The Marx Brothers Mirror Scene: Absurdity and Comments by a SEC Commissioner

I continue my Marx Brothers’ themed week by today looking at what I and many others believe to be their most cherished routine: the Mirror Scene. Danny Leigh, in his article in the Financial Times (FT), entitled “Souped-up comedy”, wrote, “The set-up is deathlessly simple. Fredonia’s President, Groucho in nightgown and cap finds Harpo, a spy from neighboring Sylvania, in his bedroom. They chase each other down some stairs and face off in front of each other, dressed identically. Harpo, the spy and intruder pretends to be Groucho’s reflection, and the two brothers spend the next three minutes locked in a mad dance of mimicry. The result is flawless, the kind of ecstatic comedy in which the world outside the cinema simply falls away. Variations on the skit had been performed by others before but the brothers raised it to undreamt absurdist heights, claiming it for ever as their own.” So you have Pinky (Harpo), dressed as Firefly (Groucho), pretending to be Firefly’s reflection in a missing mirror, matching his every move—including absurd ones that begin out of sight—to near perfection. In one particularly surreal moment, the two men swap positions, and thus the idea of which is a reflection of the other. The scene is absolutely silent until Chicolini (Chico), also disguised as Firefly, enters the scene and collides with both of them and sound resumes.

Although its appearance in Duck Soup is the best-known instance, the concept of the mirror scene did not originate in this film. Max Linder included it in Seven Years Bad Luck (1921), where a man’s servants have accidentally broken a mirror and attempt to hide the fact by imitating his actions in the mirror’s frame. Charlie Chaplin used a similar joke in The Floorwalker (1916), though it didn’t involve a mirror. This scene has been recreated many times from entertainment as diverse as Bugs Bunny cartoons, to the televisions series Gilligan’s Island and even in a The X-Files episode. Harpo himself did a reprise of this scene, dressed in his usual costume, with Lucille Ball also donning the fright wig and trench coat, in the I Love Lucy episode “Lucy and Harpo Marx”.

I find it to be absurdist comedy at its ultimate height. To this day, I almost cry I laugh so hard when I see that scene. While you may not find it quite as funny as I did, most probably one thing you will also not find funny is an ongoing debate in both academia and in legal circles involving a question on corporate governance as reported in the New York Times (NYT) in the Dealbook column by Andrew Ross Sorkin, in an article entitled “An Unusual Boardroom Battle, in Academia”. The question staggered elections of corporate board members or whether the entire slate of Board members be elected, up or down, each year.

On the side of full Board, up or down voting is Professor Lucian A. Bebchuk, a Harvard Law School professor who has long researched corporate governance issues and has been an outspoken advocate for increased democracy in corporate America’s boardrooms and his group, the Harvard’s Shareholder Rights Project. Professor Bebchuk believes staggered election of Board members “silences shareholders, entrenches management and makes it less likely that suitors or activists will emerge, depressing valuations.”

On the other side of the dispute are Daniel M. Gallagher, a member of the Securities and Exchange Commission (SEC), and Joseph A. Grundfest, a professor at Stanford Law School and a former SEC commissioner, who co-authored a paper entitled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.” The paper is in opposition to Bebchuk’s position. Sorkin observed that “Mr. Gallagher and Mr. Grundfest suggest that companies are dropping their staggered board structures — and shareholders are voting to eliminate them — based, in part, on faulty research by Harvard’s Shareholder Rights Project. Worse.” But here is the kicker and what moves this rather arcane academic debate into the realm of the absurd. “They suggest, Mr. Bebchuk’s project committed fraud by not fully disclosing the extent of contradictory research, which they say is a “material omission” by S.E.C. standards.” Yes sports fans, a sitting SEC commissioner suggested in writing that Harvard had engaged in a securities law violation.

As Sorkin noted, “there’s the fundamental issue of whether a sitting member of the S.E.C. should be writing such an incendiary paper in the first place.” Sorkin quoted an email comment made by Professor Robert J. Jackson Jr., from Columbia Law School. Jackson wrote to Sorkin in an email “All should agree that it is wildly inappropriate for a sitting S.E.C. commissioner to issue a law review paper accusing a private party of violating federal securities law without any investigation or due process of any kind. This is a striking, and as far as I know unprecedented, departure from longstanding S.E.C. practice.” Jackson went on to say “Imagine if a sitting S.E.C. commissioner wrote a law review article accusing Goldman Sachs of violating federal law without any S.E.C. investigation of the matter — Goldman and their counsel would quite rightly be outraged.”

