Archive for the ‘Declination Decisions’ Category

An Informed And Forceful Critique Of NPAs And DPAs By … Guess Who?

Thursday, April 25th, 2013

Non-prosecution and deferred prosecution agreements (NPAs, DPAs) are the most troubling and toxic feature of our criminal justice system relevant to business organizations.

In numerous prior posts (see here for instance), I have discussed how use of NPAs and DPAs to resolve alleged corporate criminal liability presents problematic policy issues across a broad spectrum.  The use of such alternative resolution vehicles in the FCPA context contributes to the ”facade of FCPA enforcement” (again across a broad spectrum) that I wrote about here and I further discussed the distortive features of NPAs and DPAs in the FCPA context in my 2010 Senate testimony – see here.

I have long called for NPAs and DPAs to be abolished in the FCPA context and will do so again next week at the National Press Club in Washington, D.C. in this event sponsored by Corporate Crime Reporter.

One does not really have to search far to find critics of NPAs and DPAs.

Most recently, as highlighted in this prior post, former Attorney General Alberto Gonzales stated at the Dow Jones Global Compliance Symposium that FCPA enforcement actions resolved via NPA and DPAs do not necessarily reflect instances of companies violating the FCPA, but rather companies feel compelled to agree to the agreements.  Equally problematic, Gonzales said, is that enforcement actions resolved via these vehicles mean that “legitimate wrongdoing is not being prosecuted as it should.”  Gonzales continued by saying that it is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs, that such resolution vehicles have “less of a toll” on the DOJ’s budget, and that such agreements “provide revenue” to the DOJ.  It is all “unfortunate” Gonzales stated.

Yet NPAs and DPAs continue to flourish – perhaps because they make the DOJ’s (and now SEC as well) job easier, they pad enforcement statistics, and, let’s face it, they expand the market for legal services.

Indeed, as I noted at the Dow Jones event, the fact that regulators and the regulated seem to approve of these agreements should itself be a red flag.  I’ve long argued that abolishing NPAs and DPAs - coupled with an FCPA compliance defense - could accomplish much including negating many of the troubling and toxic features of our criminal justice system relevant to business organizations.

This post discusses the views of a notable person concerning NPAs and DPAs.  And those views are spot on!  When articulated, this person was already a high-profile individual, and this person has since assumed an even higher-profile.

The year was 2005 and this person, a former U.S. Attorney in a high-profile district, appeared at an industry event.  This person’s views were reduced to paper in a published article (but because I don’t have copyright permission, I do not link to the full article, but provide a cite at the end of the post).

This person stated as follows.

“On the federal level especially, the sweep of corporate criminal liability could hardly be broader.  All of you in this audience probably know the law well, but its breathtaking scope always bears repeating:  If a single employee, however low down in the corporate hierarchy, commits a crime in the course of his or her employment, even in part to benefit the corporation, the corporate employer is criminally liable for that employee’s crime.  It is essentially absolute liability.”

This person next criticized the DOJ’s then guiding principles of prosecution – the so-called Thompson Memo - which have not really undergone much substantive change since then, but have largely been incorporated into the U.S. Attorneys Manual.

“The factors are being used by some prosecutors not so much as factors in making their charging decisions, but as means to force companies to behave and reform themselves as the prosecutors, fashioning themselves as the new corporate governance experts, think they should.”

[...]

“Deferred prosecution agreements by which the government allows a company to avoid a criminal indictment but by which the government forces a company to pay lots of money, admit its wrongdoing, often agree to the government’s detailed version of the facts under investigation and prosecution of a company’s employees, install a corporate monitor for some period of time and adopt a variety of enhancements to its compliance and governance mechanisms.  Who made federal prosecutors into such super-regulators?  Is their pro-activity a good thing?”

This person recognized her own fault for the current system because she “conceived of the first deferred prosecution agreement for a company – in 1994, in the case of Prudential Securities.”  This person stated as follows.

“So, I must bear my share of responsibility for how government prosecutors are today using the easy prospect of corporate criminal liability and the Thompson Memorandum to inject themselves to deeply into the business of corporate America and to dictate how companies must respond to government investigation.  But, having now been on the receiving end of these measures in my representations of companies in criminal investigations, I have seen the light and urge that some prosecutors should change or at least moderate how they are treating companies in criminal investigations.”

Turning to the root causes of misconduct and how things should proceed, this person stated as follows.

