On April 5, 2016, the Department of Justice’s (“DOJ”) Fraud Section Chief, Andrew Weissmann, issued a memo (the “Weissmann Memorandum”) announcing a one-year Pilot Program that offers a carrot and stick approach to enforcement of the Foreign Corrupt Practices Act (“FCPA”). The full Weissmann Memorandum is available on the DOJ website at: https://www.justice.gov/opa/file/838386/download
On the “stick” side, Weissmann announced what was already apparent to most in the field, which is that the DOJ is beefing up its efforts to find and prosecute individuals and companies for violating the FCPA, a statute which criminalizes bribery of foreign officials. For issuers of U.S. securities, it also requires companies to keep accurate books and records and to have reasonable internal controls to prevent bribery or other types of fraud. Weissmann announced that the DOJ is enlarging its FCPA enforcement unit by adding 10 more prosecutors to its ranks, an increase of over 50%. Additionally, the FBI is establishing a group of investigative agents focused on FCPA investigations and prosecutions. As a result, the DOJ hopes that it will scare individuals and companies into compliance with the threat of previously undisclosed violations coming to light.
But now the “carrot.” The DOJ is willing to offer a larger-than-ever amount of cooperation credit in FCPA enforcements to self-disclosing companies who meet particular cooperation requirements. Whereas section 9.28 of the U.S. Attorney Manual explains the types of actions the DOJ expects corporations to engage in to receive cooperation credit, it does not disclose how much credit a corporation can earn for cooperating. The Weissmann Memorandum quantifies it by stating that a corporation can earn “up to a 50% reduction off the bottom end of the Sentencing Guidelines fine range, if a fine is sought; and generally should not require appointment of a monitor if a company has, at the time of resolution, implemented an effective compliance program.” Because penalties for FCPA violations frequently range in the multimillions, because cooperation has typically garnered only around a 25% discount in the past (although DOJ never previously quantified credit due to cooperation), and because the appointment of a monitor is an expensive proposition, this is a big deal. Additionally, under the Pilot Program the DOJ will consider a declination of prosecution for qualifying companies. Notably, even though the Pilot Program promises a significant reduction, self-disclosing companies that successfully “cooperate” and “remediate” will still be required to disclose all profits resulting from the FCPA violation.
What is cooperation?
And this is the tricky part. What constitutes “cooperation” for a business organization may sound fairly onerous. It starts with an evaluation of the 10 factors to be considered in the prosecution of business organizations, set out in Section 9-28.300 of the US Attorney’s Office Manual (“USAM”). Accessible here: https://www.justice.gov/usam/usam-9-28000-principles-federal-prosecution-business-organizations#9-28.700. The USAM already takes into account such factors as having an effective pre-existing compliance plan, how serious and pervasive the wrongdoing was, the adequacy of the prosecution of individuals responsible for the wrongdoing, and timely disclosure, among other things.
The Pilot Program focuses on voluntary disclosures made “prior to an imminent threat of disclosure or government investigation” made “within a reasonably prompt time after becoming aware of the offense” and a requirement that the company disclose “all relevant facts known to it, including all relevant facts about the individuals involved in any FCPA violation,” including officers, employees, or agents. A company can still obtain limited credit (capped at 25%) if no self-disclosure is made but the company later fully cooperates and timely and appropriately remediates. Additionally, the Weissmann Memorandum points out that cooperation includes, among other things:
- proactive disclosure of relevant facts and evidence even when not specifically asked to do so, including those gathered during a company’s independent investigation and those located overseas;
- provision of all facts relevant to potential criminal conduct by all third-party companies (including their officers or employees) and third-party individuals; and
- making available company officers and employees who possess relevant information, wherever located, for DOJ interviews.
What is Remediation?
In addition to the factors outlined above, under the Pilot Program, a company must demonstrate it has timely remediated the violations. This will generally include implementation of an effective compliance and ethics program. The compliance and ethics program will be judged on a number of factors, including the following:
- A company must demonstrate it has established a culture of compliance and a lack of tolerance for criminal conduct.
- A company must dedicate sufficient resources to the compliance function, including employing independent and experienced compliance personnel and compensating and promoting them on par with employees outside the compliance function.
- A company must perform an effective risk assessment and tailor its compliance program based on that assessment, to be followed-up with auditing to assure the effectiveness of the compliance program.
To successfully remediate, a company must also demonstrate it has appropriately disciplined employees that have engaged in the misconduct as well as instituted a system providing for the possibility of discipline of those with oversight over the employees who committed the misconduct. Additionally, a company should show any additional steps that would demonstrate it recognizes the seriousness of the misconduct, accepts responsibility for it and has implemented measures to reduce the risk of additional misconduct.
To Disclose or Not to Disclose: That is the Question
The new Pilot Program appears to create more favorable conditions for self-disclosure of FCPA violations than ever before. Even though there are no guarantees and the decision as to whether a Company has successfully cooperated is left to DOJ’s discretion, the offer of up to a 50% reduction in fines and a reduced chance that a monitor will be appointed makes the Pilot Program a good opportunity for companies that discover serious FCPA violations. Further, it is likely that the DOJ will want to “reward” companies that utilize the Pilot Program in order to encourage other companies to come forward. In today’s world of increasing whistleblower activity, cross-border coordination of enforcement activity, and disclosures of hacked information (e.g., the “Panama Papers”) the chance that an FCPA violation will come to light has never been higher.
Despite all of the increasing reasons to self-disclose, however, a company that discovers a potential FCPA violation will still need to conduct a fact-specific analysis in order to determine whether or not it wishes subject itself to an arduous self-disclosure process that contains no guarantee that the company will avoid serious penalties or reputational damage. Further, a company that does everything required under the Pilot Program will still be required to disgorge all profits resulting from the FCPA violation in addition to any fines DOJ imposes. Simply put, the Pilot Program does not lessen the need for a long, hard look at the potential consequences that often go along with disclosing an FCPA violation.
Questions regarding this alert can be addressed to Annette Ebright at firstname.lastname@example.org / 704.335.9069 or Eric Cottrell at email@example.com / 704.335.9850. This legal update does not constitute the provision of legal advice or the creation of an attorney/client relationship with any party.