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Reflections On The Second Edition Of The FCPA Guidance

musing

As highlighted in this prior post, the DOJ and SEC quietly released a Second Edition of the FCPA Guidance last week on the Friday of a holiday weekend.

Future posts will discuss how: (i) the Second Edition (like the original Guidance) is replete with selective information, half-truths, and worse information that is demonstratively false; and (ii) how the Second Edition (like the Original Guidance) contains several spot-on sensible statements that can be used as a measuring stick for future enforcement activity.

In the meantime, this post offers some big picture reflections on the Second Edition of the FCPA Guidance.

(1)

As highlighted in this prior post, in the FCPA’s early years it was observed:

“The government has the option of deciding whether or not to prosecute.  For practitioners, however, the situation is intolerable.  We must be able to advise our clients as to whether their conduct violates the law, not whether this year’s crop of administrators is likely to enforce a particular alleged violation.  That would produce, in effect, a government of men and women rather than a government of law.”

Nearly 40 years later, has anything really changed?

The signatories of the original FCPA Guidance in 2012 (Lanny Breuer and Robert Khuzami) soon left the government and the same is true of the Second Edition. In fact, one of the signatories (Brian Benczkowski, Assistant Attorney General Criminal Division Department of Justice) has already left the government! Depending on the outcome of the election this Fall, it is possible that leadership at the DOJ and SEC may change. If so, does this mean different FCPA guidance?

(2)

The  Second Edition of the Guidance, like the original, is not law and “is not a statement by the SEC and the SEC has neither approved nor disapproved of its content.” Rather, the FCPA Guidance is:

“non-binding, informal, and summary in nature, and the information contained [there]in does not constitute rules or regulations” and “as such, it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, that are enforceable at law by any part, in any criminal, civil or administrative manner. […] It does not in any way limit the enforcement intentions or litigating positions of the DOJ, the SEC or any other U.S. government agency.”

In short, those are some massive limitations and qualifications and everyone reading the FCPA Guidance needs to realize this.

(3)

Notwithstanding these limitations and qualifications, if there is to be FCPA Guidance setting forth the enforcement agencies interpretations and enforcement considerations, a new edition of the FCPA Guidance was warranted as much has happened in the FCPA space since November 2012.

As stated in the Foreword to the Second Edition:

“Although many aspects of the [original] Guide continue to hold true today, the last eight years have also brought new cases, new law, and new policies. The Second Edition of the Guide reflects these updates, including new case law on the definition of the term “foreign official” under the FCPA, the jurisdictional reach of the FCPA, and the FCPA’s foreign written laws affirmative defense. It addresses certain legal standards, including the mens rea requirement and statute of limitations for criminal violations of the accounting provisions. It reflects updated data, statistics, and case examples. And it summarizes new policies applicable to the FCPA that have been announced in the DOJ’s and SEC’s continuing efforts to provide increased transparency, including the DOJ’s FCPA Corporate Enforcement Policy, Selection of Monitors in Criminal Division Matters, Coordination of Corporate Resolution Penalties (or Anti-Piling On Policy), and the Criminal Division’s Evaluation of Corporate Compliance Programs.

[…]

This updated Guide is meant not only to summarize the product of the dedicated and hardworking individuals who combat foreign bribery as part of their work for the U.S. government, but also to help companies, practitioners, and the public— many of whom find themselves on the front lines of this fight—prevent corruption in the first instance. We hope that the Guide will continue to be an invaluable resource in those efforts.”

(4)

To those in the know who closely follow FCPA case law, enforcement actions, and enforcement agency policy developments (such as the FCPA Corporate Enforcement Policy and the DOJ’s Evaluation of Corporate Compliance Programs), there is little that is substantively new in the Second Edition given the information that was already in the public domain. Nevertheless, it is nice to capture this newer information in one document that is easily accessible.

If you are interested in seeing how the Second Edition of the FCPA Guidance compares to the original version, see this useful comparison from Morgan Lewis.

(5)

Even though there was little that was substantively new in the Second Edition, there were a few substantive tweaks worth mentioning.

Because cooperation tends to be the name of the game when it comes to corporate FCPA enforcement, statute of limitations are generally meaningless because, to demonstrate cooperation, companies will often waive statute of limitation defenses or toll the statute of limitations.

Nevertheless, the Second Edition does contain an interesting change regarding statute of limitations in criminal actions.

The original FCPA Guidance stated:

“The FCPA’s anti-bribery and accounting provisions do not specify a statute of limitations for criminal actions. Accordingly, the general five-year limitations period set forth in 18 U.S.C. § 3282 applies to substantive criminal violations of the Act.”

The Second Edition states:

“The FCPA’s anti-bribery and accounting provisions do not specify a statute of limitations for criminal actions. Accordingly, the general statutes of limitations periods apply. For substantive violations of the FCPA anti-bribery provisions, the five-year limitations period set forth in 18 U.S.C. § 3282 applies. For violations of the FCPA accounting provisions, which are defined as “securities fraud offense[s]” under 18 U.S.C. § 3301, there is a limitations period of six years.”

As stated in this law firm release:

“The Second Edition now points to a statute – 18 U.S.C. § 3301 – that sets forth a six-year statute of limitations period for criminal violations of the FCPA’s accounting provisions. The statutory basis for the claim leaves little to question: in particular, § 3301 applies a six-year limitations period to “securities fraud offense[s],” including, specifically, the FCPA’s accounting provisions. Section 3301, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act a decade ago, has not been subject to recent amendment or relevant case law that would cause DOJ to revise its position in this area.”

Another interesting substantive change concerns the internal controls provisions.

For years these pages have discussed how the FCPA’s internal controls provisions are largely standardless and how enforcement of the internal controls provisions have, in certain instances, gone off the rails.

The Second Edition recognizes this first point when it states:

“The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal accounting controls provisions gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.”

This statement is consistent with the statutory standard, legislative history, a judicial decision, and even prior enforcement agency guidance.

However, the Second Edition then states:

“Although a company’s internal accounting controls are not synonymous with a company’s compliance program, an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls. Fundamentally, the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.” (emphasis added).

Simply put, there is NO statutory basis supporting the statement that a company’s internal controls “must” take into account these various factors.

As stated in this law firm release:

“The Second Edition does not address the statutory basis for this expansive view of the internal controls provision. While it is undoubtedly good practice for internal accounting controls to address “operational realities and risks,” this seems to go beyond the requirements of the “reasonable assurances” standard and the four specific control areas set forth in 15 U.S.C. § 78m(b)(2)(B). That said, unless and until the reach of the internal accounting controls provision is litigated, we expect that we will continue to see aggressive use of this provision by the SEC.”

(6)

The Second Edition briefly mentions the recent Supreme Court decision in Liu v. SEC (see here for the prior post). However, other than stating as follows there is no discussion of what Liu means for FCPA enforcement:

The Supreme Court “addressed the disgorgement remedy stating ‘equity courts have routinely deprived wrongdoers of their net profits from unlawful activity’ and holding that disgorgement is permissible equitable relief when it does not exceed a wrongdoer’s net profits and is awarded for victims.”

For the reasons stated in this post, it will be interesting to assess Liu’s impact on FCPA enforcement. Since Liu, there has been two FCPA enforcement actions (Novartis and Alexion) and Liu’s impact appears to be non-existent.

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