“All prosecutors recognize – or should – that no matter how good a company’s corporate culture and compliance program are, there will always be crimes committed by employees.  When that invariably occurs, prosecutors shouldn’t be automatically jumping into a Thompson factor analysis to decide whether to charge the company.  Only if the crime in question was serious, pervasive in the organization and senior management had at least some culpability, either active or by virtue of willful blindness, did federal prosecutors generally consider a corporate indictment under the Holder Memo [DOJ policy before the Thompson Memo].  Now, it seems that every case of corporate crime is a candidate for Thompson Memo analysis and potentially a corporate charge.  Ths difference in process matters a lot in practice.  What happens as a result is that some prosecutors automatically invoke the Thompson Memo criteria at the outset of every investigation and immediately start ‘grading’ a company on its performance in the government’s investigation.  [...]  No longer are the threshold issues of the seriousness and pervasiveness of the crime and management involvement always considered as thresholds to cross before considering the criminal liability of the company.”

“You get the picture – the process has, in some sense, gone backwards and is sometimes skipping a big and important threshold question – is the particular case an appropriate case to even consider for a possible corporate charge.  If the answer is no, that formerly ended the inquiry.  Today, nearly every company is put through the Thompson factor analysis.  Today, before making their decisions about charging companies, some prosecutors are exerting considerable – some say, extreme -pressure on corporate behavior under the not so subtle threat that if the company doesn’t do as the government wishes, the company risks, at the end of the day, being indicted.”

[...]

“To ensure that a company does not become that ‘rare’ case resulting in a corporate indictment with all of its attendant negative consequences, a company must not poke the government in the eye by declining any of its requests or suggestion of how a cooperative, good corporate citizen is to behave in the government’s criminal investigation.  This template, in my view, can give prosecutors too much power.”

This person next talked about the “problem” of “who the wrongdoers are, who is culpable in the eye of the beholder and the government isn’t always right” and stated as follows.

“To figure out who is a wrongdoer, a lot of it turns on, for example, the very hard-to-get-at issues of knowledge and intent.  Especially, in this age of 20/20 hindsight and rule changing mid-stream and e-mails assumed to be read and digested by all to whom they are sent, it is not as easy as the government often thinks it is to figure out who is culpable.”

“If a company, after a thorough investigation, does not agree with the government on who is guilty of wrongdoing, what does the company do when the government is rattling its sabers about insufficient remediation?  Throw overboard those the government believes have done wrong to save the company, or fight for them and try to convince the government that it is wrong?  A horrible Hobson’s choice if a prosecutor is insistent.”

This person next directed her attention to DPAs.

“In the last year or two, we have seen a virtual epidemic of these – federal prosecutors are agreeing not to indict a company if the company will agree to a deferred prosecution agreement or its equivalent.  [...]  They are becoming a rather routine way of resolving investigations of corporate crime as to companies.”

“… I feel that the deferred prosecution trend may be sweeping too broadly.  At times, a deferred prosecution agreement with a corporation can be justified and do some, or even significant good.  Some crazy U.S. Attorney in 1994 though so.  But it should not be, as it may be becoming, a semi-automatic response by the government in responding to corporate crime.  Most cases of corporate crime should result in no action by the government against corporations that have responded appropriately to the wrongdoing and any remaining problems of controls, compliance and corporate culture.  There is no need for continued government presence; such presence can indeed retard further progress and act as a drag on the company’s business and stock price.  Deferred prosecution agreements, especially if they include the filing of detailed criminal charges against the company, can also unfairly stigmatize the reputation of a good company or firm.  And they can have other negative collateral consequences.  Prosecutors should pause and take a breath before seeking deferred prosecution agreements and decide whether they are truly needed and in the company’s and public’s best interest.”

You will likely not find a more informed and forceful critique of the most troubling and toxic feature of our criminal justice system relevant to business organizations than as set forth above.  But there is more from this person besides just the one article excerpted above.

In this 2005 interview with Corporate Crime Reporter, this person struck similar themes.

Q: Some people believe that deferred and non prosecution agreements are replacing straight out declinations. Others say – no, they are replacing criminal charges. What’s your take?

A:  For the most part, not exclusively, for the most part, I think there would not have been, or at least should not have been, any kind of criminal charge in most of the cases. In some of them, there might well have been. Certainly, to the extent that you are substituting a deferred prosecution agreement for a case where you have decided to otherwise indict, then the prosecutors are appropriately limiting the use of deferred prosecution agreements. But it is almost becoming an automatic reaction in many cases beyond those where it should be used. Prosecutors are thinking – before we close out this case that involves any kind of corporate crime, we should get something from the companies.

And the something these days is a deferred prosecution agreement. In most of the cases, the resolution should have been nothing on the criminal side, or perhaps a cooperation agreement. Obviously, the government has an interest in making sure that companies continue to cooperate in the investigation and prosecution of individuals. The prosecutors tend to think that there is no cost to the companies of deferred prosecution agreements. It clearly doesn’t carry the same stigma of an indictment. But it has a tremendous reputational as well as monetary cost. The focus needs to be narrowed somewhat to cases where you think it really is appropriate to do something as to that company. The law allows you to proceed against the company in virtually every case where you have a single employee who has committed a crime. But clearly your exercise of discretion in the vast majority of cases should involve nothing criminal vis-à-vis the company – assuming the company has responded appropriately to the government investigation and addressed the problem.