Near the end of his article, Sorkin stated, “There are many opposing views on the paper. But here’s one way to think about it: It was a bad precedent for Mr. Gallagher to involve himself in a paper that raises the possibility of fraud in the field he regulates without the due process of a legal complaint. Mr. Grundfest could have written this provocative paper on his own, though it might not have attracted the same amount of attention within the industry.”

I would ask you to imagine if any of the Department of Justice (DOJ) attorneys who work in the Foreign Corrupt Practices Act (FCPA) area were to write an article, law review or other, that said not only is an entity’s position on interpretation of the FCPA wrong, its interpretation in practice is a FCPA violation. Do you think such corporation or entity would feel like they would get a fair shake from such prosecutors? Think any bias might exist going forward? While I have been one of the loudest advocates for the DOJ making more information on its FCPA declinations more public, SEC Commissioner Gallagher’s paper, demonstrates a very good reason for the DOJ not making any such information public: i.e. due process and fairness. Just as bad facts can certainly lead to bad law, this action by a sitting SEC Commissioner to even imply that an entity violated US Securities Laws in an article is not a road that we want to begin to go down.

For a clip of the famous Mirror Scene, click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

Why a Compliance Defense Will Not Make a Compliance Program Effective

Ed. Note – this week, I am pleased to join my colleagues David Simon, partner at Foley & Lardner LLP, and William ‘Bill’ C. Athanas, partner at Waller Lansden Dortch & Davis, LLP, in a tripartite debate on the efficacy of the affirmative defense of a compliance program to the Foreign Corrupt Practices Act (FCPA). Today, I will present my views, from the perspective of a former in-house counsel, on why a compliance defense would not help to create greater compliance with the FCPA. Tomorrow, David will discuss his views, from the perspective a white collar defense practitioner, on why a compliance defense under the FCPA would foster greater compliance with the Act. And finally, on Friday, Bill will present his views as a former Department of Justice (DOJ) prosecutor. I hope that you will enjoy our debate.

My starting position is that I do not believe a compliance defense would be effective in giving companies additional clarity or comfort in the design or implementation of their anti-corruption compliance program.  I also think that a compliance defense could lead to unintended and adverse consequences that could seriously downgrade the effectiveness of anti-corruption programs.

I.                   Current Credit in Place

Currently there is credit for an effective compliance, as set out in the DOJ’s prosecution guidelines; the “Principles of Federal Prosecution of Business Organizations”, which is the DOJ’s policy on the factors it considers when instigating a prosecution of a company, it includes a requirement that prosecutors consider “the existence and effectiveness of the corporation’s pre-existing compliance program.” These factors have been borne out in the numerous Declinations to Prosecute granted over the years. While only one of these Declinations, the Morgan Stanley Declination, has been publicly announced, there were six Declinations listed in last year’s FCPA Guidance, with the company identifiers removed. All of this information makes clear that the DOJ currently takes the state and effectiveness of a compliance program into account when making a decision.

II.                Trial Lawyers v. Corporations

Both of the two gents I am debating with this week are trial lawyers and I am a recovering trial lawyer. A trial lawyer’s job is to try cases. If you do not want to go to the courthouse, you should not consider yourself to be a trial lawyer. I grew up in a litigation system where there was one lawyer per side at trail. Mano-y-Mano; the two gunslingers on Main Street at High Noon, the King’s Champion – single combat warriors sent out to do battle in the courtroom for their clients. Such is the job of the trial lawyer. Trial lawyers are risk takers and will to push the envelope in front of a judge or jury. If you claim to be a trial lawyer and never go to court it will not instill any fear or much respect from your opposition. You may even turn into a laughingstock. It does not matter how big a jerk you can be in discovery and pre-trial pleading practice, if you are afraid to go to trial, you are useless as a trail lawyer.

Just as trial lawyers are made for trials corporations are not. Corporations do not and will not go to trial in FCPA cases because it is not in their interest to do so. So if a corporation will not go to trial, a compliance defense has as much use as a trail lawyer afraid of the courtroom, in other words it is useless. There are a myriad of reasons that it is not the job of a company to go to trial but I will focus on two: (1) certainty; and (2) the “Arthur Anderson” effect.

