Non-Prosecution Agreement « FCPA Professor

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Friday Roundup

Friday, May 10th, 2013

Enforcement agency speeches, “foreign official” delay, and for reading stack. It’s all here in the Friday roundup.

Enforcement Agency Speeches

This prior post detailed comments by Mary Jo White prior to becoming SEC Chairman.

Last week, White spoke before the Investment Company Institute on the general topic of the SEC’s role in an increasingly global financial and regulatory system. She stated as follows (see here) concerning the SEC’s enforcement of the FCPA.

“Of course, misrepresentations and other unlawful actions travel in both directions across borders, which is another reason why our partnership with our regulatory counterparts abroad is so important. Among the most prominent concerns in this regard is bribery by U.S. companies overseas, which not only undermines international markets and governments but also simultaneously undermines the reporting and disclosure integrity of our own markets. Thus, strong and fair enforcement of the Foreign Corrupt Practices Act, which forbids U.S. companies from bribing foreign officials, has been and will continue to be a priority for us. Our first objective is to help companies avoid FCPA violations by educating them. And so our staff along with our colleagues at the Department of Justice recently published a comprehensive Guide to the FCPA to give clear guidance and clear up some myths. Of course, the other side of education is deterrence. Deterrence can mean strong enforcement actions with tough disgorgement and penalties. But it can also mean the tangible benefits that come with cooperation – as demonstrated by the Non-Prosecution Agreement with Ralph Lauren Corporation we announced in April. In this particular case, the corporation’s Argentine subsidiary paid bribes to government and customs officials to improperly secure the importation of their products into the country. The bribes occurred during a period when the U.S. parent company lacked meaningful anti-corruption compliance and control mechanisms over its foreign subsidiary. The misconduct came to light as a result of the company’s efforts to improve internal controls and compliance. And the company immediately reported the problem to the SEC and provided exceptional assistance to our investigation. Successful FCPA cases also increasingly require assistance from foreign law enforcement authorities. That is why we recently partnered with the DOJ and FBI in conducting a foreign bribery training program that provided intensive training to 130 foreign investigators and prosecutors from 30 countries, many on which the SEC staff relies for mutual legal assistance in FCPA cases.”

Yesterday, Daniel Suleiman (DOJ Deputy Chief of Staff for the Criminal Division) spoke at the Minnesota Bar Association’s Annual International Business Law Institute. (See here). Suleiman offered “some views from the U.S. Department of Justice on the topic of anti-corruption enforcement” and “what the Justice Department is doing in the area of criminal enforcement to fight corruption at home and abroad.” He stated, in pertinent part, as follows.

“I think of our anti-corruption efforts as falling into three principal buckets: number one is criminal prosecution; number two is assisting foreign countries to build up their judicial, prosecutorial, and investigative institutions; and number three is the pursuit, through civil actions, of the proceeds of foreign official corruption. I will discuss each of these buckets in turn.

First and foremost, the Criminal Division is a litigating operation. We investigate and prosecute cases. Our corruption prosecutions are of two kinds: we prosecute corruption by domestic officials, and we prosecute foreign bribery offenses under the Foreign Corrupt Practices Act, or FCPA.”

[...]

“[W]e have an incredibly strong team of prosecutors who focus exclusively on enforcing the FCPA. Depending upon how familiar you are with FCPA enforcement, you may know that the Criminal Division is the entity in the United States with primary responsibility for criminal enforcement of the Act. It is Justice Department policy that no FCPA prosecution can be brought without authorization from the Criminal Division, which distinguishes FCPA prosecutions from most other kinds of federal criminal cases. The Securities and Exchange Commission, which is a few blocks up the street from us, has primary responsibility for the Act’s civil enforcement.”

“Foreign bribery enforcement has for a long time been an important aspect of U.S. policy. The FCPA was enacted roughly 35 years ago, around the same time that our Public Integrity Section was created to focus on public corruption prosecutions, and it was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the Watergate scandal, but it took more than 20 years for the Act to become a strong enforcement tool. And, over the past several years, the Justice Department has substantially increased its enforcement of the Act.”