A settlement on the civil side should be a sufficient government response in the vast majority of cases. And the Thompson memo, which governs federal prosecutors in deciding what to do about a company, says – it will be the rare case where a company should be indicted.

And it should also be the rare case where the government seeks a deferred prosecution agreement from the company – you need to have a reason for doing that.

Is it an alternative to what you have already decided for sure would be an indictment so you need some sanction? That’s a situation that could lead to a deferred prosecution agreement appropriately. Do you feel that this particular company needs to have bells and whistles and enhanced`compliance programs supervised by the criminal side of the government?

That situation could arise, but if you already have an SEC settlement that already has all of those bells and whistles and safeguards, then what are the criminal authorities really adding, other than to have something to show for their investigation as to the company?

Elsewhere during the Q&A, the person stated as follows.

“My point is that the government should be more sparing in its use of deferred prosecution agreements and limit those to situations where they certainly would have indicted otherwise for all the right reasons on their part. Or limit use to where the SEC or other civil regulators failed to act against the corporate culture that the government feels needs to be fixed.

Prosecutors are at their best when they decide to charge or not and not get into managing corporate America.”

[...]

“Prosecutors are at their best when it comes to corporate criminal prosecutions when they decide either to indict or not indict and not get into the management of a company.”

The following Q&A is also instructive.

Q: When you cut the Prudential Securities deal, did you see that as a groundbreaking case?

A:  No. I thought it was the right result for that case. It may have been the first deferred prosecution. It was certainly not something I thought I was likely to do again. It was a very special situation. And in fact, other prosecutors didn’t jump on the bandwagon. And nor did I when I was U.S. Attorney. We decided to indict or not. You may have a non-prosecution agreement, but not a deferred. I did not think it would catch on.

Q: But it did.

A:  Ten years later. It is a tool that prosecutors have. They clearly reassessed themselves after Arthur Andersen. You saw the collateral consequences coming to roost in Andersen. The Justice Department realized in very concrete stark terms – do I really want these kinds of consequences. Are we really serving the public interest? And so, the tool is available to them to go down several notches. You combine that with the number of cases they are involved in – and you get the results we have been seeing. And prosecutors are like anybody else – when they devote a lot of time and effort to a case, they want something to show for it.

And so I fear the deferred prosecution is becoming a vehicle to show results.

*****

Perhaps you have guessed by now.  The above person is Mary Jo White, the new Chairman of the SEC.

While not a top official at the DOJ, the SEC has many of the same policies and procedures in place that White criticized above, including alternative resolution vehicles such as NPAs and DPAs.  Indeed, earlier this week in the Ralph Lauren enforcement action (see here for the prior post), the SEC used an NPA in the FCPA context for the first time.

Perhaps White should spend her first few months at the SEC answering some of the questions she previously posed and otherwise addressing the pressing issues she previously discussed.

But that is unlikely to happen as White has promised “aggressive” and “unrelenting” SEC enforcement.

[The article authored by White at the beginning of this post is - Mary Jo White, Corporate Criminal Liability:  What Has Gone Wrong?  37th Annual Institute on Securities Regulation 815, 820 (PLI Corp. Law & Practice, Course Handbook Series No. B-1517, 2005)]

Friday Roundup

Friday, April 12th, 2013

The U.S. intervenes, I disagree, I agree, and say what.  It’s all here in the Friday roundup.

U.S. Intervenes in Wynn-Okada Dispute

Numerous prior posts (see here, here and here for instance) have highlighted the dispute between Wynn Resorts and its former board member Kazuo Okada.  Earlier this week, Bloomberg reported as follows.  “The U.S. asked to intervene in a lawsuit brought by Wynn Resorts Ltd., which accused Okada of making improper payments to Philippine gambling regulators. The Justice Department said in an April 8 filing in state court in Las Vegas that it doesn’t want the civil case to disrupt its criminal investigation into the same underlying allegations.”  According to Bloomberg:  “Okada’s lawyers have said they would probably oppose the request “in whole or in part,” according to the filing. Wynn Resorts won’t oppose its request, the Justice Department said.”  For additional coverage, see here from the Las Vegas Review-Journal.

I Disagree

Earlier this week a reader of the FCPA Blog (see here) posed the following question.  “One thing  that has not gotten much discussion is the possibility that the apparent slowdown in FCPA enforcement may be due to the spike in declinations.”

