DOJ Updates FCPA Cooperation Credit Policy for M&A
Last week, the Department of Justice (“DOJ” or “Department”) made a series of changes to the 2017 FCPA Corporate Enforcement Policy (“Policy”) contained in the Justice Manual (until last year, known as the United States Attorneys’ Manual). These changes, which were first announced by Assistant Attorney General Brian Benczkowski on March 8, 2019 during the ABA White Collar Crime Conference, include rescinding the requirement that companies prohibit the use of disappearing messages applications, clarifying the Department’s “de-confliction” policy, and updating language to soften companies’ requirement to disclose facts about involved individuals consistent with a policy change announced in November 2018. Perhaps most significant among the changes for companies considering corporate combinations is the Department’s clarification that companies undergoing mergers and acquisitions can take advantage of the Policy when wrongdoing is discovered at a target company pre- or post-acquisition.
The DOJ and SEC clarified in 2012 with the release of the FCPA Resource Guide that when a target company is subject to the FCPA, a successor company that acquires or merges with that target can be held responsible for the predecessors’ pre-acquisition misconduct, and that even where a target is not subject to the FCPA, where violations continue post-acquisition, a successor company that fails to detect and stop the wrongdoing pre-acquisition can be held responsible for any continuing violations post-acquisition.1 Until now, however, it was not clear whether the Department’s 2017 Policy providing clarity on the parameters to secure a declination would apply in the M&A context. Under the new policy, companies that discover wrongdoing after a merger or acquisition, meet applicable Policy requirements, and timely self-disclose to the Department will receive a presumption in favor of a declination to prosecute.2 Neither the DOJ nor the SEC have provided guidance about how quickly a company must self-disclose in order to receive the presumption; however, past enforcement suggests that a multi-year delay may disqualify a company.3 In addition to voluntarily self-disclosing, to obtain the presumption, companies must conduct thorough and timely due diligence and take actions consistent with the Policy, including promptly implementing an “effective compliance program at the merged or acquired entity,” remediating the conduct, and complying with other aspects of the Policy.
The presumption is not and should not be interpreted as a guarantee that successor companies will receive declinations for their predecessors’ misconduct, but it does provide increased certainty for companies considering M&A activity. While the DOJ and Securities and Exchange Commission (“SEC”) have historically “[i]n a significant number of instances” declined to take action against companies that merged with or acquired a target only to discover pre-transaction wrongdoing, previously, there was no formal policy regarding such leniency.4
The Justice Manual’s language regarding the presumption suggests that it will be broadly applicable, noting that “an acquiring company that discloses misconduct may be eligible for a declination, even if aggravating circumstances existed as to the acquired entity.” However, it is unlikely that this represents a change in the scope of conduct for which a company can expect to receive a declination. Previously, the DOJ and SEC brought enforcement actions relating to predecessor misconduct only in “cases involving egregious and sustained violations” such as where the successor company failed to stop or even participated in the misconduct after the merger or acquisition was completed. In such circumstances, a company is unlikely to satisfy the requirements for the presumption or such egregious circumstances are likely to overcome the presumption regardless.
According to the Department, the new Policy recognizes the potential benefit of corporate M&A, particularly where the surviving company has a robust compliance program from which the target entity will benefit. Companies wishing to take advantage of the Department’s new Policy are well advised to implement and carry out documented M&A due diligence procedures, ensure post-acquisition audits include review for FCPA and larger compliance issues, and provide for timely integration of the acquired entity into existing compliance programs.
1 Criminal Div., U.S. Dep’t of Justice and Enforcement Div., U.S. Sec. & Exchange Comm’n, A Resource Guide to the U.S. Foreign Corrupt Practices Act 28-30 (2012) [hereinafter FCPA Resource Guide], available at https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf.
2 U.S. Dep’t of Justice, Justice Manual § 9-47.120 (2018), https://www.justice.gov/jm/jm-9-47000-foreign-corrupt-practices-act-1977#9-47.120.
3 See, e.g., Sec. & Exchange Comm’n, Kinross Gold Charged With FCPA Violations (Mar. 26, 2018), https://www.sec.gov/news/press-release/2018-47 (settling FCPA charges arising from an acquired subsidiary’s conduct, which continued for at least three years after the acquisition due to a delay in implementing and enforcing adequate internal accounting controls).
4 FCPA Resource Guide, supra note 1, at 28.
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.