Much of what is written about Foreign Corrupt Practices Act enforcement these days seems to be mere carrying forward of DOJ and SEC statements, as if those comments represent a universal truth.
Last year at this time, Morgan Stanley’s so-called “declination” dominated the conversation. Why was it a “declination”? It seemed simply because the DOJ said it was, even though a bit of independent analysis would quickly reveal that there was likely no criminal case to be made against Morgan Stanley based on the DOJ’s own allegations and comments from the judge who sentenced Garth Peterson. (See here for the prior post “Stop Drinking the Kool-Aid”).
Last week, the DOJ and SEC announced double non-prosecution agreements against Ralph Lauren Corporation (“RLC”). (See here for the prior post). Because it was the SEC’s first use of an NPA in the FCPA context, the SEC portion of the enforcement action received the most attention.
Why did the SEC use an NPA to resolve RLC’s alleged scrutiny? The SEC said that it was because RLC voluntarily disclosed, provided extensive and thorough cooperation, and implemented various remedial measures.
Sensing an avalanche of FCPA Inc. information carrying forward the SEC’s comments, I noted in this post last Tuesday as follows.
“Of course, these are not distinguishing factors. Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.”
The RLC enforcement action was released during the early days of a new era of SEC leadership and one law firm alert on the action stated that ”the SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative” (see here for more of that initiative launched in January 2010).
Many FCPA Inc. industry participants picked up the pom-poms are started cheering alongside the SEC.
One headline read – ”Self-Reporting FCPA Violations Pays Off: Just Ask Ralph Lauren.”
Another headline read – “Another Example Of The Benefits Of FCPA Self-Reporting.”
A law firm alert stated as follows. “The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.”
Another law firm alert stated as follows. ”With the announcement of the Ralph Lauren resolution … the SEC and DOJ have taken pains to highlight that beyond self-disclosure, the expedient and thorough reporting of a potential violation, real-time cooperation, and implementation of effective remedial measures may yield more positive results for companies subject to the FCPA.”
As is often the case, the FCPA Inc. material then closed with marketing pitches concerning FCPA compliance services.
Many others highlighted that the SEC mentioned that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA. However, as noted in my post last Tuesday, a few minutes of internet research will quickly reveal that RLC made the decision in August 2012 to suspend and wind-down its Argentine operations based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. In doing so, RLC joined several other luxury brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.
Against the backdrop of misses, it was refreshing to read a hit - Covington & Burling’s release titled “The Ralph Lauren Case: Inadequate Rewards for Exemplary Corporate Cooperation.” The alert states, in pertinent part, as follows.
“Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decides to self-report potential unlawful conduct.
Based on the facts recited in the SEC NPA, Ralph Lauren appears to have held itself to an extremely high standard of compliance. On its own initiative, the company adopted a new Foreign Corrupt Practices Act policy and distributed it to employees, which led some Argentine employees to raise concerns about the company’s customs broker. The company immediately conducted an internal investigation, which ultimately uncovered improper payments and gifts to government officials. Within two weeks of this discovery, Ralph Lauren self-reported its findings to both the SEC and the DOJ. The NPA also highlights that Ralph Lauren adopted numerous remedial measures, including firing its customs broker and implementing further enhancements to its compliance program, cooperated extensively with the SEC, and undertook a world-wide review of its operations that uncovered no other violations.
It is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by the corporation itself; a thorough internal investigation of the misconduct; implementation of remedial measures, including termination of employees engaged in wrongdoing and improvements in internal controls and compliance programs; and voluntary disclosure to the DOJ and/or the SEC.
The Ralph Lauren NPAs are far less advantageous to the company than a declination, which would have involved no public allegations of wrongdoing and no fines. By contrast, in addition to paying approximately $1.6 million in penalties and disgorgement, under the DOJ NPA, the company had to publicly admit and accept responsibility for the illegal conduct, which potentially exposes it to shareholder lawsuits and reputational damage. The company also was required to agree to toll the statute of limitations, implement further extensive changes to its compliance program, and submit annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is found to have breached any of the terms of the agreements — determined solely by the SEC or the DOJ — it may still face the original charges by both agencies, plus potentially new charges based on any information collected during the course of the NPAs.
The benefits to the government from entering into these NPAs are clear. NPAs — unlike deferred prosecution agreements and SEC injunctive actions — are not filed with any court, thus escaping the kind of judicial scrutiny that has recently been given to some SEC settlements. Moreover, the SEC and DOJ are able to emphasize, once again, the importance of voluntary disclosure and cooperation, while still requiring significant ongoing obligations on the part of the company.
The benefits to Ralph Lauren, on the other hand, are less clear. It is likely that the government applied a discount when deciding what sanctions to impose based on the company’s self-reporting and cooperation. However, it is not at all clear that any such discount was sufficient to cover the incremental investigative and other costs incurred by the company as a result of the self-report, and the additional burdens the company has agreed to shoulder by entering into the NPAs. For other companies contemplating whether to self-report potential FCPA violations, the case reinforces the importance of closely evaluating the risks and rewards of potential outcomes, especially given the government’s apparent reluctance to grant a declination even when presented with a textbook case of extraordinary cooperation.”
Covington & Burling of course is the law firm former Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here for the prior post). Breuer was not listed as an author of the alert, but several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of Breuer’s DOJ senior leadership team) are listed as authors.
The RLC enforcement action involved, per the DOJ / SEC allegations, payments by one person in one of RLC’s approximate 95 subsidiaries. The payments at issue, involving customs issues, likey did not even violate the FCPA as Congress intended. [For more on what Congress intended - including, as to alleged payments to ministerial officials, see my article "The Story of the Foreign Corrupt Practices Act.'). Indeed, when the government has been put to its ultimate burden of proof in cases occurring outside the context of procurement, the government has an overall losing record. (See this prior post). In the only case that the government has won in this context, - the Fifth Circuit decision in U.S. v. Kay- the decision was equivocal and the Court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business." Indeed, the Court specifically rejected the DOJ's contrary argument and stated as follows. “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”]
Against this backdrop and as a further sign of just how backwards the FCPA conversation of late has become, the Society of Corporate Compliance & Ethics (SCCE) released this statement praising the DOJ and SEC for its handling of the RLC action.
SCCE representatives stated as follows.
“As with the recent Morgan Stanley case, the government has made it clear that companies who take compliance seriously and are committed to finding, fixing, and solving legal and regulatory problems are in a far better position than those who do not invest in real, robust, and effective compliance programs. I can think of no better proof of the value of strong compliance and ethics programs than the DOJ’s and SEC’s recent actions.”
“When the government visibly acknowledges and credits internal compliance efforts, Boards and management take note of their tangible value and are reminded of the need to support empowered, independent compliance officers and functions.”
When the DOJ (and now the SEC) use resolution vehicles that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.
When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.
When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.