“One important aspect of our FCPA enforcement involves, of course, our corporate resolutions. We have collected billions of dollars in criminal fines and penalties to resolve FCPA investigations against companies doing business abroad, including BizJet International Sales and Support Inc., a Lufthansa subsidiary; Alcatel-Lucent; Johnson & Johnson; and many others.”

“But another, critically important aspect of our enforcement regime involves holding individuals responsible for FCPA offenses. There is no greater deterrent to corporate crime than the prospect of prison time. As many have recognized, if people don’t go to prison, then enforcement can come to be seen as merely the cost of doing business. In the past four years, the Criminal Division’s FCPA Unit has obtained over three dozen criminal convictions of individuals, including of people who have been sentenced to as many as 15 years in prison.”

“We are as active today in this area as we have ever been. In the past month alone, we have announced charges against several key defendants in ongoing, active FCPA investigations. In mid-April, in a case that we are prosecuting with the U.S. Attorney’s Office in Manhattan, we secured the arrest of a defendant in connection with an alleged bribery scheme to secure mining rights in the Republic of Guinea. In a separate case, which we are prosecuting with the U.S. Attorney’s Office in Connecticut, we also secured the arrest last month of a defendant in connection with an alleged bribery scheme to secure power contracts in Indonesia. And just two days ago, together with the U.S. Attorney’s Office in Manhattan, we announced charges against two broker-dealer employees and a senior Venezuelan banking official for engaging in a multi-million dollar bribery scheme.”

[...]

“Finally, I want to tell you about a relatively new Justice Department initiative. About three-and-a-half years ago, Attorney General Holder gave a speech in Qatar, at which he pledged to increase the United States’ commitment to recovering foreign corruption proceeds. Since that time, the Criminal Division has led the charge in developing what we refer to as the Kleptocracy Asset Recovery Initiative.”

“The initiative’s purpose is to identify the proceeds of foreign official corruption – in other words, the spoils – forfeit them through civil actions, and, to the extent possible, repatriate the forfeited funds for the benefit of the people harmed. In most criminal prosecutions, a court can order forfeiture, upon conviction, as part of the defendant’s sentence. Often, however, it may be impractical or impossible to bring a criminal prosecution against a particular person – because that person is immune from prosecution, for example, beyond our jurisdiction, or otherwise unavailable. In these circumstances, we have begun bringing civil forfeiture actions to recover the stolen property.”

“We have brought several Kleptocracy cases in the past couple of years, and forfeited millions of dollars in corrupt proceeds. The most high-profile of our Kleptocracy cases to date involves two civil actions we have brought against approximately $70 million in assets allegedly belonging to a government minister in Equatorial Guinea who is also the son of that country’s president. According to court papers, despite an official government salary of less than $100,000 per year, this minister amassed wealth of over $100 million. Among the items we are seeking to forfeit are nearly $2 million worth of Michael Jackson memorabilia (including the white glove), a Gulfstream G-V jet worth $38.5 million, and a $30 million house in Malibu. These are hard, and hard-fought, cases, but we believe strongly that foreign officials who amass wealth through corruption should not be permitted to use the United States as a haven for their ill-gotten gains.”

“Foreign Official” Delay

Oral argument in the “foreign official” challenge pending in the 11th Circuit – originally scheduled for later this month, has been postponed until the week of October 7th.

This is a historic appeal in that it will be the first instance in which a circuit court directly confronts the enforcement theory that employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA (see here for a prior post, including embedded links).

Scrutiny Alerts

For more on Barclay’s scrutiny, on both sides of the Atlantic, see this recent article in Middle East Monitor concerning the bank’s relationship with the Abu Dhabi government, including Sheikh Mansour, the deputy prime minister of the United Arab Emirates.

