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.

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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.

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

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A good weekend to all.

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”?

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.”

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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.”

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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.

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.

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)]

Although the DOJ frequently uses NPAs and DPAs in the FCPA context, this is only the second instance the SEC has used an alternative resolution vehicle to resolve an FCPA enforcement action.  As noted in this previous post, in May 2011 the SEC used a DPA to resolve an FCPA enforcement action against Tenaris.  For more on the SEC’s use of alternative resolution vehicles, see prior posts here and here.

RLC agreed to pay $1.6 million to resolve its FCPA scrutiny – $882,000 pursuant to the DOJ NPA and $700,000 pursuant to the SEC NPA ($593,000 in disgorgement and $141,845 in prejudgment interest).

The gist of the enforcement action is as follows.

RLC has approximately 95 foreign subsidiaries.  One subsidiary, PRL S.R.L, an indirectly wholly-owned subsidiary of RLC headquartered and incorporated in Argentina, had a General Manager who conspired with a customs clearance agency to make improper payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.”

There is no allegation or suggestion that RLC was aware of, or participated in, the alleged conduct.  The resolution documents merely say that “in the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”

The simplistic inference would seem to be that General Manager A would not have engaged in the improper conduct had RLC had an anti-corruption program and provided anti-corruption training.  However, this notion would seem to be undermined by reference to RLC’s worldwide FCPA compliance review which ”identified no further violations.”

DOJ NPA

The NPA states that the DOJ “will not criminally prosecute RLC … related to violations of the anti-bribery provisions of the FCPA … arising from and related to improper payments in Argentina …”.

The NPA next states as follows.  “The DOJ enters into this Non-Prosecution Agreement based, in part, on the following factors:

(a) the Company’s timely, voluntary, and complete disclosure of the conduct;

(b) the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment;

(c) the Company’s early and extensive remedial efforts already undertaken – including conducting extensive FCPA training for employees world-wide, enhancing the Company’s existing FCPA policy, implementing an enhanced gift policy as well as other enhanced compliance, control and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney – and to be undertaken, including enhancements to its compliance program as described in [the compliance features of the NPA); and

(d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures, as described in [the compliance features of the NPA).

In the NPA, which has a term of two years, RLC admitted, accepted and acknowledged responsibility for the conduct set forth in the statement of facts contained in the NPA, and further agreed to a "muzzle" clause in connection with the conduct at issue (see here for the prior post describing such a clause).

The conduct at issue focused on PRL S.R.L "an indirect wholly-owned subsidiary of RLC headquartered and incorporated in Argentina."  According to the NPA, "PRL S.R.L. marketed and sold RLC merchandise, including merchandise that was shipped from outside Argentina."  According to RLC's most recent annual report PRL S.R.L. is one RLC's approximate 95 subsidiaries.

More specifically, the conduct at issue focused on "General Manager A" described as a "dual U.S. and Argentine citizen ... hired by RLC to manage the business of PRL S.R.L. from 2003 until 2009" and "Agent 1" described as a "customs clearance agency that was retained by PRL S.R.L. to assist with customs clearance issues in Argentina."

According to the NPA, from 2004 to 2009 "PRL S.R.L. and its employees, including General Manager A, together with Agent 1 and others, conspired to make unlawful payments to foreign officials to use the officials' influence with foreign government agencies and instrumentalities in order to assist PRL S.R.L. in obtaining and retaining business for and with, and directing business to PRL S.R.L."

According to the NPA, the improper payments were "to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection." The NPA states that "these payments were not for routine government action."

According to the NPA, the improper payments were "disguised" by "having Agent 1 include the payments in Agent 1's invoice as 'Loading and Delivery Expenses' and 'stamp tax/label tax."  The NPA states that "General Manager A and others at PRL S.R.L. knew of the true purpose of these expenses and nonetheless approved reimbursement to Agent 1."

The NPA next states as follows.

"In the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L."

The approximate three-page NPA concludes as follows.  "In total, General Manager A and PRL S.R.L. paid roughly $580,000 to Agent 1 for the purpose of paying bribes to customs officials in order to obtain improper customs clearance of merchandise."

Pursuant to the NPA and based on the above statement of facts, RLC agreed to pay a penalty of $882,000.  There is no indication in the NPA as to how this figure was calculated or what it is based on.

SEC NPA

The SEC's NPA is based on the core set of conduct set forth in the DOJ's NPA.

The short 2.5 page document does however contain the following additional paragraph.

"In addition to paying bribes to Argentina customs officials, RLC Argentina's general manager directly provided or authorized several gifts to be made to Argentine government officials to improperly secure the importation of RLC's products into Argentina.  The gifts provided to three different government officials between approximately 2005 through approximately 2009 included perfume, dresses and handbags value at between $400 and$14,000 each."

