Declinations with Disgorgement: The DOJ’s New Enforcement Category
V&E Foreign Corrupt Practices Act Update E-communication, October 3, 2016
Jessica Mussallem and Kurt Oldenburg
Over the past year, the
U.S. Department of Justice (DOJ) has released new directives and guidance in an
effort to enhance its enforcement of the U.S. Foreign Corrupt Practices Act of 1977, as amended (FCPA), starting with the September
2015 release of Deputy Attorney General Sally Quillian Yates’s memorandum (the Yates
Memo) followed by the announcement of a Pilot Program to encourage companies to
self-report potential FCPA violations and cooperate in federal investigations. Assistant
Attorney General Leslie Caldwell said that companies who report early and
cooperate will receive up to a 50 percent reduction off the bottom end of the
U.S. Sentencing Guidelines fine range. Coupled with this carrot of cooperation
credit was the Yates Memo stick: Companies would not be considered for
cooperation credit if they failed to disclose individual misconduct.
How these new directives would play out has been the topic of
much interest. Over the summer, the DOJ declined to pursue charges against three
companies. However, the companies also reached settlements with the Securities and Exchange
Commission (SEC) that involved disgorgement of alleged profits from the misconduct. The declination letters to Akamai Technologies and Nortek Inc. were released within days of each other this past summer. It
was widely debated whether the declinations should even be
attributed to the DOJ’s Pilot Program because it is questionable whether either
investigation involved viable criminal charges, i.e., evidence of bribery or willful and knowing violation of the
books and records provision of the FCPA. There was no articulated evidence that
anyone at the issuer companies participated in, knew of or authorized the
improper conduct. Also, neither company self-disclosed under the Pilot Program, having done so in early 2015 before the program’s conception.
Last week, the DOJ released letters to two Texas companies
declining criminal prosecution for violations of the FCPA. Both companies — which
are privately held and therefore not subject to SEC FCPA enforcement actions — agreed to disgorge all profits resulting from the bribery. These “declinations with disgorgement” mark a
new category of enforcement action for the DOJ. Although the idea of paying money to get out of a criminal case is nothing new — the DOJ has been doing this for a long time — calling it disgorgement takes a term out of SEC’s playbook.
The HMT LLC and NCH Corp. decisions are the fourth and fifth
declinations issued by the DOJ since the inception of its Pilot Program. The declination letters
are fairly brief but do offer some insight, especially into the factors
considered by the DOJ in its decisions to decline to prosecute. Most notably, the
DOJ seems to have considered very similar factors for both declinations, which
consist of: (1) the timely, voluntary self-disclosure, (2) the thorough and
comprehensive investigation including providing all known relevant facts about
the individuals involved with the misconduct, (3) the steps taken to enhance
compliance programs and internal accounting controls, (4) agreements to
disgorge all profits earned, and (5) full remediation including terminating
individuals and severing relationships with third parties.
The first factor goes directly to the Pilot Program’s encouragement
of self-disclosure. The second factor — requiring companies to provide all
known relevant facts about the individuals involved — is not surprising
post-Yates Memo, which directs prosecutors to consider and address individual
culpability in connection with each FCPA investigation. The third and fifth
factors — requiring enhancements to compliance programs and internal accounting
controls and thorough remediation — are also to be expected, considering the
DOJ’s hiring of a full-time compliance program expert on the heels of its Yates
Memo announcement. The fourth factor, although somewhat new, is a concept that was announced in the Pilot Program itself, which made clear that even a company that voluntarily self-discloses, fully cooperates, and remediates will be required to disgorge all profits resulting from the FCPA violation. Prior DOJ declinations
did not require companies to disgorge profits from the alleged wrongdoing, but cited the companies’ disgorgement to the SEC as a factor supporting declination.
The amounts at issue in four out of the five declinations have
been nominal. HMT LLC, a Woodlands, Texas-based company that makes liquid
storage tanks for the oil and gas industry, agreed to disgorge $2.7 million in
alleged profits resulting from bribes paid in Venezuela to a state-owned energy
company, and in China to various state-owned enterprises totaling $500,000. NCH Corp., an Irving, Texas-based
company that makes cleaning products, agreed to disgorge $335,000 in alleged
profits resulting from $44,545 in cash, gifts, meals, and entertainment given
in China to employees of Chinese state-controlled customers. Nortek Inc., a Rhode Island-based
building products manufacturer, entered a $320,000 non-prosecution agreement
with the SEC and allegedly paid $290,000 in improper cash payments. Akamai Technologies, a
Massachusetts-based internet services provider, entered a $673,000 non-prosecution
agreement with the SEC and allegedly arranged $40,000 in payments to induce
government-owned entities to purchase more services than they actually needed.
It is not at all clear that the expectation of an out and out declination, in cases involving larger or more substantial FCPA issues, should follow.
Program may not be such a bargain after all: The (up to) 50 percent reduction in
criminal penalties is not guaranteed, is based on the sentencing guidelines
range which is usually a high number to begin with, and now, apparently, does
not relieve companies from having to disgorge alleged profits or impact the
amount of profits that must be disgorged, which is usually a number subject to
interpretation and a lot of negotiation. These case examples also might not be representative of the fact patterns or
realistic penalties faced by large companies with FCPA exposure: Two declinations
involved private companies, and four resulted in minimal sanctions where the DOJ
may have lacked evidence needed to ultimately prove criminal conduct, causing
many to ask what, exactly, was the DOJ “declining” to prosecute?
That said, the risks of not self-reporting are higher still and must be
carefully considered when weighing against these benefits. The DOJ continues to
be in the relatively early stages of implementing its Pilot Program and the Yates
Memo, and more informative trends may begin to emerge. Corporate counsel should
continue to monitor FCPA settlements as an indicator of how these principles
will (or will not) shape FCPA enforcement in the future.
For more information, please contact Vinson & Elkins lawyers Jessica Mussallem or Kurt Oldenburg. Visit our website to learn more about V&E's FCPA & Global Anti-Corruption practice.