Archive for the ‘Non-Prosecution Agreement’ Category

In Rejecting A DPA, Judge Leon Refuses To Be A Rubber Stamp

Tuesday, February 10th, 2015

Rubber StampNon-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) are the predominate way in which the DOJ resolves Foreign Corrupt Practices Act enforcement actions against business organizations.  Indeed, as highlighted in this prior post, since 2010 86% of corporate DOJ enforcement actions have involved either an NPA or DPA.

NPAs and DPAs of course are used in other areas as well – which makes this recent opinion by U.S. District Court Judge Richard Leon (D.D.C.) of interest.  The action, U.S. v. Fokker Services, involved criminal charges against Fokker to unlawfully export U.S. origin goods and Services to Iran, Sudan, and Burma.  In resolving the case, the DOJ and Fokker agreed to an 18 month DPA in which the company agreed to forfeit $10.5 million and to pay an additional $10.5 million in a parallel civil settlement.

No so fast, Judge Leon said in rejecting the DPA. The analysis section of Judge Leon’s opinion states, in pertinent part, as follows (internal citations omitted).

“Both of the parties argue, not surprisingly, that the Court’s role is extremely limited in these circumstances.  They essentially request the Court to serve as a rubber stamp [...].  Unfortunately for the parties, the Court’s role is not quite so restricted.

[...]

“One of the purposes of the Court’s supervisory powers, of course, is to protect the integrity of the judicial process.”

[...]

[T]he government has charged Fokker Services with criminal activity.  And it does not propose to dismiss the case at this point; rather, under the proposed resolution, this criminal case would remain on this Court’s docket for the duration of the agreement’s term.

The parties are, in essence, requesting the Court to lend its judicial imprimatur to their DPA.  In effect, the Court itself would ‘become an instrument of law enforcement.  The parties also seek to retain the possibility of using the full range of the Court’s power in the future should Fokker Services fail to comply with the agreed upon terms.  To put it bluntly, the Court is thus being asked to serve as the leverage over the head of the company.

When, as here, the mechanism chosen by the parties to resolve charged criminal activity requires Court approval, it is the Court’s duty to consider carefully whether that approval should be given.

[...]

I do not undertake this review lightly.  I am well aware, and agree completely, that our supervisory powers are to exercised ‘sparingly, and I fully recognize that this is not a typical case for the use of such powers.  The defendant has signed onto the DPA and is not seeking redress for an impropriety it has identified.  But the Court must consider the public as well as the defendant.  After all, the integrity of judicial proceedings would be compromised by giving the Court’s stamp of approval to either overly-lenient prosecutorial action, or overly-zealous prosecutorial conduct.”

After reviewing various specifics of the Fokker action and resolution (including by noting that “under the DPA no individuals are being prosecuted for their conduct at issue here”), Judge Leon stated:

“While I do not discount Fokker Services’ cooperation and voluntary disclosure or, for that matter, its precarious financial situation, after looking at the DPA in its totality, I cannot help but conclude that the DPA presented here is grossly disproportionate to the gravity of Fokker Services’ conduct …  In my judgment, it would undermine the public’s confidence in the administration of justice and promote disrespect for the law for it to see a defendant prosecuted so anemically for engaging in such egregious conduct for such a sustained period of time and for the benefit of one of our country’s worst enemies.  [...]  As such, the Court concludes that this agreement does not constitute an appropriate exercise of prosecutorial discretion and I cannot approve it in its current form.”

As referenced in Judge Leon’s opinion, his analysis was very similar to that of Judge John Gleeson (E.D.N.Y) who faced as similar issue in U.S. v. HSBC Bank (see here for the July 2013 post in which Judge Gleeson ultimately approved the DPA in that case).

However, Judge Leon’s opinion contains the following concerning statement similar to Judge Gleeson’s prior ruling.

“The Government, of course, has the clear authority not to prosecute a case.  Indeed, this Court would have no role here if the Government has chosen not to charge Fokker Services with any criminal conduct – even if such a decision was the result of a non-prosecution agreement.”

Such an observation elevates form over substance and gives the DOJ a green light – indeed a further incentive – to use NPAs to resolve alleged instances of corporate criminal liability and thereby bypass the judicial system altogether and insulate its enforcement theories from judicial scrutiny.