[As to this "statement of fact," I noted in"Grading the FCPA Guidance" that one of the utilities of the FCPA Guidance issued in November 2012 would be to serve as a useful measuring stick for future FCPA enforcement activity.  As noted in this prior post, this is yet again another FCPA enforcement action based, in part, on such items as perfume, dresses and handbags - in the RLC action - allegedly paid by one employee at one of RLC's approximate 95 subsidiaries.]

Under the heading “RLC’s Inadequate Internal Controls and Inaccurate Books and Records,” the NPA states as follows.

“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) that access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.

Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”

Under the heading “RLC’s Self Report,” the NPA states as follows.

“In or about February 201 0, RLC’ s Board of Directors adopted a new FCPA policy and shortly thereafter the policy was disseminated through RLC’s intranet site. In approximately Spring or Summer 2010 RLC Argentina employees reviewed the FCPA policy and raised concerns about the company’s customs broker in Argentina. As a result, RLC conducted an internal investigation of the allegations and discovered the improper payments to the customs officials and gifts to Argentine government officials. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the Department of Justice.”

Under the heading “Remedial Measures and Cooperation,” the NPA states as follows.

“Upon discovering the bribes, RLC took steps to end the misconduct, including terminating its customs broker. RLC also thoroughly reviewed its pre-existing compliance program and undertook steps to further update and enhance its compliance program, and successfully implemented those new enhancements. These steps included, in part, adoption of: (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees. RLC also ceased retail operations in Argentina and is in the process of formally winding down all operations there.

RLC provided extensive, thorough, real-time cooperation with the staff of the Division and the Department of Justice, including: voluntary and complete production of documents and disclosure of information to the staff, including the facts described above; voluntarily providing accurate translations of documents; voluntarily making witnesses available for interviews; and conducting a risk assessment of certain other world-wide operations of the company. The worldwide review included its operations in Italy, Hong Kong and Japan, and identified no further violations. In fact, the revised compliance policies appear to be working, as the world-wide review identified one instance of a bribe solicitation being rejected by the company’s employees after adoption of the company’s revised FCPA policy in 2010.”

Without admitting or denying liability, RLC agreed to enter into the NPA.  At the same time, the NPA states as follows.  “This agreement should not … be deemed exoneration of RLC or to be construed as a finding by the Commission that no violations of the federal securities laws have occurred.”  At the same time, the NPA states that the “facts set forth are made pursuant to settlement negotiations and are not binding against RLC or its directors, officers or employees, or any other person or entity in any other legal proceeding.”

Like the DOJ NPA, the SEC NPA also contains a “muzzle” clause.

The SEC’s release (here) states as follows.

“The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.”

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 SEC release further states as follows.

“According to the NPA, Ralph Lauren Corporation’s cooperation included:

• Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
• Voluntarily and expeditiously producing documents.
• Providing English language translations of documents to the staff.
• Summarizing witness interviews that the company’s investigators conducted overseas.
• Making overseas witnesses available for staff interviews and bringing witnesses to the U.S

“The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.”

Thomas Hanusik (Crowell & Moring - and a former DOJ and SEC enforcement official) represented RLC.

*****

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have led to a world-wide risk assessment by RLC?  (See here for the prior post on the “Where Else” question).

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have lead to RLC having a reporting obligation to the DOJ and SEC during the two-year term of the NPA?  (See here for the prior post “A Government Mandated Transfer of Shareholder Wealth to FCPA Inc.?)

*****

It is tempting, based on the SEC’s statements 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, that would appear to be wrong conclusion.  As noted here and here, when RLC made the decision in August 2012 to suspend and wind-down its Argentine operations, the decision appeared to be 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.  As noted in the above-linked CNN article, the economic measures caused tourism in Argentina to drop.  Indeed, RLC was one of several luxury brands – such as Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

*****

The RLC enforcement action is just the latest to involve customs and related issues in Argentina.

See here for the Ball Corp. enforcement action, here for the Helmerich & Payne enforcement action, here for the BJ Services enforcement action.

*****

The RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny.  Subject to materiality thresholds (which are rarely triggered in cases of FCPA scrutiny), there is no disclosure obligation, yet most issuers choose to disclose FCPA scrutiny.  Thus, yesterday appeared to be the first instance of public disclosure of RLC’s scrutiny.  The company’s stock closed at $165.93, down 1.9%.