Samuel Rubenfeld (Wall Street Journal Risk & Compliance Journal) has the latest (here) regarding BSG Resources Ltd. a Guernsey-based company in the news after Frederic Cilins, a French citizen associated with the company, was recently arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea. (See here for the prior post). As noted in the WSJ article, BSG recently released this detailed statement concerning its conduct in Guinea.

Reading Stack

Several articles of interest to pass along from last week’s Corporate Crime Reporter conference. This article details comments made by Denis McInerney (DOJ Criminal Division Deputy Assistant Attorney General) regarding non-prosecution and deferred prosecution agreements. This article details comments made by McInerney concerning my suggested two-step reform plan (see here for the prior post) and also details McInerney’s response to my question concerning the definition of a declination. Articles here and here concern corporate monitors.

*****

Over the years, Bloomberg’s David Glovin has written some excellent articles concerning Viktor Kozney, Frederic Bourke, et al. With Bourke soon to report to prison, Glovin pens another great article here.

*****

This prior post discussed the NY Times recent “With Bags of Cash, CIA Seeks Influence in Afghanistan” story and how the story put our stark double standards in the headlines once again. More recently, the NY Times reports (here) as follows. ”[Afghan President] Karzai said he had called a meeting [...] with the CIA’s Kabul station chief. “I told him because of all these rumors in the media, please do not cut all this money, because we really need it,” he said. “We want to continue this sort of assistance, and he promised that they are not going to cut this money.” For more on the situation, including the views of others, see here from Alison Frankel’s On the Case column.

*****

See here from Josh Goodman (an attorney at the Federal Trade Commission) titled “The Anti-Corruption and Antitrust Connection.”

*****

A good weekend to all.

Seeing The Light From The “Dark Ages”

Tuesday, May 7th, 2013

During the panel session on DOJ non-prosecution and deferred prosecution agreements last week at the Corporate Crime Reporter sponsored conference in Washington, D.C., I shared my belief that it seems like DOJ is clearly troubled, with good reason, by traditional notions of corporate criminal liability. (See here for the prior post when I said the same thing about Lanny Breuer’s NPA/DPA speech last September). However, rather than seek substantive solutions to this issue, the DOJ defends an alternate reality (NPAs / DPAs) that are equally problematic.

After listening to fellow panelist Denis McInerney (DOJ, Deputy Assistant Attorney General) describe the goals of DOJ prosecution – among other things, to better promote compliance and to hold individuals accountable – I offered a solution in the Foreign Corrupt Practices Act context that could help the DOJ achieve these laudable goals.

Have a compliance defense and abolish NPAs and DPAs.

A compliance defense, along the lines I outlined in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” would not eliminate corporate criminal liability. Far from it. Rather, a compliance defense would only apply when, notwithstanding a company’s pre-existing compliance policies and procedures and its good-faith efforts to comply the law, a non-executive employee or agent acts contrary to those policies and procedures in violation of the law.

If a company did not have pre-existing compliance policies and procedures, it could not avail itself of a compliance defense. Similarly, even if a company did have pre-existing compliance policies and procedures, the company could not avail itself of a compliance defense if executive officers or employees (a concept already used in the U.S. Sentencing Guidelines) were involved in the improper conduct.

If this were the framework governing corporate criminal liability, then NPAs and DPAs should be abolished and the DOJ would return to the historical choice of two options: charge or do not charge.

At the conference, I stated my genuine belief that such a two-step reform would better incentive more robust corporate compliance, reduce improper conduct, and thus best advance the FCPA’s objectives of reducing bribery. Such a two-step reform would also increase public confidence in FCPA enforcement actions and allow the DOJ to better allocate its limited prosecutorial resources to cases involving corrupt business organizations and the individuals who actually engaged in the improper conduct. (See the article for additional details).

In short, this two-step reform will better allow the DOJ to achieve many of the objectives McInerney articulated.

However, not surprisingly, McInerney’s response to my two-step reform was the comment that this would be like returning to the “dark ages.”