Putting aside the big-picture and highly relevant issue of what is a declination (see here as well as other embedded posts on this issue), when addressing the issue of FCPA enforcement statistics, it is important to keep in mind (as highlighted in this prior post) the following.

Just three unique historical events (Iraq Oil for Food, Bonny Island, Nigeria conduct, and Panalpina-related issues) served as the foundation for 35% of all corporate FCPA enforcement actions between 2007-2011 and resulted in 55% of settlement amounts in corporate enforcement actions between 2007-2011.  Adding just the 2008 Siemens enforcement action to the settlement amount calculation, results in just four unique historical events accounting for 77% of settlement amounts in corporate enforcement actions between 2007-2011.

Recognizing these events and how they impacted FCPA enforcement data is important to understanding why FCPA enforcement has declined in recent years.

Even though FCPA enforcement has declined in recent years, unique events giving rise to FCPA enforcement actions have remained relatively constant between 2007 and 2012.  In 2007, corporate FCPA enforcement actions were the result of 15 unique events.  In 2008, corporate FCPA enforcement actions were the result of 10 unique events.  In 2009, corporate FCPA enforcement actions were the result of 11 unique events.  In 2010, corporate FCPA enforcement actions were the result of 14 unique events.  In 2011, corporate FCPA enforcement actions were the result of 16 unique events.  In 2012, corporate FCPA enforcement actions were the result of 12 unique events.

I Agree

Dieter Juedes (who like me is a product of Sheboygan County, Wisconsin) recently published “Taming the FCPA Overreach Through an Adequate Procedures Defense” in the William & Mary Business Law Review.  Among other things, the article “proposes specific statutory language that Congress could use in adopting such a defense and it establishes precise factors to be promulgated by the DOJ and SEC for determining whether a firm’s procedure would be deemed “adequate.”

Given my prior article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I agree with the general thrust of Juedes’s article.

Say What?

I don’t quite understand the logic or rationale of this op-ed piece in the South China Morning Post by Robert Precht (director of Justice Labs Limited, a Hong Kong think tank).

Precht argues that ”the efforts of some Western countries to enforce their own anti-bribery laws in China are more likely to produce false accusations and hinder democratic reform than reduce corruption.”  He states as follows.  “One of the unintended harms of enforcing the US anti-bribery law in China is that it may actually stifle efforts to end corruption. US journalists, human rights workers and university researchers play an important role in shining light on the darker recesses of Chinese politics. Preventing Americans from making gifts to Chinese to obtain information useful to promote democratic reform will hinder the disclosure role the Americans play.”

According to Precht, “the solution is simple.”  He argues that “the US Congress should amend the law, providing that it will only be applied in countries that meet certain minimum requirements of democracy and will not be applied in authoritarian regimes such as China.”

*****
A good weekend to all.

Former Attorney General Alberto Gonzales Criticizes Various Aspects Of DOJ FCPA Enforcement

Thursday, April 4th, 2013

Yesterday at the Dow Jones / Wall Street Journal Global Compliance Symposium, former Attorney General Alberto Gonzales openly criticized various aspects of DOJ Foreign Corrupt Practices Act enforcement.

During a featured interview at the event with David Wessel of the Wall Street Journal, Gonzales said that the DOJ could ”give more guidance and transparency” concerning issues relevant to an FCPA enforcement action.  Gonzales mentioned the FCPA Guidance, but stated that it represents no change in policy and again reiterated that “more transparency” is important because he does not see actual reform of the FCPA statute coming from this Congress or this administration.

Gonzales “salute[d] the efforts of business groups” post-FCPA Guidance who have asked for additional clarification and guidance concerning the FCPA and FCPA enforcement (see here for the prior post) and said that the FCPA Guidance “does not end the need for additional discussion” regarding these topics and the enforcement approach of the agencies.

Gonzales also had pointed criticisms for DOJ non-prosecution and deferred prosecution agreements.  Asked by Wessel whether the original motivations Congress had in passing the FCPA are being served by the current enforcement environment or whether the current enforcement environment has “lost sight of the [FCPA's] end point” Gonzales said that it is “hard to tell quite frankly” because many FCPA enforcement actions are resolved via NPA and DPAs and that these resolution vehicles do not necessarily reflect instances of companies violating the FCPA, but rather companies feels compelled to agree to the agreements.

Equally problematic, Gonzales said as to NPAs and DPAs, is that enforcement actions resolved via these vehicles mean that “legitimate wrongdoing is not being prosecuted as it should.”  Gonzales said it is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs, that such resolution vehicles have “less of a toll” on the DOJ’s budget and that such agreements “provide revenue” to the DOJ.  It is all “unfortunate” Gonzales stated.  [For additional reading on this issue, see my article "The Facade of FCPA Enforcement" and numerous prior posts - including here and here - concerning NPAs and DPAs].