A.     Certainty

The primary reason for a company, which violates the FCPA, entering into a settlement via a Deferred Prosecution Agreement (DPA), Non-Prosecution Agreement (NPA) or other vehicle, is certainty. The one thing I learned in almost 20 years of trying cases in the US (civil side only) is that nothing is certain when you leave the final decision to an ultimate trier of fact who is not yourself, whether that trier of fact be a jury, judge or arbitrator. The most important thing for a company is certainty and that is even more paramount when a potential criminal conviction looms over its corporate head. Certainty is equally critical for the prosecution. No matter how ‘slam dunk’ the facts are, or appear to be, once a prosecutor turns over the final decision to another trier of fact; the prosecution has also lost certainty in the final decision. Every corporate defendant that goes to trial can, and should, raise all procedural and factual defenses available to it. No prosecutor can ever be 100% certain that it will win every court ruling or that a guilty conviction will be upheld on appeal. However, a settlement brings certainty and for a company that certainty is in its rights and obligations and for the prosecution the same is true.

B.     The Arthur Anderson Effect

Arthur Anderson was the auditor for Enron Corporation (Enron). Neither Enron nor Arthur Anderson exists today. The reason that Enron no longer exists is that it was guilty of unsustainable fraud. The reason Arthur Anderson no longer exists is that it destroyed documents relating to its auditing services for that unsustainable fraud – Enron; primarily for countenancing in and/or not detecting the fraud. Arthur Anderson was convicted for these actions. It is of no matter that the verdict was overturned on appeal.

My former This Week in FCPA podcast partner, Howard Sklar, wrote in a piece for forbes.com entitled “Against a FCPA Compliance Defense”, that “Corporations cannot afford to fight these cases through to the stage where an affirmative defense becomes relevant.” He quoted Doug Bain, the former General Counsel (GC) of Boeing Co., for the effect on Boeing if it were to be indicted:

So what’s the impact if we get indicted or convicted?

Besides the normal fines and that kind of stuff, there’s a presumed denial of export licenses, and that would be both on the commercial and the government side. In a moment, I’ll give you an idea of why we are concerned about that one.

We can get re-suspended or all of IDS (Integrated Defense Systems) can be debarred.

We can lose our security clearances.

And one nasty little thing is that the Bureau of Alcohol, Tobacco and Firearms, which has an almost explicit prohibition on possessing explosives. For those of you who are at BCA [Boeing Commercial Airplanes], you might remember that every single door on an airplane has actuators that are triggered by explosives.

Other commentators have attempted to demonstrate quantitatively that the Arthur Anderson effect is not correct. While I do not agree with their analysis, even if I did, simply running the numbers misses the point. Corporate counsel are not trial lawyers, they are in-house corporate counsel. Their job is not to be gunslingers but to protect and preserve the corporation for its stakeholders. So, by their nature, they tend to be less of a risk-taker than trial lawyers and can be more conservative. This difference in philosophy plays out in the following question: Do you want to be the first GC to go to trial and find that the Arthur Anderson effect is real? Or do you want to settle and play it safe? And, of course, as Sklar notes “Even if a company wins eventually, oftentimes the damage is done: see, e.g., Arthur Andersen.”

The value of a compliance defense is suggested in the name, ‘defense’. It is only useful if it is raised as an affirmative defense at trial. If a company says, ‘we have a compliance defense, you cannot get to us’ a rational response from the prosecutors might be, ‘OK, let’s go to trial.’ There would be no credit for an effective compliance program in any settlement discussion because there would not be any settlement. More pointedly, it might make the DOJ even more aggressive in negotiations because they could simply take the position that a company must now prove it had a compliance program and that the compliance program was effective. How many compliance programs could stand the detailed scrutiny which would occur in a criminal case or in civil pretrial discovery? Every company has documents which discuss the areas in which the program is not fully effective. They would certainly be found in discovery. Lastly, no honest compliance officer could ever say that a program is fully “effective.”

Moreover, how would a company prove to a jury that it had an effective compliance program? Bring in an expert to say that simply because a rogue employee, group of rogue employees or entire country sales team paid out multi-million dollars in bribes that we did not detect, we still have an effective compliance program. Remember, both GlaxoSmithKline PLC (GSK) and Wal-Mart claimed to have world class, best practices compliance programs.

