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LEGAL DEVELOPMENTS ALERT: Takeaways from DOJ and SEC’s Recent Updates to the FCPA Resource Guide

On July 3, 2020, the Criminal Division of DOJ and the Enforcement Division of SEC released their first update to the Resource Guide to the U.S. Foreign Corrupt Practices Act (the “FCPA Resource Guide”) since November 2012.  The FCPA Resource Guide is a one-stop reference manual for the statutory requirements of the FCPA, DOJ’s and SEC’s enforcement policies and practices, recent enforcement actions and declinations, and applicable case law and DOJ opinion releases.  The Updated Guide incorporates important developments in FCPA enforcement over the last eight years regarding:

  • Incorporation of the DOJ’s FCPA Corporate Enforcement Policy which articulates the Department’s stated policy regarding credit for companies’ self-disclosure, cooperation and remediation;
  • Guidelines for imposing independent compliance monitors in corporate resolutions;
  • Factors controlling successor liability in the context of merger and acquisition;
  • Government remedies such as forfeiture, disgorgement as well as both criminal and civil monetary penalties;
  • Coordination of corporate resolutions between U.S. law enforcement authorities and the SEC, DOJ and the foreign counterparts to avoid “piling on”;
  • Identifying investigation, analysis, and remediation as the truest hallmark of an effective compliance program;
  • Underscoring DOJ’s Evaluation of Corporate Compliance Program as the key reference point for prosecutors in assessing corporate compliance programs;
  • Recent case law on conspiracy liability as to non-U.S. nationals, the local law affirmative defense, and the definition of “instrumentality”;
  • Clarifying the applicable statute of limitation for criminal violations of the FCPA’s accounting provisions and for criminal forfeiture and civil disgorgement actions;
  • Hypotheticals informed by recent cases.
  1. DOJ’s Corporate Enforcement Policy

The Updated Guide incorporates DOJ’s FCPA Corporate Enforcement Policy.  Based on a 2016 pilot program, the FCPA Enforcement Policy contains instructions on prosecutorial decisions as to declination, resolution and prosecution of corporate FCPA violations.  Specifically, “where a company voluntarily self-discloses misconduct, fully cooperates, and timely and appropriately remediates, there will be a presumption that DOJ will decline prosecution of the company absent aggravating circumstances.”[1]  Furthermore, where a company voluntarily discloses its misconduct and satisfies all other requirements, but severe aggravating circumstances compel prosecution, prosecutors are instructed to recommend a 50% reduction off the low end of the U.S. Sentencing Guidelines (USSG) fine range except in cases of criminal recidivism.  The Enforcement Policy also provides that, where a company fails to disclose but later fully cooperates and remediates, a 25% penalty reduction will be appropriate.

  1. Independent Compliance Monitor

The Updated Guide also addresses the 2018 changes in DOJ policy regarding the appointment of monitors.  The Updated Guide provides that prosecutors, when considering whether to impose a monitorhip, must balance the potential benefits of a monitorship against its cost and impact on a company’s operations. 

 In weighing benefits, prosecutors should consider: (a) whether the offense involved manipulation of corporate books and records and the exploitation of an inadequate compliance program or internal control systems; (b) whether the misconduct at issue is pervasive across the organization or approved or facilitated by the senior management; (c) whether the organization has made significant investments in and improvements to its compliance program and internal control system; and (d) whether the organization’s remedial improvements have been tested to demonstrate effectiveness.  A monitor may be avoided if a corporation’s compliance program and controls effective and appropriately resourced at the time of resolution.

  1. Mergers and Acquisitions

The Updated Guide recognizes robust pre-acquisition due diligence may be impossible in some transactions.  Under these circumstances, they will evaluate the timeliness and thoroughness of post-acquisition due diligence and compliance integration efforts in deciding whether to pursue liability against a successor entity.  Where an acquiring company voluntarily discloses misconduct, it may be eligible for a declination even if aggravating circumstances existed as to the acquired entity.  Another significant point is the recognition that where a company is acquired where there was no prior U.S. jurisdiction, the mere fact of acquisition cannot lead to enforcement action, unless the conduct is not remediated after acquisition and is allowed to continue.  The Updated Guide also uses new scenarios to illustrate its long-existing practices as to successor liability, including those designed to highlight: (1) the significant number of DOJ and SEC declinations where successor companies voluntarily disclosed and remediated the misconduct and cooperated with DOJ and SEC; (2) the limited circumstances where the DOJ and SEC have taken action against successor companies, generally in cases involving egregious and sustained violations and the successor company’s direct participation in the violations or failure to stop the continuation of the misconduct post-acquisition; and (3) the practice of DOJ and SEC pursuing enforcement actions against the predecessor company where the acquiring company uncovered and timely remediated the violations or the government’s investigation of the predecessor company was underway pre-acquisition. 