Gonzales further observed that the DOJ appears more focused on FCPA enforcement numbers, how successful it is being, and the dollars it receives from FCPA enforcement actions, rather than achieving the “true objective [of the FCPA] which is to discourage bribery of foreign officials.”

Gonzales also joined the growing chorus of those who have called for the DOJ to release more specific information concerning its so-called declination decisions, and also spoke out in favor, as he has in the past (see here for the prior post) for “common-sense reform” such as compliance defense

So I ask the question yet again (see here for the prior post), – how many former high-ranking DOJ officials and/or former DOJ FCPA enforcement attorneys does it take before the current DOJ realizes that its FCPA enforcement policies and procedures are, in certain cases, broken?

The Need For An FCPA Lingua Franca

Thursday, March 7th, 2013

There is a need for a Foreign Corrupt Practices Act lingua franca.  The absence of a lingua franca has all sorts of negative effects, including an impact on the quality of FCPA enforcement and related statistics.  I previously wrote about this issue here (“What is an FCPA Enforcement Action”), here (“The Need For a Consensus ‘Declination’ Definition”) and here (“Further to the Definition of ‘Declination’”).

Several recent events have put into sharper focus the need for an FCPA lingua franca – both as to what is an FCPA enforcement action and what is a declination.

What is an FCPA Enforcement Action?

Last week, a guest post on the FCPA Blog by Marc Alain Bohn (Miller & Chevalier) contained the headline “Year’s First FCPA Enforcement Action Flies Under the Radar.”  The post concerned this February 28th SEC enforcement action against Keyuan Petrochemicals, Inc. and Aichun Li (the company’s CFO).   To be sure, it was a nice find by Bohn and I agree with his statement that the action, regardless of what it is called, is significant because it was an SEC enforcement action against a China-based company whose stock is registered with the SEC and traded in the U.S.

The enforcement action was principally based on Keyuan’s systematic failure “to disclose in its SEC filings numerous material related party transactions between the company and its CEO and controlling shareholders, entities controlled by or affiliated with these persons, and entities controlled by Kenyuan’s management or their family members.”  As alleged by the SEC, “the related party transactions took the form of sales of products, purchases of raw materials, loan guarantees and short term cash transfers for financing purposes.”

The enforcement action also included allegations that Kenyuan “operated an off-balance sheet cash account that was kept off the company books.”  According to the SEC, “the account was used to pay for various items, including cash bonuses for senior officers, fees to consultants who provided technical services to the company, and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment.”  Later in the complaint, the SEC alleges as follows regarding the “off-balance sheet cash account.”

“From at least July 2008 and continuing until March 2011, Keyuan maintained an off-balance sheet cash account. Total amounts funded to and disbursed from the account were approximately $1 million. As a consequence of the use of the off-balance sheet cash account, the company’s reported balances in its financial statements for cash, receivables, construction-in progress, interest income, other income, and general and administrative expenses were misstated.  Cash disbursements from the off-balance sheet account were used to pay for various expenses. For instance, cash bonuses were paid to senior officers, including Individual A, in 2010 from the off-balance sheet cash account; Keyuan did not withhold any taxes on these bonus payments. Keyuan also paid various technical experts that provided consulting services from this account; no provision was made by Keyuan to pay local taxes in connection with these payments. The company’s CEO also received cash disbursements from the off-balance sheet cash account, including funds to cover business expenses (such as travel and entertainment) and to cover the costs of an apartment near the plant facilities.”

As detailed in this prior post,  the FCPA of course is a law much broader than its name suggests.  The FCPA’s books and records and internal control provisions are among the most generic substantive legal provisions one can find and the SEC often brings what I’ve called “non-FCPA FCPA enforcement actions.”

In the Keyuan enforcement action it is thus not surprising that the SEC charged violations of the FCPA’s books and records and internal control provisions based on the above conduct.

Yet, as Bohn correctly points out in his FCPA Blog post, the SEC complaint also did made passing reference, in detailing the off-balance sheet cash account, that it “was also used to fund gifts – both cash and non-cash – for Chinese government officials.”  Specifically, in paragraph 42 of the complaint the SEC alleges as follows.

“The off-balance sheet cash account was also used, in part, to fund gifts to Chinese government officials, typically around the Chinese New Year.  Among the recipients of the gifts were officials from the local environment, port, police, and fire departments.  Gifts ranged from household goods (such as beddings and linens) to ‘red envelope’ gifts in which cash was directly gifted to the recipients”

Of note, in the SEC’s summary paragraphs (paras. 45 and 46) titled “False Books and Records and Inadequate Internal Controls,” the SEC makes explicit reference to certain conduct, but not the above paragraph related to Chinese government officials.