III.             Two Recent Examples – GSK and Wal-Mart

 A.     GSK

Consider the following about GSK, a little over one year ago, in July of 2012; GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data in what the DOJ called the “largest health care fraud settlement in U.S. history”. You would think that any company which has paid $3 billion in fines and penalties for fraudulent actions would take all steps possible not to engage in bribery and corruption. Indeed, as part of the settlement GSK agreed to a Corporate Integrity Agreement (CIA). This CIA not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the FCPA.

In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, inclusive of the Compliance Officer and other members of senior management necessary to meet the requirements of this CIA, whose job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required Deputy Compliance Officers for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified. Further, there was detail down to specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”. How would you say all of the above helped GSK make its anti-corruption compliance program effective?

B.    Wal-Mart

Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. Its ethics policy offered this clear direction, “Never cover up or ignore an ethics problem”.  What do you think a compliance defense would do for Wal-Mart about now? Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having an effective compliance program?

How do these two investigations portend the end of efforts to add a compliance defense to the FCPA? As stated in its Code of Conduct, “The GSK attitude towards corruption in all its forms is simple: it is one of zero tolerance.” and Wal-Mart stated “Never cover up or ignore an ethics problem.” What do you think a compliance defense would do for these two companies in trial? The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about GSK and Wal-Mart. It certainly appears that having a best practice compliance program did not lead to either company doing business more ethically.

IV.              False Sense of Security

I also think that the compliance defense would give companies a false sense of security that, combined with other recent regulations, can seriously degrade internal risk management. In an article in the summer 2013 issue of the MIT Sloan Management Review, entitled “Designing Trustworthy Organizations”, by the quartet of authors: Robert F. Hurley, Nicole Gillespie, Donald L. Ferrin and Graham Dietz; they addressed this issue. Their comments seem directly on point for our debate when they intone that that external government regulation, such as a as compliance program required under the FCPA, could be a helpful starting point; but it is not the complete answer in the construction of an ethical organization and one which does business in compliance with relevant anti-corruption legislation, such as the FCPA. That is because such legal requirements can only set a minimum standard. Further, such a reliance on a paper program of compliance could well give organizations “a false sense of security that can lull them and their stakeholders into complacency.” This is the current position of the DOJ in giving credit to companies which have an effective compliance program, rather than simply a paper compliance program.

I think that the DOJ gives credit when a compliance program is effective. While the best practices have clearly evolved, it is not difficult to fully understand what the DOJ considers best practices. But, at the end of the day, the compliance defense will not help a company because no company will go to trial and face a fraud finding from a jury. It is always better to settle and obtain certainty than to risk everything.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

Wrestling as an Olympic Sport and Declinations under the FCPA

What do the US, Russia and the Islamic Republic of Iran have in common? Answer: Precious little. However one thing that they do have in common is their vehement opposition to the absolutely idiotic, boneheaded and stupid decision by the International Olympic Committee (IOC) to drop wrestling from the Olympic Games. Wrestling dates back to the ancient Greek Olympic Games and it is just inconceivable that the IOC would drop one of the very few sporting events that has endured for 2,500 years. If these three countries can agree on something, do you think that the IOC should listen?

What do the FCPA Professor, the US Chamber of Commerce and Tom Fox have in common when it comes to the Foreign Corrupt Practices Act (FCPA)? Answer: Not much. But one thing we do have in common is a belief that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) should release information regarding FCPA matters that it declines to prosecute. For my part, the reason that the DOJ/SEC should release this information is that it is a solid base of information that a compliance practitioner can use to help improve a FCPA based compliance program.

What is a Declination?

First, continuing the good faith debate as to what is a ‘declination’, I first need to provide my definition. Last week, the FCPA Professor wrote, in a post entitled “The Need For An FCPA Lingua Franca”, of his belief in the need for a clarification of precisely what is a declination. He wrote, “I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action.” The Professor further states that “anything less ought not be termed a “declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding. This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.” The Professor also cited to a WilmerHale client release which discussed the DOJ/SEC FCPA Guidance and had the following line which relates to the definition of a declination, “It is also disappointing that some of the examples do not make clear that the conduct met each of the elements of a statutory violation, since the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case.”

