This post two weeks ago addressed the same topic as today’s post and quite frankly I am growing tired of writing this same general post for what seems like the umpteenth time. However, until things change I will keep writing it which means I will probably keep writing this same general post long into the future.
The proposal is this: when a company voluntarily discloses an FCPA internal investigation to the DOJ and/or SEC and when one or both of the enforcement agencies do not bring an enforcement action, have the “declining” enforcement agency publicly state, in a thorough and transparent manner, the facts the company disclosed and why the “declining” agency did not bring an enforcement action based on those facts.
As highlighted in this March 2012 post, Minnesota-based MTS Systems Corp., a global supplier of test systems and industrial position sensors, disclosed:
“MTS Systems Corporation (the “Company”) is investigating certain gift, travel, entertainment and other expenses that may have been improperly incurred in connection with some of the Company’s operations in the Asia Pacific region. The investigation has focused on possible violations of Company policy, corresponding internal control issues and any possible violations of applicable law, including the Foreign Corrupt Practices Act. Though the investigation is not complete, the Company has taken remedial actions, including changes to internal control procedures and removing certain persons formerly employed in its Korea office. The Company believes, however, that the amount of the expenses in question is not material to its reported consolidated financial statements. The Company has voluntarily disclosed this matter to the U.S. Department of Justice and the U.S. Securities and Exchange Commission. Additionally, the Company has disclosed this matter to the U.S. Air Force pursuant to its Administrative Agreement. The Company cannot predict the outcome of this matter at this time or whether it will have a materially adverse impact on its business prospects, financial condition, operating results or cash flows.”
Like other instances of FCPA scrutiny, the company remained under FCPA scrutiny for years and as highlighted in this December 2016 post the company disclosed:
“As previously reported by us with disclosures starting in March 2012, we investigated certain gift, travel, entertainment and other expenses incurred in connection with some of our operations in the Asia-Pacific region. This investigation focused on possible violations of Company policy, corresponding internal control issues and possible violations of applicable law, including the Foreign Corrupt Practices Act. Substantial investigative work was completed on this matter and we took remedial actions, including changes to internal control procedures and removing certain persons formerly employed in our South Korea office. We voluntarily disclosed this matter to the Department of Justice and the SEC (the Agencies). We presented the results of our investigation and our corrective actions to representatives of the Agencies on January 16, 2013. We also investigated certain business practices in China. The investigation had a similar focus to the prior investigation described above. We have updated the Agencies regarding the China investigation and we took certain initial remedial actions, including changes to internal control procedures and removing certain persons formerly employed in our China business. We cannot predict the outcome of the matters described in this paragraph at this time or whether these matters will have a material adverse impact on our business prospects, financial condition, operating results or cash flows.”
As noted in the December 2016 post, at the same the company disclosed:
“that it has initiated an internal investigation into apparent violations of the company’s code of conduct involving certain employees in its China operations and this investigation will delay the issuance of its fourth quarter and full year earnings as well as the filing of the company’s Annual Report on Form 10-K for fiscal 2016.”
[…]
“Regarding the internal investigation that has delayed the filing of our Annual Report and earnings release, we are deeply disappointed to report that we recently discovered that certain individuals in our leadership in China appear to have violated MTS’s code of conduct, including association with an independent business that may compete with MTS in certain markets. Given the level of the MTS personnel in China who appear to have violated our code of conduct, the filing of our Annual Report on Form 10-K and our earnings release will be delayed until the internal investigation has been completed and its findings evaluated.”
[…]
“The Audit Committee of the Board of Directors of MTS has engaged independent external counsel in connection with the ongoing internal investigation and will assess the impact on the company’s financial inputs from China and review for potential violations of law. MTS has already begun taking certain remedial measures in response to this situation.”
Summing this all up, MTS Systems voluntarily disclosed problematic conduct regarding the company’s operations in the Asia Pacific Region, removed certain persons formerly employed in its South Korea office, voluntarily disclosed additional problematic conduct concerning certain business practices in China, removed certain persons formerly employed in its China business, initiated another internal investigations into apparent violations of the company’s code of conduct involving certain employees in its China operations, and discovered that “certain individuals in [it’s] leadership in China appeared to have violated [its code of conduct], and given the “level of MTS personnel in China who appear to have violated [its] code of conduct, delayed filing its annual report.