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

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

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

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

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

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

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

“Standard Chartered Bank, a financial institution headquartered in London, has agreed to forfeit $227 million to the Justice Department for conspiring to violate the International Emergency Economic Powers Act (IEEPA).  The bank has agreed to the forfeiture as part of a deferred prosecution agreement with the Justice Department and a deferred prosecution agreement with the New York County District Attorney’s Office for violating New York state laws by illegally moving millions of dollars through the U.S. financial system on behalf of sanctioned Iranian, Sudanese, Libyan and Burmese entities.  The bank has also entered into settlement agreements with the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Board of Governors of the Federal Reserve System.”

As indicated in the above release, Standard Chartered agreed to resolve its potential exposure via a deferred prosecution agreement.

Like DPAs in the Foreign Corrupt Practices Act context, the Standard Chartered DPA required the company to accept responsiblity for the conduct set forth in the agreement.

Like DPAs in the FCPA context, the Standard Chartered DPA contained a “public statements” clause under which the company was prohibited, directly or indirectly through others (such as attorneys, consultants, etc.), from making “any public statements contradicting the acceptance of responsibility.”  If the company, directly or indirectly, made such public statements, it would constitute, subject to cure rights, “a willful and material breach” of the DPA thereby subjecting the company to criminal prosecution.  A further provision in the ”public statements” clause was that the determination of whether a public statement contradicts acceptance of responsibility “shall be in the sole discretion” of the DOJ.  A further provision in the clause was that the company shall not issue a press release or hold a press conference concerning the facts at issue in the DPA without first consulting with the DOJ “to determine (a) whether the text of the release or proposed statements at the press conference are true and accurate with respect to matters between the United States and [the company]; and (b) whether the United States has no objection to the release.”

Portions of the Standard Chartered “public statements” clause were recently triggered.  (See here from the Wall Street Journal and here from the U.K. Guardian).

In short, during a recent earnings conference call with investors, Standard Chartered Chairman John Peace was asked a question ”concerning individual employee conduct and compensation” following the DPA.  Peace responded, when asked about bonuses for executives, as follows. ”We had no wilful act to avoid sanctions; you know, mistakes are made – clerical errors – and we talked about last year a number of transactions which clearly were clerical errors or mistakes that were made.”

According to the Wall Street Journal article, prosecutors “pounced when they heard Mr. Peace’s comments” and demanded a copy of the conference call transcript.  According to the article, “Mr. Peace and other top executives were [soon] in Washington to [apologize] before a room full of top prosecutors at the U.S. Justice Department, which has threatened to bring criminal charges if Mr. Peace didn’t recant.”  According to the article, “Standard Chartered officials and the U.S. prosecutors spent more than a week negotiating possible wording of the bank’s retraction.”

On March 21st, Mr. Peace, through the company, issued this statement which read as follows.

“I, together with Chief Executive Officer Peter Sands and Group Finance Director Richard Meddings, representing Standard Chartered Bank (the “Group”), held a press conference where certain questions were asked concerning individual employee conduct and compensation in light of the deferred prosecution agreements made with the US Department of Justice and the New York County District Attorney’s Office in December 2012.  During that press conference, which took place via phone, I made certain statements that I very much regret and that were at best inaccurate.

In particular, I made the following statements in reference to a question regarding the reduction of bonuses for [company] executives:  We had no willful act to avoid sanctions; you know, mistakes are made – clerical errors – and we talked about last year a number of transactions which clearly were clerical errors or mistakes that were made…

My statement that [the company] ”had no willful act to avoid sanctions” was wrong, and directly contradicts [the company's] acceptance of responsibility in the deferred prosecution agreement and accompanying factual statement.

Standard Chartered Bank, together with me, Mr. Peter Sands and Mr.  Richard Meddings, who jointly hosted the press conference, retract the comment I made as both legally and factually incorrect. To be clear, Standard Chartered Bank unequivocally acknowledges and accepts responsibility, on behalf of the Bank and its employees, for past knowing and willful criminal conduct in violating US economic sanctions laws and regulations, and related New York criminal laws, as set out in the deferred prosecution agreement.  I, Mr. Sands, Mr. Meddings, and Standard Chartered Bank apologize for the statements I made to the contrary.”

I’ve written before about what I will call the “muzzle” clause in FCPA DPAs.

In response to an FCPA commentator who believed that NPAs and DPAs have never been used to resolve cases that do not actually represent provable FCPA violations - because the commentator had never heard any complaint “from any practitioners, on or off the record, in public or in private” of this being the case – I noted that there was a simple explanation for this.  I then proceeded to analyze a “muzzle” clause in an FCPA DPA.  See here for the prior post.

Greater scrutiny is needed of “muzzle” clauses.