At the very least, Judge Leon’s recent order, along with Judge Gleeson’s 2013 order, has started an important legal and policy conversation as to the judiciary’s role in the alternate reality that the DOJ has created and championed through its use of alternative resolution vehicles.

Use of alternative resolution vehicles to resolve alleged corporate criminal liability in the FCPA context presents two distinct, yet equally problematic, legal and public policy issues.

The first is that such vehicles, because they do not result in any actual charges filed against a company – and thus do not require the company to plead guilty to any charges – allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence.

The second is that such vehicles, because of the same factors discussed above, nudge companies to agree to the vehicles for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the FCPA.

While the two instances of judicial scrutiny of DPAs have focused on the first dynamic rather than the second, Judge Leon did nevertheless state:

“[I]he integrity of judicial proceedings would be compromised by giving the Court’s stamp of approval to either overly-lenient prosecutorial action, or overly-zealous prosecutorial conduct.”

Three Cheers For Judge Rakoff

Monday, February 9th, 2015

RakoffIf you have not noticed by now, I admire Judge Jed Rakoff (S.D.N.Y.) (and not just because he looks like my Dad in a black robe).

Judge Rakoff recently wrote a review of Professor Brandon Garrett’s book “To Big To Fail” and the below posts provides some excerpts and commentary.

Judge Rakoff writes:

“Under federal law, corporations can be held criminally liable if even a low-level employee, in the course of his or her employment, commits a criminal act that benefits the corporation. One might think, therefore, that federal corporate prosecutions, whether deferred or otherwise, would typically be accompanied by prosecution of the responsible individuals. But more often than not, this has not been the case, especially when large companies are involved. Rather, as Garrett and many others (including this writer) have pointed out, in recent years the federal government has brought many corporate prosecutions in which no employee has been prosecuted or even identified as criminally responsible.

This is especially true in the case of deferred prosecutions. According to Garrett, “in about two thirds of the cases involving deferred prosecution or non-prosecution agreements and public corporations, the company was punished but no employees were prosecuted.” This suggests that the Department of Justice has been persuaded by its own rhetoric that the main point of these agreements is to change corporate culture, so that company employees of all levels will be dissuaded in the future from committing company-related crimes.”

For years I have exposing the DOJ’s empty rhetoric concerning individual prosecutions in the FCPA context.  Indeed, last October I extended an open invitation to the DOJ to refute statistics published in this post: since 2008,  75% of corporate FCPA enforcement actions have not resulted in any related enforcement action against a company employee.

More specific to the DOJ’s frequent use of NPAs and DPAs in the FCPA context, as highlighted in this recent post, since NPAs and DPAs were introduced to the FCPA context in 2004, if a corporate FCPA enforcement action is resolved soley with an NPA or DPA there is less than a 10% chance that the DOJ will bring related criminal charges against company employees.

Both of these statistics are notable because as Judge Rakoff notes – and recently noted by the DOJ’s Deputy Attorney General (see here) - “corporations do not act criminally, but for the actions of individuals.”

Judge Rakoff further states:

“Given such patent ineffectiveness when it comes to deferred prosecutions, it is somewhat surprising that Garrett argues that tighter enforcement of deferred prosecution agreements can still make them effective. Perhaps. But one also wonders whether the impact of sending a few guilty executives to prison for orchestrating corporate crimes might have a far greater effect than any compliance program in discouraging misconduct, at far less expense and without the unwanted collateral consequences of punishing innocent employees and shareholders.”

In the FCPA context, I have not called for NPAs and DPAs to be revised, but rather have consistently stated for at least three years that NPAs and DPAs should be abolished.  In calling for abolition of NPAs and DPAs it is important to recognize that such a proposal does not seek to abolish a long-standing feature of the U.S. criminal justice system, but rather a failed experiment brought to the FCPA context approximately ten years ago.  As previously highlighted, my proposal to abolish NPAs and DPAs is coupled with a corporate compliance defense (see here and here).

In conclusion, Judge Rakoff further states:

“The preference for deferred prosecutions also reflects some less laudable motives, such as the political advantages of a settlement that makes for a good press release, the avoidance of unpredictable courtroom battles with skilled, highly paid adversaries, and even the dubious benefit to the Department of Justice and the defendant of crafting a settlement that limits, or eliminates entirely, judicial oversight of implementation of the agreement.”

Spot-on Judge Rakoff.