  1. Forfeiture and Disgorgement

The Updated Guide includes a new section regarding Forfeiture and Disgorgement. This section stresses that forfeiture and disgorgement remedies may be imposed in addition to criminal and civil penalties..”[2]  Compared with penalties and fines imposed for punitive and deterrent purposes, forfeiture and disgorgement are for the purpose of ensuring that the perpetrator does not profit from the misconduct.  The guidance reflects the U.S. Supreme Court’s 2020 decision in Liu v. SEC, holding that while disgorgement is an equitable remedy, it is only permissible where it does not exceed a wrongdoer’s net profits and is awarded for victims.  Also, per the 2017 U.S. Supreme Court decision in Kokesh v. SEC, the new guidance adds that the five-year statute of limitations governs civil disgorgement under 28 U.S.C. §2462.      

  1. Coordinated Resolutions to Avoiding “Piling On”

Chapter 6 of the Updated Guide also adds a section entitled “Coordinated Resolutions and Avoiding ‘Piling On.’”  According to the Updated Guide, DOJ and SEC may credit companies for payments to avoid “piling up.”  It also highlights DOJ and SEC attempts to coordinate with foreign authorities and to credit fines, penalties, forfeitures and disgorgements paid in non-U.S. enforcement actions where the focus is on the same allege misconduct.  According to the Updated Guide, DOJ has thus far coordinated resolutions with foreign authorities in more than 10 cases, and SEC has similarly coordinated resolutions in at least five.  However, the Updated Guide adds that the credits are not automatic.  The DOJ and SEC may elect to award full credit, partial credit or no credit at all.  In making these decisions, DOJ and SEC will consider, among other things, the egregiousness of the misconduct, statutory mandates regarding penalties, fines, and/or forfeitures, the risk of unwarranted delay in achieving final resolutions, and the adequacy and timeliness of a company’s disclosures and its cooperation with DOJ and SEC.  A company’s cooperation will be considered separate from any such disclosure and cooperation with other relevant enforcement authorities.

  1. Effective Corporate Compliance Program

The Updated Guide also expands discussions on the Hallmarks of Effective Compliance Programs, adding a sub-subsection titled “Investigation, Analysis, and Remediation of Misconduct.”  According to the guide, the truest measure of an effective compliance program is the company’s response to potential misconduct.  The Updated Guide provides that effective compliance programs include: (1) a well-functioning and appropriately funded mechanism for timely and thorough investigations of allegations be put in place; (2) the proper documentation of the company’s response to allegations, including any disciplinary or remediation measures taken; (3) the integration of the “lessons learned” from previous departures from a company’s policies, training and controls; and (4) the company’s performance of a “root cause analysis” that permits the company to adopt appropriate and timely remedial measures to prevent future breaches. 

In addition, the Updated Guide adds discussions on DOJ Evaluation of Corporate Compliance Program guidelines.  These guidelines are intended to assist prosecutors in deciding whether, and to what extent, the effectiveness of the corporation’s compliance program at the time of the offense and at the time of a charging decision or resolution.  Effective compliance programs will impact (1) the form of any resolution or prosecution; (2) the imposition monetary penalties, if any; and (3) future compliance obligations that the resolution may impose (e.g., monitorship or reporting obligations).  We discussed the Evaluation of Corporate Compliance Program in detail in our Client Alert on June 5.  That Client Alert provides insights into the types of questions that prosecutors ask to evaluate and assess a company’s compliance program.

  1. Recent FCPA Case Law

The Updated Guide references several recent court decisions relating to the conspiracy liability as to non-U.S. nationals, the availability of the “local law” defense, and the definition of “instrumentality,” specifically:

  • The U.S. Court of Appeals for the Second Circuit’s decision in United States v. Hoskins[3] rejecting criminal liability for a non-U.S. person for conspiracy or complicity of another’s FCPA violation unless he or she falls into one of the FCPA’s express categories of perpetrators;
  • S. District Court for Southern District of New York’s rejection of the defendant’s proposed jury instruction on “local law” defense in United States v. Ng Lap Seng[4]. The decision highlights that the “local law” defense requires an affirmative showing that the payment at issue is lawful under the written laws of the relevant foreign country, not that the local laws do not expressly criminalize the payment; and
  • United States v. Esquenazi,[5]where the Eleventh Circuit defined the foreign government “instrumentality” as an entity controlled by a foreign government that performs a function the controlling government treats as its own.”[6]
  1. Developments in Conspiracy law

While the Hoskins decision was a significant setback for the DOJ in the Second Circuit, the Updated Guide notes, however, that “[a]t least one district court from another circuit has rejected the reasoning in the Hoskins decision.”[7]  This implies that DOJ may still use conspiracy or complicity theories to prosecute parties not covered by FCPA’s anti-bribery perpetrator categories outside the Second Circuit.  It also sets the stage for a future circuit split that could lead to eventual Supreme Court review. In addition, the Updated Guide sets out an alternative charging theory. Specifically, the Updated Guide notes that “[u]nlike the FCPA anti-bribery provisions, the accounting provisions apply to ‘any person,’ and thus are not subject to the reasoning in the Second Circuit’s decision in United States v. Hoskins limiting conspiracy and aiding and abetting liability under FCPA’s anti-bribery provisions.”[8]     

  1. The “local law” defense

The Ng Lap Seng decision foreshadows a weakening of the “local law” defense.  Few countries have “written law” expressly condoning bribery and corruption.  Whether the decision is followed outside of the Southern District of New York should be monitored.

