Evaluating FCPA Pilot Program: The Data, The Trends
This article by government enforcement partner Ryan Rohlfsen was published by Law360 on April 14, 2017.
April 5 marked the one-year anniversary of the "Foreign Corrupt Practices Act Enforcement Plan and Guidance."1 Announced by the U.S. Department of Justice, Criminal Division's Fraud Section, the guidance outlined three important steps employed by the DOJ in combating FCPA violations: increased FCPA enforcement resources, international cooperation and, most notably, the launching of the FCPA enforcement pilot program.The pilot program formalized the DOJ’s practice of rewarding corporate cooperation and remediation with penalty reductions beyond what was historically available under the sentencing guidelines. Fashioned as both a carrot and a stick, the pilot program incentivizes companies who self-disclose potential violations to the DOJ and penalizes those who do not. Specifically, under the pilot program, a cooperating company could receive only up to a 25 percent reduction or “discount” from the bottom of the sentencing guidelines fine range if it did not disclose the wrongdoing whereas it could earn a possible declination or up to a 50 percent discount if it promptly self-disclosed the conduct.
The pilot program was initially designed to be a one-year test, during which time the Fraud Section would determine whether the program would be extended in duration or to modify its policies. On March 10, 2017, the DOJ announced that the pilot program would remain in place after its April 5, 2017, expiration while the DOJ continues to evaluate its efficacy.2
This article will discuss patterns and key takeaways from the pilot program’s first year. Notably, the DOJ has resolved 18 FCPA matters over the last 12 months, a significant increase compared to the seven resolutions from the prior 12-month period. As indicated in the scatter plot following the article, a close review of the 18 matters provides substantial data from which to analyze the pilot program’s short-term impact.
Year in Review
Since the announcement of the pilot program, the DOJ has resolved 18 FCPA cases. Geographically, there continues to be a concentration of cases with conduct originating in China (eight of 18). There is also growing number of actions related to activity in Latin America — six this year, compared to four in the preceding year. The rise in Latin American actions is likely the result of local enforcement agencies’ increased focus on anti-corruption in the wake of the Petrobras scandal, among other high-profile prosecutions.
Over the last year, seven companies resolved self-reported misconduct, and five received the pilot program’s maximum reward —a declination. This is once again an uptick from the prior year, when the DOJ issued declinations in only two cases. The two other companies that self-disclosed under the pilot program, but did not receive declinations, General Cable Corp. and Analogic Corp., received a 50 percent and 30 percent discount, respectively. Further, no company that self-reported was required to engage a corporate compliance monitor. All seven self-disclosing companies, however, were required to disgorge profits per the pilot program’s requirements.
Interestingly, the DOJ overwhelmingly imposed monitorships with both nonprosecution agreements and deferred prosecution agreements resolutions. Nine of the 11 NPA and DPA resolutions required the company to appoint a monitor. From this group, only Rolls Royce PLC and JPMorgan were spared the imposition of a monitor.
Key Trends Under the Pilot Program
The DOJ’s application of the pilot program over the last year has yielded some degree of consistency. Three trends — cooperation, monitorships and self-disclosure — have emerged as key considerations for companies investigating potential misconduct.
Cooperation Is Key
The pilot program allows for as much as a 25 percent reduction in fines for companies that cooperate with a DOJ investigation, but did not self-report the misconduct. Of the 11 settlements involving companies that did not self-report, nine received a discount of 25 percent or less. Five of the seven companies that self-reported and fully cooperated, received declinations from the DOJ and were required to pay disgorgement — but no fines or penalties — to resolve their FCPA misconduct. The prior year’s resolutions were arguably not as consistent on this point.3Regardless of whether a company self-reports misconduct, the level of cooperation may also impact the potential discount. Companies that received less than the maximum discount also did not receive full cooperation credit from the DOJ. For example, Analogic did not initially disclose all relevant facts to the DOJ. As a result, it similarly received a 30 percent discount, instead of the full 50 percent available to self-disclosing companies under the pilot program.4Similarly, according to the DPA, Embraer.
SA fully cooperated with the DOJ’s investigation but only partially remediated. The DPA notes that Embraer did not terminate a senior executive with knowledge of the conduct described in the DPA, which was a factor that the DOJ considered when determining that Embraer would receive a 20 percent discount in lieu of a potential 25 percent discount for companies who had fully cooperated and remediated.5 For Braskem SA, Teva Pharmaceuticals Industries Ltd. and Och-Ziff Capital Management Group LLC, delays during the early stages of the investigations, led to decreased discounts of 15 percent, 20 percent, and 20 percent, respectively, instead of the maximum 25 percent discount available to each company.Monitorships Are a Very Real Possibility
Recent resolutions confirm that self-reporting companies have been far less likely to receive a monitor. Comparatively, those companies that do not self-disclose have been increasingly subject to review by a monitor. The data over the last year bears this out — nine of the companies that did not self-report were required to appoint a monitor, compared to two self-reporting companies where a monitor was not required.
The DOJ’s decision to impose a monitorship generally turns on whether the company has “implemented an effective compliance program.” However, non-self-reporting companies that received full cooperation credit and implemented (according to the resolution papers) strong compliance enhancements, still overwhelmingly received monitorships. This trend is also noteworthy because the imposition of a monitorship may represent a significant expense for companies on top of any fines, and may exceed the value of a discount off the sentencing guidelines.