Like A Kid In A Candy Store

Monday, February 2nd, 2015

Kid in Candy StoreLike every year around this time, I feel like a kid in a candy store given the number of FCPA year in reviews hitting my inbox.  This post highlights various FCPA or related publications that caught my eye.

Reading the below publications is recommended and should find their way to your reading stack.  However, be warned.  The divergent enforcement statistics contained in them (a result of various creative counting methods) are likely to make you dizzy at times and as to certain issues.

Given the increase in FCPA Inc. statistical information and the growing interest in empirical FCPA-related research, I again highlight the need for an FCPA lingua franca (see here for the prior post), including adoption of the “core” approach to FCPA enforcement statistics (see here for the prior post), an approach endorsed by even the DOJ (see here), as well as commonly used by others outside the FCPA context (see here)

Debevoise & Plimpton

The firm’s monthly FCPA Update is consistently a quality read.  The most recent issue is a year in review and the following caught my eye.

“The government’s pressure on companies to assist in investigating and prosecuting individuals raises significant challenges for in-house legal and compliance personnel as they work to navigate the potentially conflicting interests in anti-bribery compliance and internal investigations.  This pressure has produced legitimate concerns that a failure to self-report could, in and of itself, be met with, or be the cause for imposing, monetary penalties.  Although the U.S. Sentencing Guidelines provide for a reduction in fines for a heightened level of cooperation, outside of a narrow range of arenas (such as where duties to self-report are imposed on U.S. government contractors), the government generally lacks any statutory basis for imposing financial penalties against companies for the failure to self-report potential misconduct.  Since there is no legal obligation to self-report, it is our view that the government should exercise caution when discussing bases for monetary penalties and should rely solely on laws passed by Congress and the Sentencing Guidelines provisions that properly draw their authority from a duly-passed statute.  It would be a disturbing trend indeed were the government to begin to impose monetary penalties for failing to self-report where there is no legal obligation to do so.  The actions by U.S. regulators in the coming year will continue to warrant close scrutiny …”.

Gibson Dunn

The firm’s Year-End FCPA Update is a quality read year after year.  It begins as follows.

“Within the last decade, Foreign Corrupt Practices Act (“FCPA”) enforcement has become a juggernaut of U.S. enforcement agencies.  Ten years ago, we published our first report on the state-of-play in FCPA enforcement.  Although prosecutions were at the time quite modest–our first update noted only five enforcement actions in 2004–we observed an upward trend in disclosed investigations and advised our readership that enhanced government attention to the then-underutilized statute was likely.  From the elevated plateau of 2015, we stand by our prediction. In addition to the traditional calendar-year observations of our year-end updates, this tenth-anniversary edition looks back and analyzes five trends in FCPA enforcement we have observed over the last decade.”

The update flushes out the following interesting tidbit from the Bio-Rad enforcement action.

“[A noteworthy aspect] of the Bio-Rad settlement is that it is the first DOJ FCPA corporate settlement agreement to require executives to certify, prior to the end of the [post-enforcement action] reporting period, that the company has met its disclosure obligations.  As noted above in the Ten-Year Trend section, post-resolution reporting obligations, including an affirmative obligation to disclose new misconduct, have long been a common feature of FCPA resolutions.  But Bio-Rad’s is the first agreement to insert a provision requiring that prior to the conclusion of the supervisory period, the company CEO and CFO “certify to [DOJ] that the Company has met its disclosure obligations,” subject to penalties under 18 U.S.C. § 1001.”

Gibson Dunn also released (here) its always informative “Year-End Update on Corporate Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs).”  The update:  ”(1) summarizes highlights from the DPAs and NPAs of 2014; (2) discusses several post settlement considerations, including protections for independent monitor work product and post settlementterm revisions; (3) analyzes a potential trend in the judicial oversight of DPAs; and(4) addresses recent developments in the United Kingdom, where the Deferred ProsecutionAgreements Code of Practice recently took effect.

According to the Update, there were 30 NPAs or DPAs entered into by the DOJ (29) or SEC (1) in 2014. (However, this figure includes two in the Alstom action and two in the HP action.  Thus, there were 27 unique instances of the DOJ using an NPA or DPA in 2014.  Of the 27 unique instances, 5 (19%) were in FCPA enforcement actions and the FCPA was the single largest source of NPAs and DPAs in 2014 in terms of specific statutory allegation.

The Gibson Dunn updates provides a thorough review of two pending cases in which federal court judges are wrestling with the issue of whether to approve of a DPA agreed to be the DOJ and a company.