So the issue becomes what to make of this one paragraph of the 18 page SEC complaint and what to call the Keyuan Petrochemicals enforcement action?

Is it an FCPA enforcement action?

In this prior post, I set forth my criteria for an FCPA enforcement action, in pertinent part, as follows.

(1) An FCPA enforcement action is an instance in which an enforcement agency (whether DOJ or SEC) charges or finds that the FCPA (whether its anti-bribery, books and records, or internal controls provisions) has been violated.

(2) As to FCPA books and records or internal control charges or findings, such actions are only FCPA enforcement actions to the extent categorized as such by either the DOJ or SEC on its FCPA websites.

In the Keyuan Petrochemicals enforcement action, the SEC did indeed charge (as it charges in many non-FCPA FCPA enforcement actions) violations of the books and records and internal controls provisions.  However, my criteria (2) is that such charges should only be considered FCPA enforcement actions to the extent categorized as such by either the DOJ or SEC or its FCPA website.  The SEC’s FCPA website (here) does not include the Keyuan Petrochemicals action.  On that basis, and consistent with my criteria, I am not going to call it an FCPA enforcement action either.

In many respects, the Keyuan Petrochemicals enforcement action is similar to the SEC’s 2012 enforcement action against former Digi International CFO Subramanian Krishnan (see here for the prior post).  That action, like the Keyuan Petrochemical action, is also not listed on the SEC’s FCPA website.

In short, what one calls an action matters.  Just using the Kenyuan example, FCPA enforcement thus far in 2013 is either 1 action with $1,025,000 collected (Keyuan agreed to pay a $1,000,000 civil penalty and Li agreed to pay a $25,000 civil penalty) or 0 actions, $0 collected.

“What is a Declination?

The good-faith debate as to the “d” word continues.  In addition, to the declination posts highlighted above in the first paragraph, see this recent FCPA Blog guest post, also by Marc Alain Bohn.

In recent weeks, the FCPA Blog (and others – there is a certain herd mentality when it comes to such things) have called the end of FCPA scrutiny for Nabors Industries, Zimmer Holdings, and 3M - declinations.  “Nabors Wins Declination” – “Double Declination for Zimmer” – “Declination for 3m.”

I again respectfully disagree and ask why are some calling these instances of FCPA scrutiny declinations?  In doing so, I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action.  (Others have offered the same definition – see here for a Wilmer Hale Client Alert -”the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case”).

The FCPA scrutiny of both Nabors and Zimmer can be analyzed together because both companies were the subject of FCPA scrutiny because of an industry sweep.

In its February 20th SEC filing, Nabors stated, in pertinent part, as follows.

“We previously disclosed that on July 5, 2007, we received an inquiry from the U.S. Department of Justice relating to its investigation of one of our vendors [Panalpina] and compliance with the Foreign Corrupt Practices Act. The inquiry related to transactions with and involving Panalpina, which provided freight forwarding and customs clearance services to some of our affiliates. In 2012, the SEC advised us that it had concluded its review of the matter and did not intend to recommend any enforcement action against us. On February 15, 2013, the Department of Justice likewise advised us that it has concluded its inquiry, also without recommending any enforcement action against us.”

In its February 27th SEC filing, Zimmer stated, in pertinent part, as follows.

“In September 2007, the Staff of the U.S. Securities and Exchange Commission (SEC) informed us that it was conducting an investigation regarding potential violations of the Foreign Corrupt Practices Act (FCPA) in the sale of medical devices in a number of foreign countries by companies in the medical device industry. In November 2007, we received a letter from the U.S. Department of Justice (DOJ) requesting that any information provided to the SEC also be provided to the DOJ on a voluntary basis. In the first quarter of 2011, we received a subpoena from the SEC seeking documents and other records pertaining to our business activities in substantially all countries in the Asia Pacific region where we operate. We produced documents responsive to the subpoena and reported to the government concerning the results of our own reviews regarding FCPA compliance. During a meeting in December 2012, representatives from the agencies informed us that the SEC and the DOJ planned to close their investigation without pursuing any enforcement action against us. The DOJ and SEC formally notified us through letters of declination dated December 19, 2012 and February 1, 2013, respectively, that the agencies have closed their inquiries into this matter. While we are pleased with the government’s declination decision in this matter, we are committed to continuing to enhance our global anti-corruption compliance program.”

Using the above definition of declinations, I previously stated that anything less ought not be termed a ”declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding.  This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.

Sticking with the law enforcement analogy, calling an instance of FCPA scrutiny resulting from an industry sweep that does not result in an enforcement action a declination, is like saying the police “declined” to charge one with drunk driving if a sober driver successfully passes through a law enforcement sobriety checkpoint.  That is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.

In its February 14th SEC filing, 3M stated, in pertinent part, as follows.