I believe that a broader term approach, as I think that the term ‘declination’ should encompass all the situations where the DOJ or SEC turns down the opportunity to bring a FCPA case; whether that be a criminal matter enforced by the DOJ or a civil action brought by the SEC. I do not find the lack of a speeding ticket analogy to be appropriate in the FCPA/declination discussion. The reason is that the DOJ/SEC usually relies on either a self-disclosure or outside source of information before it begins an investigation. If there is a self-disclosure that means that competent white collar counsel, who probably are ex-DOJ/SEC prosecutors, think that there is a reasonable basis for an actionable FCPA issue to lie. To use the speeding ticket analogy, regarding FCPA matters, if I saw a police officer with a radar gun checking speeds and I thought that I had gone over the speeding limit, I could self-report what I believed to be a violation. He or she might say something along the lines of “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I did not have my radar gun on your car so I will not write you up.” Or the police officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit but I had my radar gun on your car and you were not going over the speed limit so I am not going to write you up.” Lastly, the officer might say, “Mr. Fox, you may have a good-faith belief that you traveled over the speed limit and I had my radar gun on you and I clocked you as going over the speed limit but because you were going 66 in a 65 and you came over here and told me about it I am not going to write you up.” So even if I had engaged in a speeding violation, there may be several reasons why I did not get a ticket.

What about situations other than self-disclosure, such those involving a whistle-blower, information which came from other companies in the same industry, such as those companies involved with  the freight forwarder Panalpina, or other situations where information comes to the DOJ/SEC and they eventually decide not prosecute. Marc Alain Bohn, writing a piece in the FCPA Blog entitled “Revisiting the Definition of ‘Declinations’”, said that “there are likely many considerations that inform an agency decision not to pursue a case. Given the agencies’ aggressive interpretations of the jurisdiction and knowledge elements of the FCPA—something the FCPA Professor has frequently drawn attention to it is likely rare that an agency’s decision not to pursue an enforcement action is based on its determination that there were insufficient facts to do so. This is particularly true in the case of issuers, against whom the agencies can more easily build FCPA-cases by focusing upon violations of the statute’s accounting provisions.” Because of these facts and other, Bohn urged a broader form of definition of declination than the FCPA Professor. Bohn gives the following definition, “I think it is appropriate to apply the short-hand label “declination” more broadly to each instance where the DOJ or SEC has notified a company that it does not intend to bring an enforcement action.”

Publicizing of Declinations

The concept that the US Chamber of Commerce, the FCPA Professor and myself do agree on, is the need for the DOJ/SEC to publicize declinations. I have argued for some time that by publicizing declinations, it would provide great value to the compliance practitioner. I believe this to be particularly true in the situation where a company has self-disclosed what it believes to be evidence of a FCPA violation. I believed this before the Morgan Stanley declination was released last year and I believed this before the FCPA Guidance had a section discussing six matters that the DOJ/SEC had declined to prosecute. The two releases of declinations have only made my belief stronger regarding the usefulness of declinations to the compliance practitioners.

I outlined some of the reason I think that declinations can be such a useful tool, in an article for the Washington Legal Foundation, entitled “DOJ Should Release FCPA Declinations Opinions”. I wrote that this is because “The substantive portions of declinations, excised of company-specific information, would greatly increase FCPA enforcement transparency. This, in turn, would inspire greater FCPA compliance through a better understanding of how DOJ interprets the law with the specific facts presented to it.” Further, “In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.”

From the Morgan Stanley declination we learned the importance of (1) annual FCPA training; (2) annual certification; (3) transaction monitoring; (4) compliance reminders; and (5) documentation of all of these factors. From the FCPA Guidance, we learned that the companies which received declinations had the following six factors:

1. The company was alerted to possible corruption via its own internal controls or compliance program.
2. The company self-disclosed to the DOJ/SEC.
3. The Company conducted a thorough investigation and shared the results with the DOJ/SEC.
4. The illegal conduct was not pervasive throughout the company, no systemic failure/over-riding of internal controls and the amount of money paid as bribe was relatively small.
5. The Company immediately took corrective action against the bad actors.
6. The extent the compliance program was expanded.