Shearman & Sterling

The firm’s “Recent Trends and Patterns in Enforcement of the FCPA” is also another quality read year-after-year.

Of note from the publication:

“[W]hat may be the most interesting facet of the SEC’s current enforcement approach is the Commission’s shift in the latter half of 2014 in Timms to settle charges against individuals through administrative proceedings. This may come as no surprise, as the SEC has had difficulty successfully prosecuting individuals for violating the FCPA in previous years. Most recently, in early 2014, the SEC suffered a pair of setbacks in its enforcement actions against executives from Nobel Corp. and Magyar Telekom [...] before the U.S. courts. Other cases, such as SEC v. Sharef (the SEC’s case against the Siemens executives) and SEC v. Clarke (which is currently the subject of a pending stay), have lingered in the S.D.N.Y. for significant periods of time without resolution.”

[...]

Obtain or Retain Business

Following the announcement of the SEC’s settlement with Layne Christensen over improper payments made to foreign officials in various African countries, we noted that the SEC’s approach to the “obtaining or retaining business” test in the FCPA appeared at odds with the Fifth Circuit’s 2007 opinion in United States v. Kay. Specifically, in Kay, the DOJ charged two executives of American Rice, Inc. for engaging in a scheme to pay Haitian customs officials bribes in exchange for accepting false shipping documents that under-reported the amount of rice onboard ocean-going barges. The result of the false shipping documents was to reduce the amount of customs duties and sales taxes that American Rice would have otherwise been forced to pay. While the court in Kay dismissed the defendants’ argument that the FCPA was only intended to cover bribes intended for “the award or renewal of contracts,” holding instead that the payment of bribes in exchange for reduced customs duties and sales taxes, the court added that in order to violate the FCPA, the prosecution must show that the reduced customs duties and sales taxes were in turned used “to assist in obtaining or retaining business” per the language of the FCPA. In short, the court in Kay held that while bribes paid exchange for the reduction of duties or taxes could violate the FCPA, they were not per se violations of the statue, and that the Department would have to show how the benefit derived from the reduced duties and taxes were used to obtain or retain business.

Fast forwarding to 2014 in Layne Christensen, the Houston-based global water management, construction, and drilling company, was forced to pay over $5 million in sanctions despite the fact that the SEC’s cease-and-desist order pleaded facts inconsistent with the Fifth Circuit’s opinion in Kay. In its discussion of Layne Christensen’s alleged violation of the FCPA’s anti-bribery provisions, the SEC only alleged that the company paid bribes to foreign officials in multiple African countries “in order to, among other things, obtain favorable tax treatment, customs clearance for its equipment, and a reduction of customs duties.” The SEC’s cease-and-desist made no reference to how these reduced costs were used to obtain or retain business, rendering the SEC’s charges facially deficient.

Layne Christensen is not, however, the first time the DOJ and SEC have brought similar FCPA charges against companies without alleging how reduced taxes and customs duties were used to obtain or retain business. In the Panalpina cases from 2010, a series of enforcement actions against various international oil and gas companies, the DOJ and SEC treated the exchange of bribes for reduced taxes and customs duties as per se violations of the FCPA. Even in the 2012 FCPA Guide the enforcement agencies make clear that “bribe payments made to secure favorable tax treatment, or to reduce or eliminate customs duties . . . satisfy the business purpose test.” Whether the DOJ’s and SEC’s approach to the “obtaining or retaining business” element of the FCPA stems from a misinterpretation of Kay or is an attempt to challenge the Fifth Circuit’s opinion, remains to be seen. Nevertheless, we are troubled by the lack of clarity in the DOJ’s and SEC’s approach as it ultimately disadvantages defendants who may otherwise be pressured to settle charges over conduct which does not necessarily constitute a crime.”

Parent/Subsidiary Liability

As noted in previous Trends & Patterns, over the past several years the SEC has engaged in the disconcerting practice of charging parent companies with anti-bribery violations based on the corrupt payments of their subsidiaries. In short, the SEC has adopted the position that corporate parents are subject to strict criminal liability not only for books & records violations (since it is the parent’s books ultimately at issue) but also for bribery violations by their subsidiaries regardless of whether the parent had any involvement or even knowledge of the subsidiaries’ illegal conduct. The SEC has subsequently continued this approach in Alcoa and Bio-Rad.

