Pardon me for being that guy, but in the Foreign Corrupt Practices Act space someone needs to put on the stripes every now and then and blow the whistle.
This post does just that regarding certain recent “declination” commentary including the recent Johnson Controls enforcement action. For prior posts on the DOJ’s recent so-called “declinations” in the Nortek and Akamai see this post titled “Dont’ Believe the Hype, Rather Ask What Viable Criminal Charges Did the DOJ Actually Decline.” For prior posts on the Johnson Controls enforcement action see here, here, and here.
This commentator suggests that “the SEC and DOJ let Johnson Controls off easy.” The following statement appears to be the foundation for this opinion.
“Johnson Controls did not implement a recommendation by the independent compliance monitor that the China Marine operation be integrated into the senior subsidiary operation in Denmark.”
This statement is false.
There is one sentence in the SEC’s Order regarding the compliance monitor whose term ended in 2010 and was appointed in October 2007 in connection with the York FCPA enforcement action.
The one sentence is the following.
“Despite taking steps to address the monitor’s recommendation that the company integrate the Marine business more closely into JCI’s compliance culture, JCI put almost all of its reliance for oversight of China Marine on a newly hired managing director to self-police his high risk business.”
In short, the SEC’s one sentence on this issue is materially different than the commentator’s suggestion and the difference is significant given that the key statutory term in the FCPA’s internal controls provisions is “reasonable assurances.”
Next, the same commentator asserts:
“Johnson Controls failed to remediate starting in 2007 and, in effect, turned a blind eye to a serious risk that China Marine would resume its bribery scheme. The deficiencies here, in this failure to remediate, are significant. First, aside from the basic structural problem, what effort, if any, did Johnson Controls take to integrate or create a culture of compliance in the China Marine subsidiary? It appears that Johnson Controls did not attempt to identify, measure or promote a positive culture except by conducting specific FCPA training.”
Time out.
Let’s go to the replay booth for this one and review what the SEC’s order actually says about Johnson Controls post-2007 conduct. In the words of the SEC:
“After acquiring York, JCI devoted additional resources to its compliance program, including hiring compliance personnel, conducting trainings, and implementing risk-based procedures and controls. With respect to China Marine, JCI terminated the individuals involved in the YRMC conduct and hired a new managing director of China Marine to oversee the business. The managing director, a Chinese national and resident, reported to the Marine business management in JCI’s Denmark subsidiary, which oversaw the Global Marine business in multiple countries. Because the misconduct identified in the prior civil action involved the improper use of agents, 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 …”
In addition, the SEC’s order mentions “Delegation of Authority thresholds in place” at China Marine.
“Despite the efforts taken by JCI,” in the words of the SEC, the China Marine employees “devised another avenue to continue the payments” with the SEC further starting that the employees “colluded with each other and circumvented and manipulated JCI’s internal and financial controls …”.
Turning to the “declination” issue more generally, as highlighted in the above-linked prior posts regarding the DOJ’s three recent so-called declinations, based on the only information in the public domain regarding the enforcement actions (that is the information found in SEC’s Johnson Controls order and the Nortek and Akamai Technologies NPAs) the question needs to be asked: what viable criminal charges against the companies did the DOJ actually decline?
As highlighted in the prior posts, the answer appears to be none.
Nevertheless, this commentator asserts:
“All parties admitted to facts, which could have formed the basis of a criminal FCPA enforcement action brought by the DOJ, yet they all received Declinations.”
For starters, this is a factually false statement.
The Nortek and Akamai NPAs lack any statement, suggestion or inference that the companies “admitted to facts.” Rather, the NPAs merely state that in connection with “possible violations of the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act,” “[if] this case had gone to trial, the Commission would have presented evidence sufficient to prove the following facts” discussed in the SEC’s order.
The Johnson Controls SEC enforcement action was resolved via an administrative cease and desist order which Johnson Controls consented to “without admitting or denying” the SEC’s substantive findings.
Moreover, the substantive opinion that the information in the SEC’s orders “could have formed the basis of a criminal FCPA enforcement action brought by the DOJ” is highly dubious for the reasons specifically discussed in the prior posts. Indeed, no less than former DOJ FCPA Unit Chief Mark Mendelsohn stated (in connection with the Nortek and Akamai “declinations”) as follows:
“[I]it is not clear from the available record whether there was a sufficient nexus to the U.S. to support bringing a prosecution consistent with DOJ prior practice, at least raising a question as to whether the DOJ would have brought a case anyway, even absent the factors cited in the letter as supporting declinations.”
In addition to the above deficiencies, the commentator next invents a speculative theory that seemingly helps to explain the DOJ’s declinations.
The commentator states:
“One of the difficulties in evaluating any Declination is the paucity of facts available to the compliance practitioner to evaluate. In the JCI case we have the Securities and Exchange Commission (SEC) resolution via a Cease and Desist Order (Order) that lays out the facts relevant to that enforcement action. However, this Order is the product of negotiations between the SEC and JCI. This means the company can seek to keep out facts, which would point to criminal liability, reputational damage, embarrassing senior executives or a plethora of other issues the company does not want in the public domain. There is no way to know if the facts laid out in the Order are all the facts in the case that were known to the DOJ or even disclosed to the DOJ so to base an argument on this underlying premise puts you on wobbly ground.”
Wobbly ground for sure, but it’s the invented speculative theory that is on wobbly ground.
First, while certain specifics of the Nortek, Akamai and Johnson Controls voluntary disclosures are not known, initial voluntary disclosure meetings (and often certain follow-up meetings) are often attended by both SEC and DOJ enforcement attorneys. In short, both agencies learn of the same initially disclosed findings.
Second, it is highly speculative to suggest that a company “can seek to keep out facts [from an SEC order], which would point to criminal liability, reputational damage, embarrassing senior executives or a plethora of other issues the company does not want in the public domain.”
Consider the following typical scenario of a company disclosing internal investigation findings.
Fact A – most egregious
Fact B – egregious
Fact C – mildly egregious
Fact D – less egregious
Fact E – least egregious
Do SEC orders always contains ALL facts disclosed by the company?
From my personal experience, I know the answer is no and sometimes the SEC enforcement action “only” includes Facts A, B, and C.
It is quite another thing to base a theory on the speculative assertion that an SEC enforcement action would omit Facts A & B and focus merely on Facts C, D & E.
Finally, the commentator states “the DOJ Pilot Program has come out of the box with some solid wins for the companies involved …”. However, for the reasons specified in this prior post, such a suggestion is pure speculation.
Missing from this simplistic suggestion is the fact that we don’t know what would have happened if Nortek, Akamai and Johnson Controls did not disclose its internal findings of possible FCPA issues to the SEC and DOJ.
Further, in assessing whether Nortek / Akamai / Johnson Controls had “solid wins” from its voluntary disclosures, it must be be acknowledged that a perfectly acceptable, legitimate, and legal alternative for the companies would have been to thoroughly investigate the issues, promptly implement remedial measures, and effectively revise and enhance compliance policies and procedures – all internally and without disclosing to the enforcement agencies.
Moreover, it must be acknowledged that Nortek spent over $4.4 million (13 x’s more than the settlement amount of $322,000) on pre-enforcement action professional fees and expenses. (Note, neither Akamai nor Johnson Controls disclosed pre-enforcement action professional fees and expenses).