We learned some very specific, useful pieces of information from the declinations that have been issued. I hope that more will be issued by the DOJ/SEC in the future. It appears that the sport of Olympic wrestling, the FCPA and politics can indeed make for some strange bedfellows.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

The FCPA Guidance and Declinations

I have previously written about my belief that the US Department of Justice (DOJ) should go further in releasing information about Declinations to Prosecute Foreign Corrupt Practices Act (FCPA) cases self-reported to both it and the Securities and Exchange Commission (SEC). The FCPA Professor, Mike Volkov and others have also written and advocated that the DOJ should release information about Declinations because they are an excellent source of information for the compliance practitioner about the DOJ’s thinking on FCPA enforcement issues.

In a piece I wrote for the Washington Legal Foundation, entitled “DOJ Should Release FCPA Declination Opinions”, I stated that “In an area like Foreign Corrupt Practice Act (FCPA) enforcement, where guiding case law is largely non-existent, compliance practitioners must rely on the actions and decisions of federal enforcement agencies for information. Such information is available in the form of enforcement actions, the release of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs), and hypothetical fact patterns presented to the Department of Justice (DOJ) through its Opinion Release procedure. But one highly valuable source of guidance has been kept from regulated entities and their counsels: DOJ and Securities and Exchange Commission (SEC) “declination” decisions, opinions which are drafted when the agencies decline to prosecute an individual or organization. A change is needed in this counterproductive policy. The release of substantive information on declinations would help foster greater compliance with the FCPA by providing practitioners with specific facts of circumstances where investigations did not result in an enforcement action.”

This request for such information was provided in the recently released document “A Resource Guide to the US Foreign Corrupt Practices Act” by the DOJ and SEC. In it presented six recent matters that the “DOJ and SEC declined to pursue.” I have set them out in full because I believe that they provide solid information for the compliance practitioner.

Example 1: Public Company Declination

DOJ and SEC declined to take enforcement action against a public U.S. company. Factors taken into consideration included:

• The company discovered that its employees had received competitor bid information from a third party with connections to the foreign government.
• The company began an internal investigation, withdrew its contract bid, terminated the employees involved, severed ties to the third-party agent, and voluntarily disclosed the conduct to DOJ’s Antitrust Division, which also declined prosecution.
• During the internal investigation, the company uncovered various FCPA red flags, including prior concerns about the third-party agent, all of which the company voluntarily disclosed to DOJ and SEC.
• The company immediately took substantial steps to improve its compliance program.

Example 2: Public Company Declination

DOJ and SEC declined to take enforcement action against a public U.S. company. Factors taken into consideration included:

• With knowledge of employees of the company’s subsidiary, a retained construction company paid relatively small bribes, which were wrongly approved by the company’s local law firm, to foreign building code inspectors.
• When the company’s compliance department learned of the bribes, it immediately ended the conduct, terminated its relationship with the construction company and law firm, and terminated or disciplined the employees involved.
• The company completed a thorough internal investigation and voluntarily disclosed to DOJ and SEC.
• The company reorganized its compliance department, appointed a new compliance officer dedicated to anti-corruption, improved the training and compliance program, and undertook a review of all of the company’s international third party relationships.

Example 3: Public Company Declination

DOJ and SEC declined to take enforcement action against a U.S. publicly held industrial services company for bribes paid by a small foreign subsidiary. Factors taken into consideration included:

• The company self-reported the conduct to DOJ and SEC.
• The total amount of the improper payments was relatively small, and the activity appeared to be an isolated incident by a single employee at the subsidiary.
• The profits potentially obtained from the improper payments were very small.
• The payments were detected by the company’s existing internal controls. The company’s audit committee conducted a thorough independent internal investigation. The results of the investigation were provided to the government.
• The company cooperated fully with investigations by DOJ and SEC.
• The company implemented significant remedial actions and enhanced its internal control structure.

Example 4: Public Company Declination

DOJ and SEC declined to take enforcement action against a U.S. publicly held oil-and-gas services company for small bribes paid by a foreign subsidiary’s customs agent. Factors taken into consideration included:

• The company’s internal controls timely detected a potential bribe before a payment was made.
• When company management learned of the potential bribe, management immediately reported the issue to the company’s General Counsel and Audit Committee and prevented the payment from occurring.
• Within weeks of learning of the attempted bribe, the company provided in-person FCPA training to employees of the subsidiary and undertook an extensive internal investigation to determine whether any of the company’s subsidiaries in the same region had engaged in misconduct.
• The company self-reported the misconduct and the results of its internal investigation to DOJ and SEC.
• The company cooperated fully with investigations by DOJ and SEC.
• In addition to the immediate training at the relevant subsidiary, the company provided comprehensive FCPA training to all of its employees and conducted an extensive review of its anti-corruption compliance program.
• The company enhanced its internal controls and record-keeping policies and procedures, including requiring periodic internal audits of customs payments.
• As part of its remediation, the company directed that local lawyers rather than customs agents be used to handle its permits, with instructions that “no matter what, we don’t pay bribes”—a policy that resulted in a longer and costlier permit procedure.