  1. Statute of Limitations

The Updated Guide clarifies the statute of limitations applicable to DOJ and SEC enforcement of the FCPA.  It states that the statute of limitations for criminal prosecutions for FCPA accounting provision violations is six years period because the offense is defined as “securities fraud offense[s]” under 18 U.S.C. 3301.   By contrast the Guide notes that the limitation period for FCPA anti-bribery violations is five years for both the DOJ and SEC, citing the Supreme Court’s Kokesh decision requiring the application of 28 U.S.C. 2462’s five-year statute of limitations period. 

  1. Case Examples and Hypotheticals

The Updated Guide updates some case examples and hypotheticals.  Other than the cases and hypotheticals already discussed above, examples are:

  • In “What Does ‘Corruptly’ Mean,” the Updated Guide replaces the old case example with the more dramatic fact pattern in the 2016 case of S. v. Joo Hyun Bahn, involving payment by a New York real estate broker of $500,000 to a middleman who actually had no relationship with the foreign officials the payer sought to bribe. This underscores the point that an attempted act of corruption needs not succeed to trigger FCPA liability;
  • In “Cash,” the Updated Guide replaces an old example based on the Daimler AG case with a new example based on SEC v. Halliburton and KBR, Inc., which involved a sophisticated bribery scheme of transferring funds to Brazilian moneychangers who would withdraw cash for bribing Brazilian government officials;
  • In “Gifts, Travel, Entertainment, and Other Things of Value”, a case example is updated based on DOJ’s 2017 resolution with the Dutch energy company SBM Offshore, N.V. This case involved alleged bribery consisting of travel to sporting events, “spending money” to foreign officials, paying school tuitions for foreign officials’ children, and shipping luxury vehicles to foreign officials.

Similar updates are made to the case examples in “How Are Payments to Third Parties Treated”, “Successor Liability”, “Who is Covered by the Accounting Provisions”, and the Part 2 of “Hypothetical: Third-Party Vetting.”  The new examples and hypotheticals are either based on more recent enforcement actions or contain more dramatic and illustrative fact patterns, or both.        

Conclusion

The Updated Guide retains the structure of the 2012 FCPA Resource Guide and updates and adds to the substantive discussions to represent the current state of FCPA interpretation and enforcement.  Neither the Resource Guide nor the Updated Guide, however, constitutes law or government enforcement policy.  These are reference manuals presenting a synthesized picture of FCPA enforcement and directing readers to the underlying statutory, judicial, regulatory, and enforcement authorities and resources. 

Smith Pachter McWhorter’s White Collar practice group includes former DOJ prosecutors, former SEC senior counsel, veteran FCPA compliance experts with decades of FCPA compliance and monitorship experiences, and former in-house lawyers of Fortune 100 companies focusing on FCPA compliance.  Together, we form a robust team ready to assist our clients who have FCPA advisory or investigative needs anywhere in the world.      

Please don’t hesitate to contact our attorneys if you have any questions about FCPA. 

Iris E. Bennett
ibennett@smithpachter.com 

Vincent W. Li
vli@smithpachter.com 

Michael K. Lowman
mlowman@smithpachter.com 

Carlos A. Grover
cgrover@smithpachter.com 

 

Footnotes:

[1] Aggravating circumstances include involvement of the company’s executive management, significant profits to the company from the misconduct, pervasiveness of the misconduct within the company, and criminal recidivism.

[2] Id., pp. 71.

[3] 902 F.3d 69 (2nd Cir. 2018).  The defendant in the case was a senior executive of the UK subsidiary of Alstom S.A. (“Alstom”) who was assigned to work at Alstom Resources Management S.A.  At no time during the relevant time period did Hoskins visit the United States.  Hoskins was the also Senior Vice President for Alstom’s Asia region and performed services for and on behalf of various other Alstom subsidiaries, including Alstom Power US.  The charges against Alstom were based on the allegations that Hoskins conspired with others to pay bribes to Indonesian government officials through two external consultants in exchange for the bribed officials’ assistance in securing a $118 million contract for Alstom and its subsidiaries and also Marubeni Corporation, Alstom’s consortium partner.     

[4] Jury Instructions at 4249-62, U.S. v. Ng Lap Seng, no. 15-cr-706 (S.D.N.Y. July 26, 2017).

[5] 752 F.3d 912, 925-6 (11th Cir. 2014).

[6] Id., at 925. 

[7] United States v. Firtash, 392 F. Supp. 3d 872, 889 (N.D. Ill. 2019).

[8] Updated Guide, pp. 46.

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