First, the DOJ can use its leverage and its ability to bring criminal charges against a company.  Second, the DOJ will can then use an NPA or DPA to insulate its version of the facts and enforcement theories from judicial scrutiny which the risk averse company will more often that not accept.  Third, in the resolution agreement, the DOJ can include a “muzzle” clause prohibiting anyone associated with the company from making any statement inconsistent with the DOJ’s version of the facts or its enforcement theories.  Fourth, if the DOJ believes, in its sole discretion, that a public statement has been made contradicting its version of the facts or its enforcement theories, the DOJ can “pounce” and threaten to bring criminal charges.

Is this an effective system of justice?

Is this consistent with the rule of law (recognizing that one accepted factor in analyzing the rule of law is distribution of authority in a manner that ensures that no single organ of government has the practical ability to exercise unchecked power)?

Professor Ellen Podgor has rightfully asked on the her White Collar Crime Prof Blog (see here) whether the government can include such clauses in resolution agreements without infringing on First Amendment rights.

Reacting to the August 2012 DOJ enfocement action against Gibson Guitar resolved with a DPA (with a “muzzle” clause), Harvey Silverglate(author of “Three Felonies a Day: How the Feds Target the Innocent”) wrote in this Wall Street Journal opinion piece as follows.

“Put another way, Gibson is now forbidden to tell the world the whole truth about its conduct and its reasons for settling a case it previously claimed publicly, including in an opinion piece in [the Wall Street Journal], involved no criminal conduct on its part. In exchange for agreeing to read the government’s script, Gibson regained its ability to conduct business without a federal sword of Damocles dangling over its corporate head.  This naked effort by federal prosecutors to control both news and outcomes, not to mention their own reputations, does not surprise those familiar with the modern federal criminal justice system.”

As noted in this previous post, when the U.K. Serious Fraud office attempted to insert a “muzzle” clause in its Innospec resolution documents, it received a lashing from Lord Justice Thomas who stated as follows.  “It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

Whether in the FCPA context or otherwise, ”muzzle” clauses are in need of greater scrutiny.

As discussed in this previous post, in September 2012 then Assistant Attorney General Lanny Breuer passionately defended the DOJ’s use of NPAs and DPAs.  Among other things, Breuer boldly stated that NPAs and DPAs “have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe” and that the result of DOJ’s frequent use of such agreements “has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts.”  Breuer further stated as follows.

“One of the reasons why deferred prosecution agreements are such a powerful tool is that, in many ways, a DPA has the same punitive, deterrent, and rehabilitative effect as a guilty plea:  when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing, agree to cooperate with the government’s investigation, pay a fine, agree to improve its compliance program, and agree to face prosecution if it fails to satisfy the terms of the agreement.”

Despite Breuer’s rhetoric, the question of whether NPAs and DPAs adequately deter future improper conduct has long been asked.

As noted in this previous post, in 2009, the Government Accountability Office (“GAO”) released a report regarding DOJ’s use of NPAs and DPAs. The GAO Report was not FCPA specific, although it does mention the FCPA as being one area where NPAs and DPAs are frequently used.  The GAO Report stated as follows.

“DOJ cannot evaluate and demonstrate the extent to which DPAs and NPAs—in addition to other tools, such as prosecution—contribute to the department’s efforts to combat corporate crime because it has no measures to assess their effectiveness. Specifically, DOJ intends for these agreements to promote corporate reform; however, DOJ does not have performance measures in place to assess whether this goal has been met.”

The GAO Report concluded as follows.

 “[W]hile DOJ has stated that DPAs and NPAs are useful tools for combating and deterring corporate crime, without performance measures, it will be difficult for DOJ to demonstrate that these agreements are effective at helping the department achieve this goal.

As noted in this previous post, in the 2010 OECD Phase 3 Report of U.S. FCPA enforcement, the evaluators likewise noted that the “actual deterrent effect [of NPAs and DPAs have] not been quantified.”  In the Report, the evaluators sought information about the deterrent effect of DPAs and NPAs” and one of the recommendations in the Report was for the U.S. to “make public any information about the impact of NPAs and DPAs on deterring the bribery of foreign public officials.”

The DOJ recently responded to the OECD’s recommendation in its “Final Follow-Up To Phase 3 Report and Recommendations.”  The DOJ response, dated December 2012, states in full, as to the NPA / DPA issues as follows.

“Scholars have recognized that quantifying deterrence is extremely difficult. This is equally true for the deterrent effect of DPAs and NPAs. Thus, as discussed at the time this recommendation was made, measuring ‘the impact of NPAs and DPAs in deterring the bribery of foreign public officials’ would be a difficult task, save providing certain anecdotal and other circumstantial evidence.

