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An Article Based On A Fallacy


Recently on the FCPA Blog, Professor Andy Spalding touted his article “Restoring Pre-Existing Compliance Through the FCPA Pilot Program.”

I’ve previously wrote about the DOJ’s FCPA Pilot Program in April 2016 soon after it was released (see here for the article “Grading the DOJ’s FCPA Pilot Program”) and am no big fan of the Program for the reasons discussed in the article.

Moreover, as highlighted in this prior post, given the DOJ’s self-described “principal goal” of the Program – that is “to promote greater accountability for individuals and companies that engage in corporate crime by motivating companies to voluntarily self disclose FCPA-related misconduct,” the Program has been an utter failure in that the DOJ has self-identified seven corporate matters as being resolved pursuant to / or consistent with the Pilot Program: (Nortek, Akamai Technologies, Johnson Controls, HMT LLC, NCH Corp, Linde Gas, and CDM Smith), yet none of these matters (zero, zilch, nada) have involved related prosecution of individuals.

In any event, the apparent thesis of Spalding’s article seems to be that the Pilot Program is step back from prior FCPA guidance such as the 2012 FCPA Guidance because the Pilot Program is silent regarding pre-existing compliance. However, any reasonably informed FCPA practitioner will recognize upon reading the full article that this apparent thesis is based on a fallacy.

Spalding states in the article at various points as follows: “[the pilot program] makes virtually no mention of pre-existing compliance,” “the seemingly inadvertent omission of pre-existing compliance from the Pilot Program,” “pre-existing compliance has dropped out of the conversation,” “the inadvertent obscuring of pre-existing compliance in the Pilot Program,” “the Pilot Program’s Curious Silence [regarding pre-existing compliance].”

However, the Pilot Program document specifically states:

“By way of background, the Principles of Federal Prosecution of Business Organizations (the “USAM Principles”) have long provided guidance on whether a criminal disposition against a company is appropriate and what form that disposition should take.”


The Guidance does not supplant the USAM Principles. Prosecutors must consider the ten factors set forth in the USAM when determining how to resolve criminal investigations of organizations. Prosecutors must also calculate the appropriate fine range under Chapter 8 of the Sentencing Guidelines.”

Any reasonably informed FCPA practitioner will understand that pre-existing compliance is very much a part of the Principles of Federal Prosecution of Business Organizations as well as the U.S. Sentencing Guidelines.

Indeed, what makes Spalding’s article odd is he himself recognizes this when he states:

“Admittedly, the Pilot Program does not displace all the other factors that first emerged in the Holder Memo, were refined in subsequent memos, and then incorporated into the U.S. Attorneys’ Manual. The Guidance makes clear that it ‘does not supplant the USAM Principles’ and that ‘prosecutors must consider the ten factors set forth in the USAM’ when resolving cases. One of these factors, of course, is pre-existing compliance.”

Elsewhere, Spalding recognizes:

“of course, it [pre-existing compliance] remains among the ten factors in the U.S. Attorneys’ Manual, and it is certainly discussed in settlement negotiations.”

Unlike the 2012 FCPA Guidance which was written for a layperson audience (as stated in the Guidance – the Guidance was “intended to provide information for businesses and individuals regarding” the FCPA), the Pilot Program was an internal policy memo (obviously publicly released) that was addressed to – in the words of the DOJ – “our FCPA attorneys.”

The FCPA attorneys in the DOJ Fraud section probably did not need – given the above references in the Pilot Program – a refresher course on how pre-existing compliance is a relevant factor in their decision-making.

There are other flaws in Spalding’s article as well.

For instance, the article asserts that each of the five declinations (when the article was written – Nortek, Akamai Technologies, Johnson Controls, HMT LLC, NCH Corp) “involved evidence of the bribery of an employee, either of the defendant or a subsidiary but despite sufficient evidence of wrongdoing within the company, the DOJ did not hold the company liable.”

Not true.

In three of the matters (Nortek, Akamai, and Johnson Controls) the strongest language the DOJ used was “possible violations of the FCPA” and notably in the SEC NPAs against Nortek and Akamai all the civil law enforcement agency likewise articulated was “possible violations.”

More broadly, when one reads all of the information in the public domain relevant to the Nortek, Akamai, and Johnson Controls matters, the obvious question becomes: just what viable criminal charges did the DOJ actually decline? (See here and here for prior posts).

Spalding also asserts that in the above-referenced matters “the DOJ did not hold the company liable.” True, the Nortek, Akamai and Johnson Controls “declination letters” did not require payment to the DOJ. However “did not hold the company liable” is a curious phrase to use in connection with the HMT and NCH matters given that pursuant to the letter agreements the companies coughed up $2.7 million and $335,000.

Spalding also asserts as follows: “[T]hat there is an “absence of pre-existing compliance in the Pilot Program’s declinations,” and that “we are told nothing – literally, nothing, in public declinations about the strength of the pre-existing compliance program.”

Knowledgeable observers know that the Nortek, Akamai and Johnson Controls “declination letters” were released at the same time as the SEC’s enforcement actions against the companies based on the same core conduct. Indeed, the “declination letters” specifically reference the SEC resolution and in the SEC matters we learn the following about the company’s pre-existing compliance policies, procedures and control environment.

For instance, in the Nortek matter the SEC states:

“In 2014, Nortek conducted an internal audit of Linera China’s books and records. The internal audit team identified questionable payments made to local Chinese officials. As a result, Nortek conducted an internal investigation of Linear China’s conduct and forensically analyzed Linear China’s financial records.”

In the Akamai matter, the SEC states:

“Akamai discovered the violations in late December 2014 when it received a complaint from an Akamai-China sales representative alleging that the Regional Sales Manager had received improper payments from channel partners and had made improper payments to end customer employees to secure business.”

The Johnson Controls matter contains the most extensive discussion of the company’s pre-existing compliance policies, procedures and control environment as the SEC stated:

“After acquiring York, JCI devoted additional resources to its compliance program, including hiring compliance personnel, conducting trainings, and implementing risk-based procedures and controls. With respect to China Marine, JCI terminated the individuals involved in [prior] conduct and hired a new managing director of China Marine to oversee the business. The managing director, a Chinese national and resident, reported to the Marine business management in JCI’s Denmark subsidiary, which oversaw the Global Marine business in multiple countries. Because the misconduct identified in the prior civil action involved the improper use of agents, JCI limited the use of agents in its China Marine business model and required that all sales go through its internal sales team based in China. […] JCI conducted multiple compliance trainings for the China Marine employees, including trainings on the FCPA. JCI also conducted audits of China Marine …”.

The SEC further stated that JCI implemented “Delegation of Authority thresholds” applicable to China Marine.

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