According to the charging documents, officials at two Alcoa subsidiaries arranged for various bribe payments to be made to Bahraini officials through the use of a consultant. The SEC acknowledged that there were “no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme” but it still charged the parent company with anti-bribery violations on the grounds that the subsidiary responsible for the bribery scheme was an agent of Alcoa at the time. The Commission’s tact is curious considering that it charged Alcoa with books and records and internal controls violations as well, making anti-bribery charges seemingly unnecessary. Moreover, it is noteworthy that in the parallel criminal action, the DOJ elected to directly charge Alcoa’s subsidiary with violations of the FCPA’s anti-bribery provisions instead of Alcoa’s corporate parent.

In Bio-Rad, the SEC’s cease-and-desist order alleged that the corporate parent was liable for violations of the FCPA’s anti-bribery provisions committed by the company’s corporate subsidiary in Russia, Vietnam, and Thailand. In order to impute the alleged wrongful conduct upon the corporate parent, the SEC relied heavily upon corporate officials’ willful blindness to a number of red flags arising from the alleged schemes in Russia, Vietnam, and Thailand. Nevertheless, even if certain officials from Bio-Rad’s corporate parent were aware of the bribery scheme, the SEC’s charges ignore the black-letter rule that in order to find a corporate parent liable for the acts of a subsidiary, it must first “pierce the corporate veil,” showing that the parent operated the subsidiary as an alter ego and paid no attention to the corporate form.

It is also interesting that much like the case of Alcoa, the DOJ’s criminal charges against Bio-Rad are notably distinct from the SEC’s. Specifically, while the DOJ charged Bio-Rad’s corporate parent with violating the FCPA, the Department elected to only charge the company with violations of the FCPA’s book-and-records and internal controls provisions, not the anti-bribery provisions like the SEC.

The SEC’s charging decisions in Alcoa and Bio-Rad are even more peculiar given the fact that the SEC took an entirely different approach in HP, Bruker, and Avon, where despite alleging largely analogous fact patterns, the SEC charged the parent companies in HP, Bruker, and Avon with violations of the FCPA’s books-and-records and internal controls provisions only. Much like Alcoa and Bio-Rad, all of the relevant acts of bribery in HP, Bruker, and Avon were committed by the company’s subsidiaries in Mexico, Poland, Russia (HP), and China (Bruker and Avon). The SEC’s decisions in Alcoa, Bio-Rad, HP, Bruker, and Avon to charge parent companies involved in largely analogous fact patterns with different FCPA violations raise ongoing questions as to consistency and predictability of the SEC’s approach to parent-subsidiary liability.”

WilmerHale

The firm’s FCPA alert states regarding the travel and entertainment enforcement actions from 2014.

“While most cases involving travel and entertainment historically have involved other allegedly corrupt conduct, it was notable this year that travel and entertainment was the focus of the conduct in some cases. … [T]his suggests that travel and entertainment should continue to be a focus of corporate compliance programs. Unfortunately, the settled cases give little guidance as to some of the gray areas that challenge compliance officers, such as the appropriate dollar amounts for business meals, or how much ancillary leisure activity is acceptable in the context of a business event. Perhaps most interesting about the recent cases is that the government’s charging papers in some cases seem to lack any direct evidence that the benefits provided were provided as a quid pro quo to obtain a specific favorable decision from the official. The cases seem to simply conclude that if there were benefits provided to a government decision maker, the benefits must have been improper. Whether such allegations would be sufficient to satisfy the FCPA’s “corruptly” standard in litigation remains to be seen.”

Regarding the lack of transparency in FCPA enforcement, the alert states:

“[T]here still remains legitimate debate about whether the amount of credit that companies receive for voluntary disclosures is sufficient, especially when compared to companies that cooperate but do not self-report. One important factor that is often left out of the debate on this topic is the “credit” that is not visible in the public settlement documents but is nonetheless often informally received by companies that voluntarily disclose and/or cooperate. While the discussion above focuses on Sentencing Guidelines calculations and percentages of credit off the Sentencing Guidelines ranges, the discussion does not take into account decisions made by the government in settlement discussions that affect the ranges that are not seen in the settlement documents. For example, in settlement negotiations, the government might determine not to include certain transactions when calculating the gains obtained by the corporate defendant—perhaps because the evidence might have been weaker, or because jurisdiction might have been questionable, or because the settlement may have focused on transactions from a certain time period, or because of other factors. Thus, while the settlement documents might suggest a 20% discount from the bottom of the Sentencing Guidelines range, that range could have been higher had other transactions been included. These determinations are not transparent, but, anecdotally, there is some basis to believe that companies that voluntarily disclose and/or cooperate are more likely to get the benefit of the doubt as the sausage is being made. Given the lack of transparency in this area, the debates on this topic are likely to continue for a long time.”

