global search plan and he said “no, no, no, that is not what I want.” Duross indicated that the lawyers and other professional advisors in the room ‘looked unhappy,’ but that the general counsel of the company was happy.”

In addition to not meaningfully addressing bucket #1 pre-enforcement action professional fees and expenses, the pilot program also does not meaningfully address bucket #3 post-enforcement action professional fees and expenses.

Sure, the pilot program does state, consistent with the DOJ’s prior rhetoric on the issue, that voluntary disclosure, cooperation and remediation “generally should not require appointment of a monitor.” But even FCPA enforcement actions resolved without a monitor typically require reporting obligations by the business organization to the enforcement agencies and in some cases “enhanced compliance obligations” complete with audits.

While bucket #3 is the smallest of the “three buckets” of financial exposure, post-enforcement action professional fees and expenses, even in garden variety FCPA corporate enforcement actions, often exceed millions of dollars per year for the one to three years of the requirements.

The corporate community needs to fully understand and appreciate that the pilot program only addresses a relatively minor component of the overall financial consequences that typically result from FCPA scrutiny and enforcement.

Related to this key point, is the fact that a company (particularly an issuer) subject to FCPA scrutiny and enforcement will often also experience several other negative financial consequences above and beyond the “three buckets” of financial exposure. Such financial consequences often include a drop in market capitalization, an increase in the cost of capital, a negative impact on merger and acquisition activity, lost or delayed business opportunities, and shareholder litigation. In certain cases, these other negative financial consequences can far exceed even the “three buckets” of financial exposure discussed above.

In short, corporate leaders need to fully understand and appreciate (in addition to the specific topics discussed above) that a voluntary disclosure of potential FCPA violations is going to set into motion a wide-ranging sequence of events that will be far more costly to the company than any marginal benefit obtained through the pilot program’s non-binding promise of a reduced settlement amount. (Recall that under the pilot program, even if a company does not voluntarily disclose it may receive a 25% credit off the minimum amount suggested by the guidelines if it cooperate and remediates).

No doubt there are some who are likely to respond along the following lines: if a business organization does not voluntarily disclose FCPA violations, it is likely that the enforcement agencies will independently find out about the violations and when this happens the company is going to experience the same negative financial consequences highlighted above plus, because of the lack of voluntary disclosure, a larger settlement amount.

However, this line of reasoning represents pure speculation.

Recognize that the following is anecdotal and not offered to establish the truth of the matter asserted. However, I have been actively involved in the FCPA space for approximately 15 years both as a lawyer in private practice who conducted FCPA internal investigations around the world and in other professional capacities. To my knowledge, never once did the DOJ independently find out about the underlying conduct and in speaking to other FCPA practitioners about this precise topic, it has never happened to their clients either.

Notwithstanding the many shortcomings in the pilot program, going forward there no doubt will be companies (perhaps persuaded by FCPA counsel eying lucrative billings that flow from voluntary disclosures) that choose to voluntarily disclose FCPA issues in the hopes of being “rewarded” under the pilot program. Certain commentators are likely to then proclaim the pilot program a success.

However, this line of reasoning completely misses the point that business organizations were often voluntarily disclosing prior to the pilot program.

Rather, the key issue to track is whether the pilot program is motivating voluntary disclosure of potential FCPA violations that did not occur prior to the pilot program. It will be impossible to empirically measure this issue. Likewise, it will be difficult (if not impossible) to assess whether the DOJ is acting consistent with the pilot program for the reasons discussed above regarding how the final sentencing guidelines amount is the product of and contingent upon several less than transparent discretionary calls made by the DOJ earlier in the sentencing guidelines equation.