In its nearly 40 years of existence, there have been numerous SEC Foreign Corrupt Practices Act enforcement actions against issuers that did not also involve a DOJ component.
As highlighted below and also last month in this very similar post involving Nortek and Akamai Technologies, there is a simple reason for this. Not all civil SEC FCPA enforcement actions involve viable criminal charges against an issuer.
For most of the FCPA’s history, the DOJ never saw the need to highlight the FCPA cases it did not bring. But in April 2016 the DOJ announced its so-called FCPA “Pilot Program” and went into public relations marketing mode.
Yesterday, the DOJ once again publicized its decision to “decline” an enforcement action.
In conjunction with the SEC’s enforcement action against Johnson Controls, the DOJ released this letter from DOJ FCPA Unit Chief Daniel Kahn to JCI’s counsel. Sent to the media in an e-mail with the heading “Justice Department Declination Letter for Johnson Controls,” the e-mail stated in pertinent part: “Attached is a letter the Criminal Division’s Fraud Section provided to counsel for Johnson Controls, outlining the department’s decision to close its FCPA inquiry into the conduct. We will decline to comment beyond the text of the letter.”
In full, the letter states:
“I write regarding the investigation by the Department of Justice, Criminal Division, Fraud Section into your client Johnson Controls, Inc. (“JCI” or “the Company”), concerning possible violations of the Foreign Corrupt Practices Act. Based upon the information known to the Department at this time and consistent with the FCPA Pilot Program, we have closed our inquiry into this matter despite the bribery by employees of JCI’s subsidiary in China. We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; the thorough investigation undertaken by the Company; the Company’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct) and its agreement to continue to cooperate in any ongoing investigations of individuals; the steps that the Company has taken and continues to take to enhance its compliance program and its internal accounting controls; the Company’s full remediation (including separating from the Company all 16 employees found to be involved in the misconduct, including high-level executives at the Chinese subsidiary); and the fact that JCI will be disgorging to the SEC the full amount of disgorgement as determined by the SEC, as well as paying a civil penalty to the SEC. If additional information or evidence should be made available to us in the future, we may reopen our inquiry.”
Just as in the Nortek and Akamai Technologies examples from last month, don’t believe the hype.
Rather, ask what viable criminal charges against JCI did the DOJ actually “decline” to prosecute?
For starters, let’s review a couple of things.
The SEC enforces the FCPA civilly and the DOJ’s Criminal Division enforces the FCPA criminally.
The FCPA’s contain two sets of provisions: the anti-bribery provisions and the books and records and internal controls provisions.
It is a matter of black-letter law that legal liability (whether FCPA anti-bribery violations or otherwise) does not hop, skip and jump around a business organization. In other words, just because an employee or employees of a subsidiary of an issuer engages in improper conduct, does not mean that the issuer is legally liable for that conduct absent veil piercing / alter ego circumstances. Even the FCPA Guidance recognizes this legal fact.
The books and records and internal controls provisions can result in criminal charges only to the extent the issuer engaged in knowing and willful conduct. Such criminal charges are typically reserved for factually egregious conduct (i.e. Siemens and VimpelCom).
The SEC’s administrative order in the JCI matter is, from a substantive standpoint, the only information in the public domain concerning the conduct that the DOJ “declined” to prosecute.
However, the Order does not contain any finding, suggestion, or inference that anyone at JCI (the issuer) participated in, authorized, or had knowledge of the improper conduct of the subsidiary employees. Indeed, as is often the case, the SEC specifically found that subsidiary employees concealed the improper conduct from the issuer. Specifically, the Order states that members of JCI’s indirect Chinese subsidiary “colluded with each other and circumvented and manipulated JCI’s internal and financial controls for over six years.”
Moreover, the Order does not contain any finding, suggestion, or inference to support a veil piecing / alter ego finding (and here it should be noted that the SEC has asserted such theories in several recent FCPA enforcement).
Indeed, the SEC’s Order does not find that JCI violated the FCPA’s anti-bribery provisions.
Turning next to the books and records and internal controls provisions, viable criminal charges exist only to the extent the issuer engaged in knowing and willful conduct. Here again, there is no articulated finding or other evidence to support such charges against JCI. Indeed, several findings in the SEC’s Order are complimentary of JCI’s internal controls. For instance, “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 …”.
Hardly the stuff of knowing and willful misconduct.
As discussed in the recent article “Grading the DOJ’s FCPA Pilot Program,” given the lack of transparency surrounding FCPA enforcement, it will be difficult (if not impossible) to assess the FCPA Pilot Program.
The timing of the Nortek, Akamai, and now JCI “declination” letters, as well as the specific reference of the FCPA Pilot Program in the letters, should be viewed as attempts by the DOJ to “market” its FCPA Pilot Program.
Just like another instance of the DOJ “marketing” its “declination” decisions, there are many who are likely to drink the Kool-Aid and advance the DOJ’s policy statement to advance their own interest.
More sophisticated (and less interested) observers however should take a step back and ask the salient question: just what viable criminal charges against JCI did the DOJ actually “decline.”
Based on the only information in the public domain, the answer appears to be none.