One of the best sources of anecdotal evidence demonstrating that DPAs and NPAs have a deterrent effect comes from the companies themselves. The companies against which DPAs and NPAs have been brought have often undergone dramatic changes. For instance, prior to or following the entry of DPAs or NPAs, many companies have terminated personnel, including senior managers, established new codes of conduct and compliance policies and procedures, pledged not to use third-party agents, withdrawn from bids tainted by corruption, provided new and substantial resources to compliance and audit functions within their organizations, and instituted new training regimes. These companies, through their remediation efforts under DPAs and NPAs, have often fundamentally changed how they conduct business. In addition, just like with individuals on parole or probation, the monitor provisions or self-reporting requirements of DPAs and NPAs are designed to deter future misconduct and, at the same time, ensure that companies meet their obligations. In meetings with board members, chief executive officers, chief financial officers, general counsel, and chief compliance officers, DOJ and SEC have heard directly from these senior leaders about the impact DPAs and NPAs have had on their companies for the better.

Beyond the companies themselves, DOJ and SEC have heard anecdotal stories about the deterrent effect of NPAs and DPAs on other companies and how those resolutions raise awareness of anti-corruption laws. Often those stories come from other corporate leaders who have discussed how their own practices have changed or even whole industries that have changed their behavior for the better. For example, during the course of one investigation, it was revealed that a major multinational corporation’s DPA caused another Fortune 50 company to implement an FCPA compliance program. In addition, following DPAs in different cases, companies have come forward to make voluntary disclosures of similar conduct. Many of our DPAs and NPAs are publicized extensively and scrutinized closely by the business community, the legal profession, and the compliance community, among others. The ‘lessons learned’ from these DPAs and NPAs, for example, help raise awareness of compliance risks and failures. The existence of DPAs and NPAs also encourages companies to voluntarily disclose conduct, by providing meaningful rewards to those companies, which enables DOJ and SEC to ensure further specific and general deterrence.”

Of course, what the DOJ says above as to the deterrent value of NPAs or DPAs would equally apply to actual prosecutions.

But let’s test the following statement made by the DOJ  “One of the best sources of anecdotal evidence demonstrating that DPAs and NPAs have a deterrent effect comes from the companies themselves. The companies against which DPAs and NPAs have been brought have often undergone dramatic changes.”

In 2008, the DOJ announced (here) that Aibel Group Ltd. (Aibel Group) pleaded guilty to violating the antibribery provisions of the FCPA.  As noted in the DOJ release, “Aibel Group admitted that it was not in compliance with a deferred prosecution agreement it had entered into with the Justice Department in February 2007 regarding the same underlying conduct.”  The DOJ release further states as follows.  “This is the third time since July 2004 that entities affiliated with Aibel Group have pleaded guilty to violating the FCPA.”

As this previous Wall Street Journal Corruption Currents post highlighted, Ingersoll-Rand, fresh off its exit of a DPA in 2011, soon disclosed that it found other potential violations of the FCPA.  In a 2011 filing, the company stated as follows.

“We have reported to the DOJ and SEC certain matters which raise potential issues under the FCPA and other applicable anti-corruption laws, including matters which were reported during the past year. We have conducted, and continue to conduct, investigations and have had preliminary discussions with respect to these matters with the SEC and DOJ, which are ongoing.”

So the question remains, do NPAs and DPAs deter?

It turns out that not even the DOJ knows the answer.

*****

Interested in NPA and DPA issues?  On May 3rd, I will be speaking at this event at the National Press Club in Washington, D.C.  hosted by Corporate Crime Reporter.

• Since 2008, the DOJ has charged 77 individuals with FCPA criminal offenses.
• 61% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 77% of the individuals charged by the DOJ since 2008 have been in just seven cases.
• There have been 53 corporate DOJ FCPA enforcement actions since 2008 and of the 53 corporate DOJ FCPA enforcement actions, 39 (or 74%) 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.”

Likewise, 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 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 perhaps most notably 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 (NPA / DPA)  in the FCPA context and how these agreements, 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.  For more on this dynamic, 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 NPA and DPAs always represent provable FCPA violations.

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 context 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 69 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.  10 of these corporate enforcement actions – 83% – resulted in related criminal charges of company employees.
• 46 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 3 instances – 6.5% – were 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 the relevant foreign subsidiary – and an NPA or DPA against the parent company.  Since the advent of NPAs and DPAs in the FCPA context, there have been 11 such corporate enforcement actions.  In 3 of these actions - 27% -  there were 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 these three 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).

If the above statistics do not cause you 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.

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 83% 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 6.5% 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]