Earlier this week, MTS Systems disclosed:
“As previously reported by us with disclosures starting in March 2012, we investigated certain gift, travel, entertainment and other expenses incurred in connection with some of our operations in the Asia Pacific region. This investigation focused on possible violations of Company policy, corresponding internal control issues and possible violations of applicable law, including the Foreign Corrupt Practices Act. Substantial investigative work was completed on this matter and we implemented remedial measures, including changes to internal control procedures and removing certain persons formerly employed in our Korea office. We voluntarily disclosed this matter to the Department of Justice and the SEC (the Agencies). We also investigated certain business practices in China, starting in 2014 and that investigation had a similar focus to the 2012 investigation described above. We have also updated the Agencies regarding the China investigation described in the Internal Investigation Related to China Operations above. We were notified by the Agencies in August 2017 that their respective investigations were closed as to MTS without further action taken by either agency. With the closure of the government investigations by the Agencies and the steps being taken by the Company voluntarily, we believe that the matter has been resolved. We are committed to continuing to monitor compliance with the Company’s Code of Conduct policy and applicable law.”
Regarding the other issue, the company disclosed:
“As previously reported by us, in November 2016, after the end of fiscal year 2016, we initiated an internal investigation into apparent violations of our Code of Conduct involving certain employees in our China operations, including association by those employees with an independent business that may compete with us in certain markets. As the apparent violations implicated members of leadership in our China operations, the Audit Committee engaged independent external counsel to conduct an investigation of our China operations in order to assess the impact of these apparent violations on the Company’s financial input from China and to review for potential violations the Company’s Code of Conduct, anticorruption compliance policies and procedures and related U.S. law. Independent forensic accountants, acting at the direction of external counsel, performed testing of certain transactions related to our China operations as part of this investigation.
As of March 2017, substantial investigative work was completed. The investigation through March 2017 confirmed that the former China Test leader and several other former senior managers associated with our China Test operations violated the conflict of interest provisions of the MTS Code of Conduct in connection with their involvement with an independent business that competed with the Company’s low-end products in the China market. This inconsistent adherence to the Company’s Code of Conduct could have resulted in management override of internal control over financial reporting.
In light of, and to address the findings of the investigation, and to remediate the material weakness in our internal control over financial reporting resulting from the conclusion described in the prior paragraph, we will conduct more robust monitoring to ensure adherence to our Code of Conduct. Additionally, we have identified opportunities to meaningfully enhance our processes and controls related to the adherence with our compliance policies and procedures, and we will be particularly focused on enhancing our third-party intermediary diligence, engagement and monitoring processes, with the support of and guidance from external resources, and continued clear and consistent messaging on compliance expectations at all levels of the organization.
To address the challenges presented by the findings of the investigation of our China operations, we are exploring multiple business alternatives to address the low-end materials market. The consideration of these alternatives could possibly result in a future expectation of sale or disposal of certain assets that could cause an impairment charge to be recognized in a subsequent period. As of July 1, 2017, we do not anticipate any material impairment charges for the tangible and intangible assets. We are prepared to assess the mix of products, markets in which we compete and manner by which we select and utilize resellers, agents, consultants and vendors to support these commitments. We have begun implementing measures to strengthen our compliance program and monitoring to ensure adherence to our Code of Conduct.”
Again, the proposal is this: when a company voluntarily discloses an FCPA internal investigation to the DOJ and/or SEC and when one or both of the enforcement agencies do not bring an enforcement action, have the “declining” enforcement agency publicly state, in a thorough and transparent manner, the facts the company disclosed and why the “declining” agency did not bring an enforcement action based on those facts.
If the FCPA enforcement agencies are sincere about transparency in their FCPA enforcement programs as officials frequently mention the public (not to mention MTS shareholders who shelled out millions if this instance of FCPA scrutiny followed the typical path) have a right to know the facts the company disclosed and why the “declining” agency did not bring an enforcement action based on those facts.
Here is why the proposal makes sense and is in the public interest.
