DOJ Signals FCPA Policy Shift Focusing on M&A Transactions, Creating New Incentives and Heightened Risks for Companies on Both Sides of Deals
A recent expansion by the Department of Justice (“DOJ” or the “Department”) to its FCPA Corporate Enforcement Policy (“CEP”) has gone largely unnoticed, but the shift in policy now provides new incentives for companies to self-report misconduct that is discovered after a merger or acquisition (“M&A”), while also raising the specter of increased exposure for companies and executives who sell assets tainted by corruption. In prepared remarks to white collar practitioners last month in Prague, a senior DOJ official announced the policy shift, explaining that acquiring companies in M&A deals now have the opportunity to obtain a declination of criminal charges without publicity, and possibly without disgorging profits, which previously were required under the CEP. However, this remedy will only be available to self-reporting companies that fully remediate and cooperate with government investigations into culpable companies and individuals, and where the misconduct and financial impact is deemed to be “de minimis.” The change is the second move by DOJ in less than a year to focus specifically on M&A transactions in FCPA cases, and when viewed in connection with the requirement that companies cooperate with DOJ’s criminal investigations, it should place selling companies on notice that DOJ intends to weaponize acquiring companies to build new cases against a predecessor entity and its executives, directors and shareholders.
Background on the CEP and DOJ’s Policy to Incentive Self-Reports
In the aftermath of the 2008 financial crisis, DOJ faced mounting criticism for its perceived failure to prosecute culpable executives in white collar cases. In response, DOJ issued a memorandum on “Individual Accountability for Corporate Wrongdoing” (colloquially referred to as the “Yates Memo”) on September 9, 2015, which set forth guidelines for prosecutors in corporate cases and focused on the role that companies could play in building criminal cases against individuals, requiring, among other things, that companies “must provide . . . all relevant facts [to the government] relating to the individuals responsible for the misconduct” if a company hoped to receive any type of cooperation credit.1 On November 28, 2018, Deputy Attorney General Rod Rosenstein later modified the Yates Memo by allowing companies to be eligible for cooperation credit by identifying those individuals who were “substantially involved in or responsible for the criminal conduct.”
In cases involving violations of the Foreign Corrupt Practices Act (“FCPA”), DOJ has adopted additional incentives for companies to self-report misconduct and cooperate with the government’s investigations of individuals. Although DOJ’s guidance on corporate prosecutions and Chapter 8 of the United States Sentencing Guidelines have always provided for incentives for a company to self-report and cooperate with a government investigation,2 DOJ’s policy moves are aimed at sweetening the deal even further in FCPA cases. On April 5, 2016, DOJ’s Criminal Fraud Section initiated a “Pilot Program” in foreign bribery cases, which, among other things, provided for “up to a 50% reduction off the bottom end of the Sentencing Guidelines fine range” for a self-reporting company that fully remediated and cooperated with a government’s investigation. Under the Pilot Program, an eligible company also would be considered for a possible declination of prosecution.3 On November 29, 2017, DOJ formally adopted the Pilot Program, rebranding it as the CEP, and enhancing the incentives so that, absent “aggravating circumstances,” a self-reporting company that fully cooperated and remediated would presumptively receive a declination.4 However, the CEP still includes a significant disincentive; namely, unlike a traditional declination, a company that received a declination under the CEP would have its declination made public by DOJ and the company would be required to disgorge all of its profits.
DOJ Turns Its Attention to M&A Deals
Over the past year, the Department has made two new announcements, signaling a shift of attention to FCPA cases that could arise from M&A-related self-reports. Although both included relatively modest policy adjustments, the changes are noteworthy because both are specifically aimed at M&A deals.
First, on July 25, 2018, Deputy Assistant Attorney General Matthew Miner delivered prepared remarks to announce that the CEP specifically applied to self-reporting of an FCPA violation that was discovered in the aftermath of a M&A transaction.5 Recognizing that “otherwise law-abiding companies can sometimes inherit problems that are not of their own making,” Miner explained that the CEP would apply to a company that discovered a problem through post-acquisition due diligence and thereby promptly disclosed the misconduct, fully remediated and cooperated with the government’s investigation of others. Under such circumstances, DOJ would find such a self-report to be timely and there would be a presumption that such a company would receive a public declination with disgorgement under the CEP.