The question is why?

Presumably most countries have an incentive to better promote compliance and to hold individuals accountable for wrongdoing. Does this mean that the following OECD Convention countries that have a compliance-like defense relevant to their FCPA-like laws are living in the “dark ages” – Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, Switzerland, and the United Kingdom. (See here).

Are Stanley Sporkin (former Director of the SEC Division of Enforcement, among other positions), James Doty (current head of the PCAOB), and Andrew Weissmann (former Director of the Enron Task Force and current General Counsel of the FBI) all living in the “dark ages”? All have supported compliance-like defenses or concepts relevant to the FCPA. (See here, here, and here).

Are former Attorney Generals Michael Mukasey and Alberto Gonzales or other former high-ranking DOJ officials such as Larry Thompson living in the “dark ages”? (See here, here, and here). Is former DOJ FCPA Unit chief Joseph Covington living in the “dark ages.” (See here).

Or have all these individuals, and others who support an FCPA compliance defense, seen the light and it’s the DOJ who is living in the “dark ages”?

“Our Stellar FCPA Unit Continues To Go Gangbusters, Bringing Case After Case”

Monday, May 6th, 2013

Last Friday, Acting Assistant Attorney General Mythili Raman delivered prepared remarks (here) at a Corporate Crime Reporter sponsored conference in Washington, D.C. The conference focused on DOJ and SEC resolution policies and procedures. While Raman’s remarks were broad in scope, a portion of her remarks focused on the FCPA, and in her first publicly released statements on the FCPA, Raman continued to employ much of the same FCPA rhetoric that defined Lanny Breuer’s tenure as Assistant Attorney General. (See here for an article summarizing Breuer’s many FCPA speeches).

Raman began her FCPA remarks by stating as follows. “Our stellar FCPA Unit continues to go gangbusters, bringing case after case.” [Note, Raman's delivered remarks deviated from her prepared remarks as to this sentence].

Stellar?

The last three times the DOJ has been put to its ultimate burden of proof in FCPA cases, the end results were either acquittals or dismissals, including for prosecutorial misconduct.

In the Africa Sting cases, Judge Richard Leon stated as follows. “This appears to be the end of a long and sad chapter in the annals of white collar criminal enforcement. . . . I for one hope this very long, and I’m sure very expensive, ordeal will be a true learning experience for both the [DOJ] and the FBI as they regroup to investigate and prosecute FCPA cases against individuals in the future.”

In the John O’Shea case, Judge Lynn Hughes stated as follows: ‘‘The problem here is that the principal witness against Mr. O’Shea . . . knows almost nothing … [ ] The government should have been prepared before they brought the charges to the Grand Jury. . . . You shouldn’t indict people on stuff you can’t prove.’’

In the Lindsey Manufacturing case, Judge Howard Matz stated as follows. “The instances of misconduct were so varied and occurred over such a long time that they add up to an unusual and extreme picture of a prosecution gone badly awry.”

[For more on the above cases, see my article "What Percentage of DOJ FCPA Losses Is Acceptable?"]

As to the FCPA, Raman further stated as follows [the remainder of the post is from the DOJ's release].

“Just in the last month, we announced charges against several key defendants in ongoing, active FCPA investigations, one case – with the U.S. Attorney’s Office in Manhattan – involving an alleged bribery scheme to secure mining rights in the Republic of Guinea, and another – with the U.S. Attorney’s Office in Connecticut – involving an alleged bribery scheme to secure power contracts in Indonesia.”

[...]

“In our FCPA prosecutions, too, we aggressively use all the tools available to us. As is evident in our many recent foreign bribery cases, individual targets all over the globe are being charged and arrested, and many companies across a variety of industries have entered into guilty pleas and exacting deferred prosecution agreements with the government. In reaching these dispositions, we can and do require companies to remediate their criminal practices – sometimes with the oversight of a corporate monitor. By demanding remediation as part of such a resolution, we can clean up the misdeeds at a corporation in a lasting way. Corporate leadership is often replaced. We frequently require businesses to implement and sustain rigorous internal controls and compliance programs. And the implementation of these sorts of internal controls by one company in a particular industry can often have a cascading, beneficial effect at other companies that follow suit. You need only look to the effects of our FCPA enforcement program on corporate compliance culture to see that this is true.”