Covington & Burling

The firm’s “Trends and Developments in Anti-Corruption Enforcement” is here.  Among other things, it states:

“As we have noted in the past, U.S. enforcement authorities have a taken creative and aggressive legal positions in pursuing FCPA cases. This past year saw a continuation of that trend, most notably with the SEC staking out an expansive position on the FCPA’s reach via agency theory.

Aggressive Use of Agency Theory. 2014 saw the SEC make use of a potentially far reaching agency theory to hold a parent company liable for the conduct of subsidiaries. In the Alcoa settlement, the SEC made clear that it had made “no findings that an officer, director or employee of [corporate parent Alcoa Inc.] knowingly engaged in the bribe scheme” at issue. Instead, its theory of liability was that the parent company “violated Section 30A of the Exchange Act by reason of its agents, including subsidiaries [Alcoa World Aluminum and Alcoa of Australia], indirectly paying bribes to foreign officials in Bahrain in order to obtain or retain business.” This agency theory was premised on the parent company’s alleged control over the business segment and subsidiaries where the conduct at issue allegedly occurred. Notably, the SEC did not rely on any evidence that parent-company personnel had direct involvement in or control over the alleged bribery scheme. Instead, the SEC pointed only to general indicia of corporate control that are the normal incidents of majority stock ownership (e.g., that Alcoa appointed the majority of seats on the business unit’s “Strategic Council,” transferred employees between itself and one of the relevant subsidiaries, and “set the business and financial goals” for the business segment). This is notable, in our view, because it is arguably at odds with DOJ and the SEC’s statement in the FCPA Resource Guide that they “evaluate the parent’s control — including the parent’s knowledge and direction of the subsidiary’s actions, both generally and in the context of the specific transaction — when evaluating whether a subsidiary is an agent of the parent.” (Emphasis added.) In the Alcoa matter, the SEC seemed to focus solely on “general” control; it did not allege any facts to support parent-level “knowledge and direction . . . in the context of the specific transaction.” This potentially expansive use of agency theory underscores the need for parent companies who are subject to FCPA jurisdiction to be attentive to corruption issues and compliance in all their corporate subsidiaries, even entities over which they do not exercise day-to-day managerial control.”

Miller & Chevalier

The firm’s FCPA Winter Review 2015 is here.

Among other useful information is a chart comparing the top ten FCPA enforcement actions (in terms of settlement amounts) as of 2007 compared to 2014 and a chart comparing SEC administrative proceedings and court filed complaints since 2005.

Davis Polk

The firm recently hosted a webinar titled “FCPA: 2014 Year-End Review of Trends and Global Enforcement Actions.”  The webcast and presentation slides are available here.

Jones Day

The firm’s FCPA Year in Review 2014 is here.

Other Items for the Reading Stack

From the FCPAmericas Blog – “Top FCPA Enforcement Trends to Expect in 2015.”

From the Corruption, Crime & Compliance Blog – “FCPA Year in Review 2014,” and FCPA Predictions for 2015.”

DOJ Prosecution of Individuals – Then vs. Now

Thursday, January 22nd, 2015

Thenvs.Yesterday’s post highlighted the following statistics concerning Foreign Corrupt Practices Act individual criminal prosecutions by the DOJ.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA criminal enforcement actions. 53 of these corporate enforcement actions were resolved solely with an NPA or DPA. In only 5 of these actions – 9% – was there related criminal charges of company employees.

More broadly, other statistics recently published on this site highlighted how in this new era of FCPA enforcement approximately 75% of corporate DOJ FCPA enforcement actions have not (at least yet) resulted in any DOJ charges against company employees.

Prior posts proposed, based on these statistics, that instead of asking the “but why was nobody charged” question in connection with most corporate DOJ FCPA criminal enforcement actions, the more appropriate question is asking whether NPAs and DPAs necessarily represent provable FCPA violations.