For starters (as I first wrote in 2010 and even more relevant today), the DOJ and the SEC are already wildly enthusiastic when it comes to talking about FCPA issues. Enforcement attorneys from both agencies are frequent participants on the FCPA conference circuit and there seems to be no other single law that is the focus of more DOJ or SEC speeches than the FCPA. Thus, there is clearly enthusiasm and ambition at both agencies when it comes to the FCPA.
Further (as I first wrote in 2010 and even more relevant today), both the DOJ and the SEC have the resources to accomplish this task. Both agencies have touted the increased FCPA resources in their respective offices and the new personnel hired to focus on the FCPA. Combine enthusiasm and ambition with sufficient resources and personnel and the proposal certainly seems doable considering that there are likely less than 10 relevant examples per year.
In addition, the DOJ is already used to this type of exercise. It is called the FCPA Opinion Procedure Release (see here), a process the DOJ frequently urges those subject to the FCPA to utilize. Under the Opinion Procedure regulations, an issuer or domestic concern subject to the FCPA can voluntarily disclose prospective business conduct to the DOJ which then has 30 days to respond to the request by issuing an opinion that states whether the prospective conduct would, for purposes of the DOJ’s present enforcement policy, violate the FCPA. The DOJ’s opinions are publicly released and the FCPA bar and the rest of FCPA Inc. study these opinions in advising clients largely because of the general lack of substantive FCPA case law.
If the DOJ is able to issue an enforcement opinion as to voluntarily disclosed prospective conduct there seems to be no principled reason why the enforcement agencies could not issue a non-enforcement opinion as to voluntarily disclosed actual conduct. If the enforcement agencies are sincere about providing guidance on the FCPA, as they presumably are, such agency opinions would seem to provide an ideal platform to accomplish such a purpose.
Requiring the enforcement agencies to disclose non-enforcement decisions after a voluntary disclosure could also inject some much needed discipline into the voluntary disclosure decision itself – a decision which seems to be reflexive in many instances any time facts suggest the FCPA may be implicated. For instance, MTS’s initial disclosure referred to “possible violations of Company policy, corresponding internal control issues and any possible violations of applicable law, including the Foreign Corrupt Practices Act.” Why a company would disclose “possible” violations is beyond me, but then again see this prior post for the important voluntary disclosure decision and the role of FCPA counsel.
Notwithstanding the presence of significant conflicting incentives to do otherwise, it is hoped that FCPA counsel would advise clients to disclose only if a reasonably certain legal conclusion has been reached that the conduct at issue actually violates the FCPA. Accepting this assumption, transparency in FCPA enforcement would be enhanced if the public learned why the enforcement agencies, in the face of a voluntary disclosure, presumably disagreed with the company’s conclusion as informed by FCPA counsel. If the enforcement agencies agreed with the conclusion that the FCPA was violated, but decided not to bring an enforcement action, transparency in FCPA enforcement would similarly be enhanced if the public learned why.
A final reason in support of the proposal is that it would give the disclosing companies (and others similarly situated) a benefit by contributing to the mix of public information about the FCPA.
In most cases, companies spend millions of dollars investigating conduct that may implicate the FCPA and on the voluntary disclosure process. When the enforcement agencies decline an enforcement action, presumably because the FCPA was not violated, these costs are forever sunk and company shareholders can legitimately ask why it just spent millions investigating and disclosing conduct that the DOJ and the SEC did not conclude violated the FCPA.
However, if the enforcement agencies were required to publicly justify their declination decision, the company would achieve, however small, a return on its investment and contribute to the mix of public information about the FCPA – a law which the company will remain subject to long after its voluntary disclosure and long after the enforcement agencies declination decision. Thus, the company, the company’s industry peers, and indeed all those subject to the FCPA would benefit by learning more about the DOJ and the SEC’s enforcement conclusions.
Transparency, accountability, useful guidance, a return on investment.
All would be accomplished by requiring the enforcement agencies to publicly justify a declination decision in instances where no enforcement action follows a voluntary disclosure.
All points to ponder … until the next time I write this same general post.
FCPA Institute - Zoom (May 16-18, 2023)
Elevate your FCPA knowledge and practical skills. Nine hours of integrated and cohesive instruction led by Professor Koehler (an FCPA expert with teaching experience). Learn more, spend less. Professional credential available.
Learn More and Register
