The Benefits of Corporate Anti-Corruption Programs: No ChargesWhite Collar Watch (December 2017 • Vol. 1, Issue 3) Article
The U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") issued 15 declination letters in 2017 notifying companies of their decision not to pursue charges in connection with alleged violations of the Foreign Corrupt Practices Act ("FCPA"). These declinations are a strong signal to companies that they should have strong anti-corruption systems in place, and that when they find themselves facing a potential violation, how they choose to respond can have a far-reaching impact on the outcome of any government investigation. Companies are much more likely to avoid facing charges with respect to the alleged unlawful conduct if they have a robust compliance program, conduct a thorough investigation when allegations of misconduct are raised internally, cooperate through voluntary self-disclosure, and, in certain cases, disgorge ill-gotten gains.
Declinations are the most favorable mechanism for resolving FCPA matters, followed by non-prosecution agreements ("NPAs") and deferred prosecution agreements ("DPAs"). NPAs typically require companies to commit to ongoing obligations, including engaging corporate monitors for a period of years and conducting annual anti-corruption reviews followed by reports to the government setting forth their findings and continuing remedial efforts. DPAs are a less-favored type of resolution, because they also involve the filing of a public pleading that is held in abeyance while the company works to satisfy the conditions set forth in the agreement. Most notably, NPAs and DPAs involve the payment of harsh fines, penalties, and the disgorgement of ill-gotten gains in most instances. By contrast, while certain declinations—specifically those granted under the DOJ’s Pilot Program—require companies to disgorge their ill-gotten gains, they involve no other penalties, no continuing obligations, and no finding of guilt by the court or admission of guilt. Declinations result in the total avoidance of criminal charges in connection with the alleged conduct.
In an October 2017 policy speech, DOJ Deputy Attorney General ("DAG") Rod Rosenstein announced that the DOJ "is working to incentivize, reward, and even partner with companies that demonstrate a commitment to combating corporate fraud." This message was reinforced when DAG Rosenstein announced in November 2017 that the principles behind the DOJ’s Pilot Program, which commenced in April 2016 and offers companies incentives to self-disclose FCPA violations, cooperate with the government, remediate unlawful conduct, and disgorge any profits that resulted from the violations, would be made permanent through incorporation into the U.S. Attorneys’ Manual. The declinations that have been issued to date offer an example of the policies that the DOJ is implementing. Specifically, they reflect decisions not to pursue criminal charges against companies that have anti-corruption programs in place and adopt a cooperative stance vis-à-vis the government’s investigation into alleged FCPA misconduct.
DOJ’s Pilot Program—"Declinations with Disgorgement"
In 2017, two declinations were issued under the Pilot Program. In declining to pursue charges, the DOJ cited the following factors:
1) voluntary self-disclosure; 2) thorough and comprehensive internal investigation; 3) full cooperation; 4) full disgorgement;
5) continuing enhancements to the company’s compliance program and internal controls; and 6) full remediation, including the termination of or disciplinary action against the executives and other employees involved in the misconduct. These factors echoed the reasons cited by the DOJ in the five declinations granted under the Pilot Program in 2016. These declinations of charges also continued the DOJ’s practice under the Pilot Program of requiring companies to disgorge profits to secure a declination. Per DAG Rosenstein’s November 2017 policy announcement, this practice will now be incorporated into the U.S. Attorneys’ Manual.
In addition to the two declination letters sent under the Pilot Program in 2017, 13 public companies, including Merck & Co. and IBM, announced that they received declination letters from the DOJ and/or the SEC.1 Unlike Pilot Program declinations, these "traditional" declinations did not involve disgorgement of profits.
Whereas a stated objective of the Pilot Program is to increase transparency regarding FCPA enforcement, including what companies must do in order to receive a declination letter or a criminal penalty below that recommended under the U.S. Sentencing Guidelines, "traditional" declinations offer no such transparency. Moreover, as companies make "traditional" declinations public only through general statements, usually in required securities filings,2 specific information is not readily available about the declinations.
Notwithstanding the absence of stated criteria, certain factors that likely contribute to the DOJ’s decision to issue a "traditional" declination mirror the bases for obtaining a declination under the Pilot Program. These factors include: 1) the existence of a strong compliance program; 2) the completion of a comprehensive internal investigation; and 3) remedial measures. The overlap of these factors with those required under the Pilot Program highlights that the two types of declinations both require a proactive approach by the subject companies.
Compared to 2016, when 14 declinations, including five under the Pilot Program, were issued, the total number of declinations increased in 2017.3 A key takeaway of the Pilot Program that has now been made permanent is that disgorgement is an integral part of both the DOJ’s and SEC’s strategy against global corruption. Regarding declinations more broadly—both in and out of the Pilot Program—companies with a potential FCPA violation are well-served to be mindful of the huge benefits of implementing a timely and effective compliance and remediation program.
- See, e.g., press release issued by Orthofix International, Orthofix Announces Resolution of SEC Investigations, Jan. 18, 2017, available at http://ir.orthofix.com/releasedetail.cfm?ReleaseID=1008341; Press release issued by Cobalt International Energy, Cobalt Announces Closing of DOJ Investigation, Feb. 9, 2017, available at www.cobaltintl.com/newsroom/cobalt-announces-closing-of-doj-investigation; Merck & Co., Form 10-K (filed Feb. 28, 2017), at 103; Crawford and Company, Form 10-K (filed Feb. 27, 2017), at 97; and Innodata Inc., Form 10-K (filed March 16, 2017), at 29.
- By contrast, Pilot Program declinations are publicized by DOJ on the agency’s website and in public letters issued to the target companies.
- www.fcpablog.com/blog/2017/1/3/the-2016-fcpa-enforcement-index.html; www.justice.gov/criminal-fraud/pilot-program/declinations.
© 2017, Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.