Example 5: Public Company Declination

DOJ and SEC declined to take enforcement action against a U.S. publicly held consumer products company in connection with its acquisition of a foreign company. Factors taken into consideration included:

• The company identified the potential improper payments to local government officials as part of its pre-acquisition due diligence.
• The company promptly developed a comprehensive plan to investigate, correct, and remediate any FCPA issues after acquisition.
• The company promptly self-reported the issues prior to acquisition and provided the results of its investigation to the government on a real-time basis.
• The acquiring company’s existing internal controls and compliance program were robust.
• After the acquisition closed, the company implemented a comprehensive remedial plan, ensured that all improper payments stopped, provided extensive FCPA training to employees of the new subsidiary, and promptly incorporated the new subsidiary into the company’s existing internal controls and compliance environment.

Example 6: Private Company Declination

In 2011, DOJ declined to take prosecutorial action against a privately held U.S. company and its foreign subsidiary. Factors taken into consideration included:

• The company voluntarily disclosed bribes paid to social security officials in a foreign country.
• The total amount of the bribes was small.
• When discovered, the corrupt practices were immediately terminated.
• The conduct was thoroughly investigated, and the results of the investigation were promptly provided to DOJ.
• All individuals involved were either terminated or disciplined. The company also terminated its relationship with its foreign law firm.
• The company instituted improved training and compliance programs commensurate with its size and risk exposure.

From these six examples, I believe that there are some common elements that the compliance practitioner can draw upon, which I expand on below:

1. The company was alerted to possible corrupt conduct via its compliance program or internal controls. This clearly follows Paul McNulty’s Maxim No. 2, “What did you do to detect it?” If a company has a robust internal reporting system, including anonymous whistleblower line and strong internal reporting lines that are not only respected but taken seriously, this clearly is a plus. But more than internal reporting is both monitoring and auditing to determine not only the effectiveness of your compliance program, but to pick up potential violations.
2. Possible FCPA violations were self-reported or otherwise voluntarily disclosed to the DOJ/SEC. These declinations make clear that self-disclosure pays off in positive benefits by creating credibility in the eyes of the DOJ.
3. The entities in question conducted a thorough internal investigation and shared the results with the DOJ/SEC. I would view this as mandatory if a company is to have any hope of receiving a declination.
4. The conduct violative of the FCPA was not pervasive and consisted of relatively small bribes or other corrupt payments.
5. The company took immediate corrective action against the person engaging in the conduct.
6. Each company’s compliance program was expanded or enhanced and these enhancements were reflected in compliance training, internal process improvements and additional enhanced internal controls.

So I applaud the DOJ for releasing this information on Declinations. I have written that I believe the DOJ Declination given to Morgan Stanley was the most important FCPA (non) enforcement action of 2012. While the Guidance may be a more significant overall FCPA event because of its wider focus and reach, the inclusion of these six declinations continues to provide solid information to compliance practitioners to use in creating or evaluating their compliance programs. I ended my piece for the Washington Legal Foundation with the following, “In the declination process, DOJ is handling a much broader and more significant amount of information. A self-disclosing company has investigated or will investigate a matter, most likely with the aid of specialized outside FCPA investigative counsel. DOJ has the opportunity to review the investigation and suggest further or other lines of inquiry. Company personnel are made available for DOJ interviews, if appropriate. In short one would have actual facts and detailed oversight by DOJ, which in the case of a declination to prosecute, would provide substantive guidance on why it did not believe a FCPA violation had occurred in the face of a company’s good faith belief that it had violated the FCPA.”

I believe that this is still true.

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The US Supreme Court today, denied the Petition for Writ filed by ICE that I wrote about last week. It now appears that ICE’s efforts to intervene under the Crime Victims’ Rights Act in the DOJ settlement with Alcatel-Lucent are at an end.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012