As highlighted in this post, the $2 million settlement amount in the recent Transport Logistics International enforcement action could have been much higher as the DOJ and the company agreed “based on the application of the Sentencing Guidelines, that the appropriate criminal penalty [was] $21,375,000.” However, as stated in the resolution documents, the DOJ “with the assistance of a forensic accounting expert, conducted an independent inability to pay analysis, [and] it was determined that a penalty greater than $2 million would substantially jeopardize the continued viability of the Company.”
According to some, this “appears to be a recent trend,” and “in prior years, the DOJ rarely cited a company’s inability to pay as a factor for a particular fine.” However, like much FCPA commentary these comments lack an appreciation for history (including not too distant history) because as highlighted below the “inability to pay” dynamic in the TLI matter is not a recent trend and “inability to pay” determinations, as previously highlighted in FCPA Professor posts, have been made in several FCPA enforcement actions going back several years (in addition to more recent examples involving SBM Offshore and Odebrecht).
Alcoa (2014)
As highlighted in this prior post, the 2014 FCPA enforcement action (DOJ and SEC) against Alcoa and a related entity could have been much higher than $384 million. The advisory Sentencing Guidelines calculation set forth in the plea agreement was $446 million – $892 million. The plea agreement stated that a $209 million criminal fine was an “appropriate disposition” of the case “because immediate payment of the entire fine would pose an undue burden” on Alcoa and the agreement lists the following factors:
“the impact of a penalty within the guidelines range on the financial condition of Alcoa and its potential to substatially jeopardize Alcoa’s ability to compete, including, but not limited to, its ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.”
The DOJ’s release further stated: “The plea agreement and related court filings acknowledge Alcoa’s current financial condition as a factor relevant to the size of the criminal fine …”.
Innospec (2010)
As highlighted in this previous post, Innospec got hit on both sides of the Atlantic and agreed to pay $40.2 million in combined DOJ/SEC/U.K. SFO fines and penalties for violating the Foreign Corrupt Practices Act and other laws.
However, the total amount of fines and penalties could have been much higher as the minimum U.S. Sentencing Guidelines amount was $101.5 million and the SEC also ordered the company to pay approximately $60 million.
However, Innospec received a pass on approximately $100+ million in fines and penalties based on its claimed inability to pay. The DOJ’s sentencing memorandum (here) stated as follows.
“Innospec has represented that it is unable to pay, and, even with the use of a reasonable installment schedule, is not likely to be able to pay, a $101.5 million fine. Over the course of nearly a year, Innospec has provided the Department, the SEC [and other U.S. and non-U.S. authorities] with detailed presentations regarding its current financial condition and available assets. Those representations have been analyzed in detail by qualified accounting professionals within the SEC […]. Innospec has represented that, were the company to pay more than the amount agreed, the continued viability of the company would be threatened, as follows: (1) Innospec would breach the limits of its credit facilities; (2) Innospec would be unable to make up a deficit in funding its pension plan, resulting in an $85 million shortfall; (3) Innospec would be unable to remediate certain environmental damage caused by its manufacturing facility in the United Kingdom; (4) Innospec would be unable to invest sufficiently in research and development; and (5) Innospec would be forced to close facilities around the world, resulting in dozens of employees losing their jobs.”
Likewise, the SEC release (see here) noted that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement was waived.
Thereafter, Innospec’s claimed inability to pay was highlighted numerous times on FCPA Professor (see here, here, here and here) each time Innospec reported positive financial results.
NORDAM Group (2010)
As detailed in this prior post, the Oklahoma-based privately held provider of aircraft maintenance, repair and overhaul services agreed to enter into a non-prosecution agreement and pay a $2 million penalty “to resolve violations of FCPA” concerning business conduct in China.
As highlighted in the prior post, the NPA “recognizes that a fine below the standard range under the U.S. Sentencing Guidelines is appropriate because NORDAM fully demonstrated to the department, and an independent accounting expert retained by the department verified, that a fine exceeding $2 million would substantially jeopardize the company’s continued viability.” As to the fine reduction, the NPA further stated:
“This discount recognizes that, over a period of months, the Company fully cooperated with the Department and with an independent accounting expert that the Department retained to review the Company’s financial condition. Following that review, the Department and its independent expert both concluded that this discount was appropriate under the Sentencing Guidelines.”
Unlike Innospec, NORDAM Group is not publicly held, so it was difficult to assess the true nature of its financial condition. However, NORDAM Group’s federal government contracts are in the public domain and a simple internet search indicates that in the 90 days after resolving its FCPA enforcement action NORDAM Group racked in approximately $24.4 million in federal government contracts.
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