To best highlight how NPAs and DPAs have transformed the nature and quality of FCPA enforcement, it is useful to analyze FCPA enforcement statistics prior to the introduction of NPAs and DPAs to the FCPA context in 2004.

For starters, it must be recognized that few meaningful conclusions can be drawn when comparing early FCPA enforcement (lets say 1977 – 2004) to FCPA enforcement 2005 to the present.

Growing pains associated with a new law, and a pioneering one at that, were understandable as both business organizations and enforcement agencies alike were absorbing the law and its new expectations and challenges.  More substantively, for much of the FCPA’s history there were material differences in the law, enforcement agency policies, and the global business environment that all impacted early FCPA enforcement.  

Nor can any meaningful conclusions be drawn from comparing fine and penalty amounts in early FCPA enforcement actions to fine and penalty amounts in this new era.  For starters, the FCPA’s statutory fine and penalty amounts have changed over time.  Perhaps more significantly, criminal fine amounts in FCPA enforcement actions are rarely based on the statutory amounts, but rather based on the Alternative Fines Act, a statute passed in 2006, which can result in a fine amount up to twice the benefit the payer sought to obtain through the improper payment. Moreover, for much of the FCPA’s history, the SEC did not have authority to assess civil monetary penalties in a wide variety of securities law enforcement actions including FCPA enforcement actions, and disgorgement, a central feature of most SEC FCPA enforcement actions in this new era, was not used for most of the FCPA’s history.

Although certain historical comparisons of FCPA enforcement lack meaningful value, other comparisons are noteworthy.

For instances, while one can question how the DOJ held individuals accountable (i.e whether the criminal fines and sentences were too lenient) for most of the FCPA’s history, the DOJ did frequently hold individuals accountable when a company resolved an FCPA enforcement action.

Indeed, from 1977 to 2004, approximately 90% of DOJ criminal corporate FCPA enforcement actions RESULTED in related charges against company employees.

Compare that to FCPA enforcement in this new era when approximately 75% of DOJ criminal corporate FCPA enforcement actions HAVE NOT RESULTED (at least yet) in related charges against company employees. 

Consider also that when a DOJ criminal corporate FCPA enforcement action is resolved solely with an NPA or DPA, approximatley 90% of such actions HAVE NOT RESULTED (at least yet) in related charges against company employees.

In other words, NPAs and DPAs have significantly distorted the nature and quality of FCPA enforcement and if the statistics recently published on this site do not convince you of this, no statistics ever will.

DOJ Prosecution Of Individuals – Are Other Factors At Play?

Wednesday, January 21st, 2015

What woudl you doYesterday’s post (here) focused on DOJ FCPA individual prosecutions and highlighted the following facts and figures.

  • Since 2008, the DOJ has charged 99 individuals with FCPA criminal offenses.
  • 58% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just five cases and 78% of the individuals charged by the DOJ since 2008 have been in just eleven cases.
  • There have been 67 corporate DOJ FCPA enforcement actions since 2008 and of these actions, 50 (or 75%) have not (at least yet) resulted in any DOJ charges against company employees.

These statistics should cause alarm, including at the DOJ as it has long recognized that a corporate-fine only enforcement program is not effective and does not adequately deter future FCPA violations.   For instance, in 1986 John Keeney (Deputy Assistant Attorney General, Criminal Division, DOJ) submitted written responses in the context of Senate hearings concerning a bill to amend the FCPA. He stated as follows:

“If the risk of conduct in violation of the statute becomes merely monetary, the fine will simply become a cost of doing business, payable only upon being caught and in many instances, it will be only a fraction of the profit acquired from the corrupt activity. Absent the threat of incarceration, there may no longer be any compelling need to resist the urge to acquire business in any way possible.”

In 2010 Hank Walther (Deputy Chief Fraud Section) stated that a corporate fine-only FCPA enforcement program allows companies to calculate FCPA settlements as the cost of doing business.

In 2013 Daniel Suleiman (DOJ Deputy Chief of Staff, Criminal division) stated that “there is no greater deterrent to corporate crime that the prospect of prison time … if people don’t go to prison, then enforcement can come to be seen as merely the cost of doing business.”

More recently, Patrick Stokes (DOJ FCPA Unit Chief) stated that DOJ is “very focused” on prosecuting individuals as well as companies and that “going after one or the other is not sufficient for deterrence purposes.”

Earlier this week, Deputy Assistant Attorney General Sung-Hee Suh rightly acknowledged that “corporations do not act criminally, but for the actions of individuals.”

