Should you voluntarily disclose FCPA violations?

March 2017 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

The Foreign Corrupt Practices Act (FCPA) continues to be a high priority area for the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Companies paid a record-breaking $2.4bn to resolve FCPA enforcement actions in 2016 and this trend shows no signs of slowing. What has changed is the DOJ’s new focus on holding individual wrongdoers accountable for corporate misconduct. In April 2016, the DOJ’s fraud section created the one-year FCPA pilot programme, which affords companies substantial credit for the voluntary self-disclosure of FCPA violations in order to identify individual wrongdoers.

Recent high-profile FCPA cases like the $519m paid by Israeli pharmaceutical company Teva and the combined $420m paid by Brazilian construction conglomerate Odebrecht and its petrochemical subsidiary Braskem, demonstrate both the enormous cost of FCPA violations and the international reach of enforcement actions. Given the potentially serious consequences of an FCPA violation, the voluntary self-disclosure framework under the pilot programme represents a significant opportunity for companies to reduce or even avoid criminal and civil penalties.

Companies that fulfil the requirements of the programme can earn credit of up to 50 percent off any fine, avoid an appointed monitor, and most significantly, the DOJ will decline to prosecute in appropriate cases, potentially avoiding a fine altogether. Although the DOJ has long given credit informally for voluntary self-disclosure and cooperation in FCPA matters, the pilot programme adds an important level of transparency so that companies will know more precisely what they can expect to receive for coming forward voluntarily.

The pilot programme grew out of a number of trends, including the DOJ’s new focus on holding individuals accountable for corporate wrongdoing. In 2015, then deputy attorney general Sally Yates issued the ‘Yates Memo’, which instructs federal prosecutors to consistently identify individuals who perpetrated corporate wrongdoing and evaluate whether to bring criminal or civil actions against them. The memo also requires that in order for a company to be eligible for any cooperation credit, the company must provide to the DOJ all the relevant facts about individuals involved in the corporate misconduct.

Yates highlighted the pilot programme in a recent speech as a way in which the DOJ was implementing this directive. One of the purposes of the pilot programme is to encourage companies to voluntarily disclose the identity of those responsible for FCPA violations in order to allow the prosecution of those individuals whose wrongdoing might otherwise remain undiscovered. Former assistant attorney general Leslie Caldwell, then head of the Criminal Division, also explained that the pilot programme is intended to communicate more transparently to companies that “a decision not to disclose wrongdoing will result in a significantly different outcome than if the company had voluntarily disclosed the conduct and cooperated in our investigation”. Companies that become aware of an FCPA violation should, therefore, seriously consider whether to voluntarily self-disclose.

Under the pilot programme, a company must fulfil four general requirements: voluntary self-disclosure of the FCPA violation, full cooperation, timely and appropriate remediation and disgorgement of all profits resulting from the violation. Voluntary self-disclosure is obviously the most significant factor and the one that will require the most consideration. A company must disclose all relevant facts known to it, including information about the individuals involved in the FCPA violation. It is imperative that the disclosure occur “prior to an imminent threat of disclosure or government investigation”. This means that time may be of the essence, lest the violation be discovered by the government before a disclosure can be made. Similarly, it is not enough to wait to disclose until right before the violation is about to be discovered.

After making a disclosure, a company is required to fully cooperate with the DOJ’s investigation, which generally means proactively providing additional facts and identifying other sources of information as they arise. This includes making company officers and employees who possess relevant information available for interviews.

The third requirement of the pilot programme is that a company make timely and appropriate remediation. Remediation encompasses several different items, including implementing an effective compliance and ethics programme, appropriate discipline of employees responsible for the misconduct and any additional steps that demonstrate recognition of the seriousness of the company’s misconduct, including other measures to identify future risks.

Finally, a company must disgorge all profits resulting from the FCPA violation. The DOJ has generally made a practice of giving credit for disgorgement made to the SEC in a related enforcement action, so the disgorgement need only be made once.

A company that has fully complied with the requirements of the pilot programme may earn up to a 50 percent reduction off any fine and generally will not be required to have a monitor appointed, so long as there is an effective compliance programme in place. In appropriate cases, the DOJ will consider an outright declination of prosecution. A company that does not voluntarily disclose, but complies with the other requirements, is only eligible for a more limited credit of up to a 25 percent reduction off any fine and is not eligible for a declination of prosecution. It is important to note that the terms of the pilot programme only apply to the DOJ, so the SEC may still impose civil penalties to the extent that the SEC also brings an enforcement action.

The DOJ has publicly released five declination letters since the programme began, showing that it is serious about issuing declinations in appropriate cases. Even when the DOJ finds that a declination is not appropriate, such as in the case of a particularly egregious violation, the possibility of a 50 percent reduction off any fine is still a substantial incentive to voluntarily self-disclose. In December, the DOJ announced that General Cable Corporation would pay a $20m penalty to resolve an FCPA investigation, which reflected a 50 percent reduction based upon General Cable’s voluntary self-disclosure, cooperation, remediation and disgorgement of an additional $55m to the SEC.

Naturally, a company can only voluntarily self-disclose and receive a declination or credit off a fine if it is aware of the FCPA violation in the first place. It is therefore crucial to have an effective compliance programme in place and to undertake a thorough investigation when FCPA violations are suspected. Ideally, internal controls will prevent FCPA violations, but failing that, it is important to identify them as quickly as possible. A company that is not in a position to self-identify FCPA violations, or identifies them too late, will be unable to disclose before the DOJ comes knocking, at which point any hope of a declination or credit may well go out the window.

There is no doubt that the pilot programme has increased the transparency of enforcement decisions in FCPA cases. It remains to be seen whether the DOJ, under the new administration, will decide to extend or modify the pilot programme. But it is likely that the DOJ will still give weight to voluntary self-disclosures. Companies should therefore continue to be mindful of the potential advantages of voluntarily disclosing FCPA violations.

Barry A. Bohrer is a partner at Schulte Roth & Zabel LLP. He can be contacted on +1 (212) 756 2380 or by email: barry.bohrer@srz.com.

Barry A. Bohrer

Schulte Roth & Zabel LLP