The July 2018 announcement was a small change, and many continued to criticize the policy as not going far enough. After all, the decision by a company to self-report is fraught with unknown risks for a company, especially since one can never really know how a prosecutor may view the gravity of the misconduct at issue or if a prosecutor may find it too hard to resist the temptation to dig into a company’s operations, investigating conduct that goes well beyond the scope of what was initially reported. Add to this, the publicity around each declination, which could invite derivative litigation and reputational damage, as well as the disgorgement of profits that could amount to over tens, or even hundreds, of millions of dollars.6
Last month, the Department sought to address these policy shortcomings in an effort to further incentivize self-reports emanating from M&A. In prepared remarks at the American Bar Association’s Third Global White Collar Crime Conference in Prague, Czech Republic on June 27, 2019, Miner announced a modification to the CEP that, for the second time in less than a year, highlighted the Department’s focus on M&A transactions.7 After acknowledging the criticism of the CEP, Miner announced that there may be instances where a public declination is not required. Miner explained: “For instance, if a company self-discloses misconduct that was discovered in the context of a merger or acquisition, and [the Department] determine[s] that the conduct and financial impact was de minimis,” then the Department may decide not to disclose the declination. Miner reiterated that, as part of its cooperation, a company must “identify relevant facts as to every individual who was ‘substantially’ involved in or responsible for the criminal conduct at issue,” and he added, “make no mistake, we remain focused on identifying and holding culpable individuals to account.”
Implementation of the CEP Tracks a Dramatic Rise in FCPA Enforcement
It should be noted that the initiation of the Pilot Program and implementation of the CEP has coincided with a dramatic increase in FCPA enforcement by DOJ. In 2016, DOJ charged 17 people with violations of the FCPA and related offenses, while also resolving criminal cases against 13 corporate defendants in what amounted to the highest ever total in global fines and disgorgement.8 In 2017, DOJ resolved seven corporate cases for over $2.5 billion in global penalties, and 26 people were charged with FCPA-related crimes, which was then a record year for individual cases.9 In 2018, DOJ broke the previous year’s records by charging 31 people and resolving corporate cases for over $3.4 billion in global penalties.10 And halfway through this year, DOJ is on track to break the previous year’s records yet again.11
While the implementation of the CEP tracks the recent increase in DOJ’s enforcement of FCPA violations, it would be wrong to suggest that cases of self-reporting have driven the uptick in criminal cases against companies or individuals. Since the Pilot Program began in April 2016, DOJ has charged 89 people with FCPA-related crimes and resolved 27 corporate cases (resulting in over $11.5 billion in global fines and disgorgement). However, only three of those 27 corporate resolutions (or 11%) and eight of the 89 individual cases (or 9%) involved self-reporting companies.12
Why the Focus on M&A?
With this context in mind, one must ask what explains the specific focus by DOJ on FCPA cases emanating from M&A deals? After all, FCPA enforcement is at historic highs and the Department has proven that it is fully capable of building cases without the need for voluntary disclosures. These new incentives are thus hardly born out of necessity.
One explanation may be that the Department is now focused on building and bringing the types of cases that have proved more elusive in the past. As stated above, the Department has brought more criminal cases against individuals than ever before, but recent years have seen DOJ’s criminal prosecutions improve in terms of both the quantity and quality. Early FCPA cases frequently targeted lower-level employees and mid-level foreign officials who were the “low hanging fruit” and most easy to catch. Over the past few years, however, as the Department’s FCPA Unit has matured, we have seen DOJ bring charges in higher-profile criminal cases against CEOs,13 directors,14 company presidents,15 general counsels,16 high-profile bankers17 and even hedge fund managers.18 Perhaps cases involving successor liability are next in line. Such cases have proven difficult to build in the past, and there have been few, if any, charges against shareholders or management from companies that knowingly sold companies and assets that were tainted by corruption. DOJ’s recent emphasis on M&A transactions may be designed at mobilizing the support and cooperation of acquiring companies to help prosecutors build such cases.
What This Means for You
At this point, the specific details of DOJ’s recent policy changes may be less significant than the fact that DOJ appears to be spending so much attention on M&A more generally. After all, it remains unclear what type of conduct or financial benefit ultimately would be considered to be “de minimis” under the CEP. Recent experience with the CEP, however, suggests that DOJ may be willing to apply its policy liberally to benefit self-reporting companies. For example, DOJ exercised its prosecutorial discretion to issue declinations in both Cognizant and ICBL,19 even though DOJ brought charges against the heads of both companies, and most understood that such high-level involvement constituted “aggravating circumstances” under the CEP. If this precedent serves as a guide, then an acquiring company seeking a declination from DOJ under the CEP may be well positioned to argue for a full declination without publicity and may even avoid disgorging profits if, for example, the company self-reports and terminates a problematic contract before significant benefits are realized. Under such circumstances, DOJ very well may be apt to make a positive example of the company so it can message the success — even if anonymously — by rewarding the company with a “quiet” declination and without disgorgement, provided, of course, that the company fully remediate and cooperate with the Department’s investigation of the predecessor entity and individuals.