“Additionally, it is important to note that no matter how we proceed in any particular case, we always put a premium on securing cooperation from corporate entities, because meaningful cooperation enables us to hold criminally accountable to the fullest extent possible the widest possible range of bad actors, from individuals responsible for the criminal conduct to other business entities. Simply put, a company’s cooperation – which can lead us to critical information about wrongdoing by executives and employees – can absolutely make the difference as we assess whether there is proof beyond a reasonable doubt sufficient to charge an individual. Moreover, the value of this cooperation is only enhanced when our investigations cross international borders, as they frequently do. We routinely face the reality that in many foreign jurisdictions there are legal roadblocks, including data privacy limits, to what U.S. law enforcement can obtain if it seeks to build a case; in those circumstances, the company’s cooperation can be the critical factor in our ability to hold individual wrongdoers to account.”

“Let me give you a recent example from the FCPA context. In March 2012, we announced that we had entered into a DPA with BizJet International Sales and Support Inc., an aircraft services company, and an NPA with its parent company, Lufthansa Technik AG. As part of the resolution, BizJet admitted to bribing Latin American officials in order to secure various services contracts. And, critically for our prosecutors, BizJet also agreed, together with Lufthansa, to cooperate in our ongoing investigation, continue implementing an enhanced compliance program and internal controls, and pay $11.8 million in criminal penalties. Our agreements with BizJet and Lufthansa laid the groundwork for us to bring felony charges against high-ranking corporate executives. Just last month, we announced charges against four former BizJet executives, including the former president and CEO, and the former sales manager. This example, among many others, proves that, no matter what form of criminal resolution we reach with a company, it decidedly does not mean immunity for its culpable employees – indeed, the opposite is true.”

*****

Despite several individual enforcement actions in April, the fact remains that since 2008 approximately 75% of DOJ FCPA enforcement actions, have not (at least yet) resulted in any DOJ charges against company employees. (See here for the prior post with statistics through 2012).

Moreover, as indicated in this prior post, contrary to Raman’s remarks regarding the “form of criminal resolution,” since NPAs and DPAs were first introduced to the FCPA context in 2004, only 6.5% of corporate DOJ FCPA enforcement actions resolved solely with an NPA or DPA have resulted in related criminal charges of company employees. This compares to 83% of corporate DOJ enforcement actions that were the result of a criminal indictment or resulted in a guilty plea by the corporate entity resulting in related criminal charges of company employees.

I presented these numbers at the conference during a panel on NPAs and DPAs. Denis McInerney (DOJ, Deputy Assistant Attorney General) was on the panel and I stated that the ball was now in his court to explain this wide gap. He described two enforcement actions resolved via an NPA or DPA in which there were indeed related individual prosecutions, but otherwise said that he did not know where these numbers are coming from.

The numbers are described in this prior post. It was really quite easy calculating the numbers. One simply takes all DOJ corporate enforcement actions since 2004 and then looks to see if there have been related individual actions against company employees.

During the panel, McInerney made an important acknowledgment. After I discussed Gabrial Markoff’s excellent article “Arthur Anderson and the Myth of the Corporate Death Penalty” (see here for the prior post), McInerney agreed that there is a very small chance that a company would be put out of business as a result of actual DOJ criminal charges. This was a notable acknowledgment in that the so-called “Arthur Anderson” effect has always been a central justification for the DOJ’s frequent use of NPAs and DPAs. For instance, see this prior post regarding Lanny Breuer’s September 2012 NPA / DPA speech. As fellow panelist Professor David Uhlmann (a frequent critic as well on DOJ’s use of NPAs and DPAs – see here) stated, the DOJ’s policy on NPAs and DPAs is a “policy is search of a rationale.”