As noted above, although they did not self-report, neither JPMorgan nor Rolls Royce received a monitor.6 The DOJ determined that “an independent compliance monitor was unnecessary” for JPMorgan based on the “state of [the company’s] compliance program” and its agreement to provide periodic reports to the DOJ and the U.S. Attorney’s Office for the Eastern District of New York.7 In the case of Rolls Royce, the U.K.-based company entered into $800 million global resolution with authorities in the United Kingdom, United States and Brazil. Of that amount, the U.K. received $605 million, the U.S. $170 million, and Brazil $25 million. Based on the size of the U.K. portion of the settlement, compared to those with the U.S. and Brazil, it is possible that the DOJ deferred to the U.K. regarding such issues as to whether to impose a Monitor.DOJ Further Incentivizes Self-Disclosure
Over the last year, the majority of self-reporting companies (five of seven) received declinations. The remaining companies, Analogic and General Cable, received significant discounts and were not required to engage a monitor. Companies should consider these results when making a disclosure decision.
The terms of the DOJ’s settlement with Analogic, despite the company’s incomplete self-disclosure, signals the value the government places on self-reporting.8 While Analogic self-reported a scheme whereby a subsidiary funneled millions of dollars to third parties, including government officials in Russia, it failed to initially disclose all relevant facts. Nevertheless, the DOJ credited Analogic for its self-disclosure and cooperation during the investigation. As result, Analogic settled upon a $3.4 million fine — a 30 percent discount — and was not required to engage a monitor.Limitations on Declinations
Despite the penalty consistency of the first year, the full impact of the pilot program remains to be seen. While the DOJ has resolved cases under the pilot program’s guidance, these matters were apparently reported prior to its launch. We expect that cases handled entirely within the pilot program’s framework will be resolved later in 2017 and may provide more clarity, particularly with respect to the use of declinations.
Contrary to the five self-disclosed cases that received declinations, General Cable’s resolution provides support for the notion that the size and scope of self-reported conduct will inform whether a company receives a declination. General Cable self-reported a scheme whereby foreign subsidiaries used third-party agents and distributors to make corrupt payments to foreign officials in Angola, Bangladesh, Indonesia, Thailand and China to obtain business. Disgorgement — typically calculated from the profits attributable to the misconduct — is at least one indicia of the size of a company’s misconduct. In addition to a three-year NPA with the DOJ, General Cable disgorged $55 million in a separate resolution with the U.S. Securities and Exchange Commission.
General Cable’s $55 million disgorgement payment was almost six times the highest amount paid by the five self-reporting companies that received declinations. Indeed, three of the five companies receiving declinations paid disgorgement that did not exceed $700,000. The size of General Cable’s disgorgement sheds light on the existence of an upper limit to the types of self-reported schemes that will receive declinations.
While the pilot program continues, its future is by no means set in stone. Instead, the DOJ will continue to evaluate the pilot program’s “utility and efficacy” to determine “whether to extend it, and what revisions, if any” should be made.9Importantly, the pilot program was announced also as an initiative to cooperate with international regulators. In fact, the DOJ has credited foreign authorities with providing valuable assistance in nearly ever resolution over the last year. Furthermore, a number of foreign jurisdictions have ramped up anti-corruption investigations and enhanced international cooperation. For example, prosecutors from 10 Latin American countries (Brazil, Argentina, Chile, Colombia, Ecuador, Mexico, Peru, the Dominican Republic, Venezuela and Panama) and one European country, Portugal, recently announced that they will form a task force to share evidence in the investigation of bribes paid by Odebrecht SA.10 The goal of the task force is to speed up the exchange of information between countries to avoid “bureaucratic hurdles” encountered when assessing penalties.11
In summary, the DOJ’s FCPA enforcement does not appear to be on the decline. Further anti-corruption developments abroad will only serve to increase pressure on the DOJ to strengthen its FCPA efforts.
1 See Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance (https://www.justice.gov/criminal-fraud/file/838416/download).
2 Acting Assistant Attorney General Kenneth A. Blanco Speaks at the American Bar Association National Institute on White Collar Crime (https://www.justice.gov/opa/speech/acting-assistant-attorney-general-kenneth-blanco-speaks-american-bar-association-national).
3 In 2015, the DOJ declined to take action in two cases, Petro Tiger and SAP, but only Petro Tiger self-disclosed its misconduct. In the remaining five cases, the fine discounts ranged from 0 percent to 45 percent, with no two companies receiving the same discount.
4 BK Medical ApS NPA at 1 (https://www.justice.gov/criminal-fraud/file/869661/download).
5 Embraer S.A. DPA at 4 ( https://www.justice.gov/criminal-fraud/file/904636/download).
6 JPMorgan Securities NPA at 2 (https://www.justice.gov/criminal-fraud/file/911356/download); Rolls-Royce PLC DPA at 4-5 (https://www.justice.gov/criminal-fraud/file/929126/download).
7 JPMorgan NPA, supra note 6.
8 BK Medical NPA, supra note 4.
9 Blanco Speaks at the American Bar Association National Institute on White Collar Crime, supra note 2.