“In November 2009, the Company contacted the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities. The Company also contacted certain affected government agencies in Turkey. In September 2012, the Turkish Competition Authority issued its decision finding that there was insufficient evidence obtained in the investigation to find that 3M Turkey or the other companies investigated violated the Turkish competition law.  The Company retained outside counsel to conduct an assessment of its policies, practices, and controls and to evaluate its overall compliance with the Foreign Corrupt Practices Act (FCPA), including a review of its practices in certain other countries and acquired entities. As part of its review, the Company has also reported to the DOJ and SEC issues arising from transactions in other countries. In January 2013, the DOJ and SEC each notified the Company that they are terminating their investigations into possible violations of the FCPA without taking any action or imposing any fines against the Company. Among the reasons cited by the DOJ for closing its investigation included the Company’s voluntary disclosure and cooperation, the Company’s thorough investigation, and the steps the Company has taken to enhance its anti-corruption compliance program.”

There is nothing in this disclosure to suggest that the definition of declination has been met.  Indeed, given that Turkish authorities concluded that there was “insufficient evidence” as to certain of the disclosed conduct, speaks to perhaps the quality of information 3M initially received as to its subsidiary.

Of course, if my declination proposal (see here from August 2010) were to be adopted, we would likely know the answer as to why the DOJ and SEC did not bring an enforcement action as a result of 3M’s voluntary disclosure.

*****

Further to declination issues, I could not help but notice in the U.S.’s recent ((Jan. 28, 2013) “Final Follow-Up to Phase 3 Report and Recommendations” (a document that, to my knowledge has yet to be covered elsewhere) the U.S. acknowledged that it “has declined to bring criminal charges in some cases, in part due to lack of admissible evidence obtained prior to the statute of limitations.”  This reason for “declining” is self-obvious, but there was no mention of it in the November 2012 FCPA Guidance section on declinations, likely because it did not advance the enforcement agencies’ policy positions.

Finally, if you have not yet read “Legal Limbo – Seeking Clarity In How and When The Department of Justice Declines to Prosecute” by George Terwilliger and Matthew Miner, put it on your reading stack.  Like my 2010 declination proposal and the policy rationales behind it, Legal Limbo states, in pertinent part, as follows.

“While the cases DOJ elects to prosecute are well known, better understanding of the parameters of its decisions to forego prosecution can add significantly to the body of guidance available to the business community. In addition, fundamental fairness dictates that decisions not to prosecute be communicated to affected parties as soon as possible.”

“Legal Limbo” notes that a “little bit of daylight on the declination process could help light corporations’ way to improved compliance with legal requirements and enforcement expectations within their operations” and it proposes as follows.

 ”First [...], notice of declinations be issued presumptively, rather than permissively following a declination decision. This practice could be subject to clearly-stated and narrowly defined exceptions that are necessary to protect the Department’s interests in ongoing investigations.

Second [...], the Department publish an annual report summarizing the circumstances or key factors underlying major declination decisions. Such a report should be drafted with the goal of providing maximum guidance as to the factors underlying the Department’s declination determinations by case category, while also protecting the identities of those who had been investigated. Such a reform could be presented in a categorical fashion so that companies facing investigations are provided a better understanding of the types of conduct leading to a declination decision.”

Broad Coalition Of Business Groups Seek Real FCPA Reform

Friday, February 22nd, 2013

At the FCPA Guidance press conference last November (see here), Assistant Attorney General Lanny Breuer wisely noted that the Guidance was not “complete closure” to various concerns regarding the Foreign Corrupt Practices Act and he stated that the DOJ “welcomes” continued discussions regarding FCPA reform.

And why should non-binding enforcement agency Guidance be the end to FCPA reform discussions?  As Breuer and then SEC enforcement chief Robert Khuzami both acknowledged during the press conference, the Guidance “does not represent a change in policy.”

And why should Wal-Mart’s potential FCPA scrutiny (one of approximately 100 companies currently the subject of FCPA scrutiny) which involves FCPA issues as a condiment to a bigger corporate governance sandwich be the end to FCPA reform discussions?  (See here for the prior post).

As I noted in my article “Grading the Foreign Corrupt Practices Act Guidance” while there were certain FCPA reform measures, such as abolishing NPAs and DPAs, as I have urged, that the enforcement agencies could have accomplished through a change in policy in the Guidance, other FCPA reform measures, like amending the statute to include a compliance defense, can be accomplished only through congressional action and presidential signature.

This post last month detailed the Manhattan Institute’s post-Guidance call for FCPA reform, and this recent post highlighted various post-Guidance FCPA reform scholarship from a practitioner and an academic.