*****

In other DOJ news, last Friday the DOJ announced (here) that Paul Novak (a former consultant for Willbros International who previously pleaded guilty – see here for the prior post) was sentenced by U.S. District Court Judge Simeon Lake (S.D.Tex.) to 15 months in prison and two years of supervised release.

Of perhaps greater note, Novak was ordered to pay a $1 million fine. This is among the top individual FCPA criminal fines in history.

The DOJ’s release states that in sentencing Novak, “the court took into consideration the assistance Novak provided the government in ongoing investigations.” Novak’s sentencing documents are under seal and not publicly available.

In May 2008, Willbros resolved parallel DOJ (here) and SEC (here) FCPA enforcement actions and agreed to pay approximately $32 million in combined fines and penalties.

Ralph Lauren Enforcement Action Commentary – Hits And Misses

Monday, April 29th, 2013

Much of what is written about Foreign Corrupt Practices Act enforcement these days seems to be mere carrying forward of DOJ and SEC statements, as if those comments represent a universal truth.

Last year at this time, Morgan Stanley’s so-called “declination” dominated the conversation. Why was it a “declination”? It seemed simply because the DOJ said it was, even though a bit of independent analysis would quickly reveal that there was likely no criminal case to be made against Morgan Stanley based on the DOJ’s own allegations and comments from the judge who sentenced Garth Peterson. (See here for the prior post “Stop Drinking the Kool-Aid”).

Last week, the DOJ and SEC announced double non-prosecution agreements against Ralph Lauren Corporation (“RLC”). (See here for the prior post). Because it was the SEC’s first use of an NPA in the FCPA context, the SEC portion of the enforcement action received the most attention.

Why did the SEC use an NPA to resolve RLC’s alleged scrutiny? The SEC said that it was because RLC voluntarily disclosed, provided extensive and thorough cooperation, and implemented various remedial measures.

Sensing an avalanche of FCPA Inc. information carrying forward the SEC’s comments, I noted in this post last Tuesday as follows.

“Of course, these are not distinguishing factors. Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.”

The RLC enforcement action was released during the early days of a new era of SEC leadership and one law firm alert on the action stated that ”the SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative” (see here for more of that initiative launched in January 2010).

Many FCPA Inc. industry participants picked up the pom-poms are started cheering alongside the SEC.

One headline read – ”Self-Reporting FCPA Violations Pays Off: Just Ask Ralph Lauren.”

Another headline read – “Another Example Of The Benefits Of FCPA Self-Reporting.”

A law firm alert stated as follows. “The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.”

Another law firm alert stated as follows. ”With the announcement of the Ralph Lauren resolution … the SEC and DOJ have taken pains to highlight that beyond self-disclosure, the expedient and thorough reporting of a potential violation, real-time cooperation, and implementation of effective remedial measures may yield more positive results for companies subject to the FCPA.”

As is often the case, the FCPA Inc. material then closed with marketing pitches concerning FCPA compliance services.

Many others highlighted that the SEC mentioned that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA. However, as noted in my post last Tuesday, a few minutes of internet research will quickly reveal that RLC made the decision in August 2012 to suspend and wind-down its Argentine operations based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. In doing so, RLC joined several other luxury brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

Against the backdrop of misses, it was refreshing to read a hit - Covington & Burling’s release titled “The Ralph Lauren Case: Inadequate Rewards for Exemplary Corporate Cooperation.” The alert states, in pertinent part, as follows.

“Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decides to self-report potential unlawful conduct.

