Today’s post is from Peter Manda. Manda is a former international in-house counsel and has worked on a variety of international in-house investigations and FCPA matters.
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In the early days of FCPA enforcement, courts and the DOJ alike made every effort to ascertain the source of the violation and to deal with that violation on the local level. Prosecutions were limited to local employees; and fines and penalties on issuers were limited in scope.
Over time, as issuers were found to have intentionally and knowingly violated the FCPA, disgorgement of profits and high fines and penalties became more common. Nevertheless, collected fines and penalties (while volatile) increased (at most) at an average rate of $100M a year. This all changed in 2012 with the adoption by the SEC and DOJ of the FCPA Guidelines which purport to outline the compliance steps that must be undertaken in order to prevent an FCPA violation or to reduce or mitigate potential fines and penalties through voluntary disclosure and cooperation.
In describing liability for acts conducted in or by subsidiaries, the Guide articulates a strict liability respondeat superior standard that compels issuers to disgorge any revenue that is arguably derived from an alleged violation. The results have sent shock waves through the international business community. Fines and penalties collected have increased at a clip pace of $500M a year. Issuers now face the difficult choice of voluntarily reporting and potentially paying impressively high fines or hedging a bet that the SEC or DOJ won’t find the violation for a while and then paying a lesser fine by cooperating in the investigation. Worse, it is pretty clear from recent official statements that the SEC and DOJ assume issuers are companies that go out into the world with the intent of breaking all the rules, paying bribes, and being corrupt.
Yet, a review of recent FCPA enforcement actions does not show how bad US issuers are. Rather, they often point to local employees in far-distant countries committing FCPA violations — violations that are often only apparent in hindsight after the controls implemented by the issuer detect the wrong-doing. In most cases, those employees are individuals who operate culturally under different assumptions and who don’t seem to have received the memo that US companies don’t tolerate bribery and corrupt practices. This is especially the case where an issuer acquires a foreign company and then finds that employees in the acquired company had been engaging in corrupt practices.
The outcry from issuers and from those who think about the FCPA and its scope is justified. In effect the government has converted what should be an anti-corruption measure into a revenue generating measure. By having widened the standards to allow prosecutors to coerce settlements that disgorge from the consolidated global earnings of issuers, the DOJ and SEC have opened the revenue stream pipeline and the money is flowing at a clip pace of $500M a year. Naturally there is pushback from this overreach, pushback that has included Congressional hearings. The negative result of this pushback could be a watering down of the effort to fight corruption abroad. Not only would that be unfortunate, it would violate OECD objectives and commitments.
In an article I wrote – recently published by the International In-House Counsel Journal – I suggest that the DOJ and SEC should adopt an intermediate standard that allows for limitation of liability (including fines and penalties) to the foreign subsidiary (that is, no disgorgement of consolidated global earnings) where (a) the issuer parent voluntarily discloses immediately upon the discovery of a violation, (b) the issuer parent’s compliance controls are effective and were the reason for the discovery, and (c) the violations were engaged in by employees or agents who knew of the issuer’s commitment to FCPA compliance but chose to ignore them regardless; or (d) where an issuer acquires a foreign subsidiary and finds a violation after the fact despite due diligence conducted according to generally accepted auditing principles.
I believe the result of adopting an intermediate standard would encourage more cooperation between the government and issuers. An intermediate standard would make issuers allies with the DOJ and SEC in the fight against corruption — rather than adversaries fighting a calculus of revenue generation and earnings reduction. Equally important, by focusing on the subsidiary rather than the parent issuer, the DOJ and SEC could engage the issuer to interact with local authorities to prosecute the violators and to implement effective informational campaigns that could have a wider, more permanent, effect in the fight against corruption. Disgorgement of consolidated earnings punishes the parent issuer, it does nothing to help reduce foreign corrupt practices. It’s time the SEC and DOJ turned their attention from generating revenue from issuers to making them allies in the fight against foreign corrupt practices.