On the flip side of the coin, those on the selling side of M&A deals would be well-served to take notice of the current trends and be sure that appropriate measures are taken to upgrade and enhance compliance systems so that all potential issues are cleaned up and fully remediated before companies or assets are sold. Red flags in corporate documents, emails and board minutes, which may transfer with a company in any asset sale, may turn out being used against them in the event a buying company discovers wrongdoing and opts to cooperate with the Department.
In either scenario, it is clear that the situation requires a nuanced analysis and understanding of the FCPA and the CEP. Companies should engage counsel with the requisite experience and expertise if they want to avoid trouble and achieve the best results with the government.
1 See U.S. Department of Justice, Deputy Attorney General Sally Quillian Yates, Memorandum on Individual Accountability for Corporate Wrongdoing, September 9, 2015, available at https://www.justice.gov/archives/dag/file/769036/download. On November 28, 2018, Deputy Attorney General Rod Rosenstein later modified the Yates Memo by, among other things, enabling companies to be eligible for cooperation credit by identifying those individuals who were “substantially involved in or responsible for the criminal conduct.”
2 For example, DOJ’s Justice Manual (“JM”) recognizes that the Department “encourages corporations, as part of their compliance programs, to conduct internal investigations and to disclose the relevant fact to the appropriate authorities,” and a company’s “timely and voluntary disclosure of wrongdoing,” in addition to a company’s cooperation and remediation, are among the specific factors that prosecutors must consider when determining whether to pursue a criminal case against a company. JM §§ 9-28.300 (“Factors to be Considered”), 9-28.900 (“Voluntary Disclosures”). In addition, Chapter 8 of the United States Sentencing Guidelines (“U.S.S.G.”) on the Sentencing of Organizations provides that a company should receive a significant reduction in its “culpability score,” and therefore, a substantial reduction in its ultimate fine amount, if that company is deemed to have voluntarily and timely self-reported an offense, fully cooperated and clearly demonstrated an affirmative acceptance of responsibility to authorities. U.S.S.G. § 8C2.5(g)(1) (2018).
3 U.S. Department of Justice, The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance, April 5, 2016, available at https://www.justice.gov/archives/opa/blog-entry/file/838386/download.
4Vinson & Elkins FCPA & Global Anti-Corruption Update, Pilot Program No Longer: DOJ Makes FCPA Pilot Program Permanent Policy, November 30, 2017.
5 U.S. Department of Justice, Deputy Assistant Attorney General Matthew S. Miner Remarks at the American Conference Institute 9th Global Forum on Anti-Corruption Compliance in High Risk Markets, July 25, 2018, available at https://www.justice.gov/opa/pr/deputy-assistant-attorney-general-matthew-s-miner-remarks-american-conference-institute-9th.
6 DOJ can point to some success stories under the CEP. Thus far, DOJ has awarded 12 declinations to self-reporting companies under the CEP, and eight people have been charged in connection with four of those cases. See HMT LLC (involving charges against HMT Regional Sales Managers Eduardo Betancourt and Franklin Marzan); Guralp Systems Limited (involving FCPA-related money laundering charges against South Korean official Heon Cheol Chi); Insurance Corporation of Barbados Limited (involving FCPA-related money laundering charges against Barbadian official Donville Inniss, ICBL CEO Ingrid Innes, and ICBL Senior Vice President Alex Tasker); and Cognizant Technology Solutions Corporation (involving charges against Cognizant President Gordon Coburn and Chief Legal Officer Steven Schwartz). In addition, the United Kingdom’s Serious Fraud Office has charged three additional individuals (Dr. Cansun Guralp, Andrew Bell, and Natalie Pearce) for allegedly conspiring to make corrupt payments in connection with the Guralp scheme.
7 U.S. Department of Justice, Deputy Assistant Attorney General Matt Miner Delivers Remarks at The American Bar Association, Criminal Justice Section Third Global White Collar Crime Institute Conference, Prague, Czech Republic, June 27, 2019, available at https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-matt-miner-delivers-remarks-american-bar-association.