Based on the facts recited in the SEC NPA, Ralph Lauren appears to have held itself to an extremely high standard of compliance. On its own initiative, the company adopted a new Foreign Corrupt Practices Act policy and distributed it to employees, which led some Argentine employees to raise concerns about the company’s customs broker. The company immediately conducted an internal investigation, which ultimately uncovered improper payments and gifts to government officials. Within two weeks of this discovery, Ralph Lauren self-reported its findings to both the SEC and the DOJ. The NPA also highlights that Ralph Lauren adopted numerous remedial measures, including firing its customs broker and implementing further enhancements to its compliance program, cooperated extensively with the SEC, and undertook a world-wide review of its operations that uncovered no other violations.

It is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by the corporation itself; a thorough internal investigation of the misconduct; implementation of remedial measures, including termination of employees engaged in wrongdoing and improvements in internal controls and compliance programs; and voluntary disclosure to the DOJ and/or the SEC.

[…]

The Ralph Lauren NPAs are far less advantageous to the company than a declination, which would have involved no public allegations of wrongdoing and no fines. By contrast, in addition to paying approximately $1.6 million in penalties and disgorgement, under the DOJ NPA, the company had to publicly admit and accept responsibility for the illegal conduct, which potentially exposes it to shareholder lawsuits and reputational damage. The company also was required to agree to toll the statute of limitations, implement further extensive changes to its compliance program, and submit annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is found to have breached any of the terms of the agreements — determined solely by the SEC or the DOJ — it may still face the original charges by both agencies, plus potentially new charges based on any information collected during the course of the NPAs.

The benefits to the government from entering into these NPAs are clear. NPAs — unlike deferred prosecution agreements and SEC injunctive actions — are not filed with any court, thus escaping the kind of judicial scrutiny that has recently been given to some SEC settlements. Moreover, the SEC and DOJ are able to emphasize, once again, the importance of voluntary disclosure and cooperation, while still requiring significant ongoing obligations on the part of the company.

The benefits to Ralph Lauren, on the other hand, are less clear. It is likely that the government applied a discount when deciding what sanctions to impose based on the company’s self-reporting and cooperation. However, it is not at all clear that any such discount was sufficient to cover the incremental investigative and other costs incurred by the company as a result of the self-report, and the additional burdens the company has agreed to shoulder by entering into the NPAs. For other companies contemplating whether to self-report potential FCPA violations, the case reinforces the importance of closely evaluating the risks and rewards of potential outcomes, especially given the government’s apparent reluctance to grant a declination even when presented with a textbook case of extraordinary cooperation.”

Covington & Burling of course is the law firm former Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here for the prior post). Breuer was not listed as an author of the alert, but several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of Breuer’s DOJ senior leadership team) are listed as authors.

The RLC enforcement action involved, per the DOJ / SEC allegations, payments by one person in one of RLC’s approximate 95 subsidiaries. The payments at issue, involving customs issues, likey did not even violate the FCPA as Congress intended. [For more on what Congress intended - including, as to alleged payments to ministerial officials, see my article "The Story of the Foreign Corrupt Practices Act.'). Indeed, when the government has been put to its ultimate burden of proof in cases occurring outside the context of procurement, the government has an overall losing record. (See this prior post). In the only case that the government has won in this context, - the Fifth Circuit decision in U.S. v. Kay- the decision was equivocal and the Court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business." Indeed, the Court specifically rejected the DOJ's contrary argument and stated as follows. “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”]

Against this backdrop and as a further sign of just how backwards the FCPA conversation of late has become, the Society of Corporate Compliance & Ethics (SCCE) released this statement praising the DOJ and SEC for its handling of the RLC action.

SCCE representatives stated as follows.

“As with the recent Morgan Stanley case, the government has made it clear that companies who take compliance seriously and are committed to finding, fixing, and solving legal and regulatory problems are in a far better position than those who do not invest in real, robust, and effective compliance programs. I can think of no better proof of the value of strong compliance and ethics programs than the DOJ’s and SEC’s recent actions.”

“When the government visibly acknowledges and credits internal compliance efforts, Boards and management take note of their tangible value and are reminded of the need to support empowered, independent compliance officers and functions.”

When the DOJ (and now the SEC) use resolution vehicles that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.

When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.

When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.

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)]