Earlier this week, the Chamber of Commerce and a broad coalition of business groups (such as the American Bankers Association, the American Gaming Association, the American Insurance Association, the Generic Pharmaceutical Association, the National Association of Manufacturers, the National Foreign Trade Council, the Financial Services Roundtable, and the Poultry Federation) sent this letter to the DOJ and SEC “to identify several areas of continuing concern for businesses seeking in good faith to comply with the FCPA.”

The letter addressed the following sections:  compliance programs and voluntary disclosure, foreign official / instrumentality, parent-subsidiary liability issues, successor liability issues, mens rea for corporate criminal liability and declinations.

As to compliance programs, the letter states, in pertinent part, as follows.

“Even if a company had in place a state-of-the-art compliance program that was well-designed to prevent FCPA violations and that was aggressively enforced, it remains exposed to liability if the program is circumvented by even one employee. The [Guidance] offers little assurance that the company’s pre-existing, strong compliance program will be given sufficient weight in the charging decisions of the Department and the SEC. Such assurance should be provided through legislative reform of the FCPA to add an affirmative defense that would permit a company, if charged with an anti-bribery violation, to rebut the imposition of criminal liability if the individuals responsible for the violation circumvented compliance measures that were otherwise reasonably designed to identify and prevent such violations and implemented with appropriate vigor.”

As to declinations, the letter states,in pertinent part, as follows.

“We do not share the view expressed by some in the Department and SEC that because the agencies do not routinely provide information on declinations in other types of cases, FCPA cases should not be treated any differently. The FCPA is exceptional in that: (i) it is over 30 years old, not a brand new law; (ii) it is very aggressively enforced, in terms of the number of pending investigations initiated each year and in the massive fines and penalties that are sometimes imposed; and (iii) it lacks a material body of case law through which it can be interpreted by the business community. Other statutes, including ones targeting financial fraud, antitrust violations and money laundering, have been extensively construed by the courts. As the Department and SEC recognize in the [Guidance] it is the courts and not the agencies that have the final say. However, until such time as a significant body of case law is developed, we encourage and would welcome regular release of anonymized information on declinations.”

“[A] decision not to bring a case where the evidence of a violation simply is lacking should not be considered a “declination.”  We remain concerned that the Department and the SEC may be defining “declination” to include both circumstances. In order to provide useful guidance and positive incentives to companies seeking to comply with the FCPA, the Department and the SEC should continue to provide information – on an anonymized basis – regarding matters in which the agencies found sufficient evidence of an FCPA violation but nevertheless declined to pursue prosecution or enforcement action on the basis of other circumstances, such as the company’s voluntary disclosure, cooperation and remedial measures.”

Regarding the two issues discussed above, it is simply wrong and closed-minded to view these issues as “Chamber” issues when the reality is that many people for many years have been saying the same thing.  (See my ”Revisiting a Foreign Corrupt Practices Act Compliance Defense” article (which details the pro-compliance defense positions of many former high-ranking DOJ officials among others) and my “Grading the Foreign Corrupt Practices Act Guidance” article for a discussion of declination issues.

As the letter this week by a broad-coalition of business groups indicates, FCPA reform discussion is not dead, nor should it be.  A compliance defense is not a race to the bottom, it is a race to the top.  (See here for the prior post).  Abolishing NPAs and DPAs, and thereby reconstructing a system of checks and balances to FCPA enforcement, is consistent with the rule of law.  So too is increasing transparency in government decision-making.

During the FCPA reform debate in the 1980′s, Senator Alfonse D’Amato opened Senate hearings on a bill to amend the FCPA by stating as follows. “The discussion which takes place during these hearings is not a debate between those who oppose bribery and those who support it. I see the major issue before us to be whether the law, including both its antibribery and accounting provisions, is the best approach …”.

During Senate hearings, Senator John Heinz stated as follows. “… There are many people that are extremist, and there are others who get carried away by their enthusiasm who are going to argue that even if we change the provisions in the present act [...], we are legalizing bribery. That strikes me as the worst kind of demagoguery, because it implies that everything that Congress has done in the past is perfect. And does anybody believe that?”

The FCPA Guidance issued last November was not the result of a policy debate as to whether the current FCPA and its enforcement is the best approach.  In fact, if you analyze, in chronological order, enforcement agency statements and positions (see pages 1-2 of my “Grading the Foreign Corrupt Practices Act Guidance” article) there is a credible argument to be made that one of the purposes of the Guidance was to prevent such a policy debate from going forward.

The FCPA is a fundamentally sound statute and I stated as such in my November 2010 Senate testimony.  But how many truly believe that the FCPA is a perfect statute or that its enforcement is best accomplishing the objectives of punishing improper payments and deterring future improper payments?

These are worthy objectives to pursue.  For this reason, it is good that FCPA reform discussions continue in the hopes that a substantive policy debate can result.