8 See U.S. Department of Justice, Criminal Division, Fraud Section, FCPA Unit, Related Enforcement Actions: 2016, available at https://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2016.
9 See U.S. Department of Justice, Criminal Division, Fraud Section, FCPA Unit, Related Enforcement Actions: 2017, available at https://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2017.
10 See U.S. Department of Justice, Criminal Division, Fraud Section, FCPA Unit, Related Enforcement Actions: 2018, available at https://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2018.
11 See U.S. Department of Justice, Criminal Division, Fraud Section, FCPA Unit, Related Enforcement Actions: 2019, available at https://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2019.
12 In three cases, a company self-reported but still did not receive a declination under the CEP, either because there were aggravating circumstances, or the company failed to fully cooperate or remediate as the policy requires. On June 21, 2016, BK Medical ApS received a non-prosecution agreement (“NPA”) with only a 30% reduction off the low-end of the applicable fine range, because the government found that the company did not fully cooperate by failing to disclose all relevant facts about state-owned end users and certain significant statements by employees. On December 23, 2016, General Cable received an NPA with the full 50% reduction off the low-end of the applicable guideline fine amount, because the government found “aggravating circumstances” existed in the form of high-level executive involvement, bribe payments in five different countries, and profits to the company of over $50 million. On February 25, 2019, Fresenius received an NPA and a two-year corporate monitorship, in addition to receiving only 40% off the low-end of the guideline fine range, because the government found cooperation was lacking as the company failed to timely and fully respond to certain requests.
13 See, e.g., U.S. Department of Justice, Oil Services CEO and Executive Sentenced to Prison for Roles in Foreign Bribery Scheme, Sept. 28, 2018, available at https://www.justice.gov/opa/pr/oil-services-ceo-and-executive-sentenced-prison-roles-foreign-bribery-scheme (United States v. Anthony Mace); U.S. Department of Justice, Former Chief Executive Officer and Senior Vice President of Barbadian Insurance Company Charged with Laundering Bribes to Former Minister of Industry of Barbados, Jan. 28, 2019, available at https://www.justice.gov/opa/pr/former-chief-executive-officer-and-senior-vice-president-barbadian-insurance-company-charged (United States v. Ingrid Innis); United States Department of Justice, Two Businessmen Convicted of International Bribery Offenses, June 20, 2019, available at https://www.justice.gov/opa/pr/two-businessmen-convicted-international-bribery-offenses-0 (United States v. Roger Bouncy).
14 See, e.g., U.S. Department of Justice, Retired U.S. Army Colonel Indicted for Conspiring to Bribe Senior Government Officials of the Republic of Haiti, Oct. 4, 2017, available at https://www.justice.gov/opa/pr/retired-us-army-colonel-indicted-conspiring-bribe-senior-government-officials-republic-haiti(United States v. Joseph Baptiste).
15 See, e.g., U.S. Department of Justice, Former President and Former Chief Legal Officer of Publicly Traded Fortune 200 Technology Services Company Indicted in Connection with Alleged Multi-Million Dollar Foreign Bribery Scheme, Feb. 15, 2019, available at https://www.justice.gov/opa/pr/former-president-and-former-chief-legal-officer-publicly-traded-fortune-200-technology (United States v. Gordon Coburn).
16 See, e.g., id. (United States v. Steven Schwartz).
17 See, e.g., U.S. Department of Justice, Malaysian Financier Low Taek Jho, Also Known As “Jho Low,” and Former Banker Ng Chong Hwa, Also Known As “Roger Ng,” Indicted for Conspiring to Launder Billions of Dollars in Illegal Proceeds and to Pay Hundreds of Millions of Dollars in Bribes, Nov. 1, 2008, available at https://www.justice.gov/opa/pr/malaysian-financier-low-taek-jho-also-known-jho-low-and-former-banker-ng-chong-hwa-also-known (United States v. Tim Leissner & United States v. Roger Ng).
18 See, e.g., U.S. Department of Justice, Former Executive Managing Director of Och-Ziff Capital Management Indicted for Defrauding Client and Obstruction of Justice, Jan. 3, 2018, available at https://www.justice.gov/opa/pr/former-executive-managing-director-och-ziff-capital-management-indicted-defrauding-client-and (United States v. Michael Cohen).
19 See note 7, supra.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.