In my 2010 Senate FCPA testimony (here), I noted that the absence of individual FCPA charges in most corporate FCPA enforcement actions causes one to legitimately wonder whether the conduct giving rise to the corporate enforcement action was engaged in by ghosts.

Others have rightly asked the “but nobody was charged” question, including James Stewart in a New York Times column highlighted in this previous post.

However, as I stated in my Senate testimony, there is an equally plausible reason why no individuals have been charged in connection with many corporate FCPA enforcement actions.  The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.

Readers know well of the prevalence of non-prosecution and deferred prosecution agreements (NPAs / DPAs)  in the FCPA context. As highlighted in this recent post, since 2010, 86% of corporate DOJ enforcement actions have involved either an NPA or DPA.

Informed observers also understand how NPAs and DPAs, not subject to any meaningful judicial scrutiny, are often agreed to by companies for reasons of ease and efficiency, and not necessarily because the conduct at issue violates the FCPA.

Indeed, prior to becoming SEC Chair, Mary Jo White stated a “fear [that] the deferred prosecution [agreement] is becoming a vehicle to show results” (here) and former Attorney General Alberto Gonzales has stated as follows.

“It is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs; such resolution vehicles have “less of a toll” on the DOJ’s budget and such agreements “provide revenue” to the DOJ.  It is all “unfortunate”

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

Moreover, Mark Mendelsohn (former chief of the DOJ’s FCPA Unit), has talked about the “danger” of NPAs and DPAs and how “it is tempting for the [Justice Department] or the SEC…to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.” (See “Mark Mendelsohn on the Rise of FCPA Enforcement,” 24 Corporate Crime Reporter 35, September 10, 2010).

For more on the above dynamics, see my article “The Facade of FCPA Enforcement.”

Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.

In other words, perhaps the more appropriate question is not “but nobody was charged,” but rather do corporate NPAs and DPAs always represent provable FCPA violations?  For a recent excellent article asking the same general question, see here.

I set out to test this with the following working hypothesis.

  • Instances in which the DOJ brings actual criminal charges against a company or otherwise insists in the resolution that the corporate entity pleads guilty to FCPA violations, represent a higher quality FCPA enforcement action (in the eyes of the DOJ) and is thus more likely to result in related FCPA criminal charges against company employees.
  • Instances in which the DOJ resolves an FCPA enforcement action solely with an NPA or DPA, represent a lower quality FCPA enforcement action and is thus less likely to result in related FCPA criminal charges against company employees given that an individual is more likely to put the DOJ to its high burden of proof.

The below statistics provide a compelling datapoint concerning the quality and legitimacy of many corporate DOJ FCPA enforcement actions.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA enforcement actions.

  • 14 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  10 of these corporate enforcement actions – 71% – resulted in related criminal charges of company employees.
  • 53 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 9% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since the introduction of NPAs and DPAs in the FCPA context, there have been 16 such corporate enforcement actions.  In 5 of these actions – 31% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above, although it is interesting to note the following regarding 3 of these 5 instances.  The DOJ ended up dismissing the charges against Si Chan Wooh (Schnitzer Steel), John O’Shea (ABB) was not found not guilty, and Bobby Elkin (Alliance One) received a probation sentence after the sentencing judge questioned many aspects of the enforcement action (see here for the prior post).

Although NPAs and DPAs were first introduced to the FCPA context in 2004, their use by the DOJ was sporadic at first and such alternative resolution vehicles did not become a fixture of FCPA enforcement until approximately 2007.

Thus, in testing the above hypothesis, 2007 is perhaps the best starting point.  Since 2007, there have been 77 corporate DOJ FCPA enforcement actions.

  • 12 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  9 of these corporate enforcement actions – 75% – resulted in related criminal charges of company employees.
  • 50 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 10% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since 2007, there have been 15 such corporate enforcement actions.  In 4 of these actions – 26% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above.

If the above statistics do not cause one to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will.  For those who believe NPAs and DPAs always represent provable FCPA violations, the ball is now in your court to offer credible explanations for following datapoints.

Since NPAs and DPAs were introduced to the FCPA context in 2004, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 71% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 9% chance that criminal charges will be brought against a company employee.

Since 2007, when NPAs and DPAs become a fixture of DOJ FCPA enforcement, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 75% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 10% chance that criminal charges will be brought against a company employee.

[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]