A non-prosecution agreement with the SEC rewards an enhanced compliance policy that helped uncover bribes, and the company’s quick steps to report them.
Designer clothing company Ralph Lauren won’t be prosecuted for bribing Argentine customs officials with cash and gifts worth more than a half million dollars, and neither will its executives under an agreement announced by the Securities and Exchange Commission on April 22. The company must pay the SEC and the Department of Justice a combined $1.6 million, and play by the rules laid out in agreements with each agency for a few years, but that’s it.
The corruption was apparently clear cut and easy to document. Between 2005 and 2009 the Argentine subsidiary paid bribes to a customs agent so that Ralph Lauren products could enter the country without regard to their legality. In January, 2010, the SEC created a division responsible for prosecuting violations of the Foreign Corrupt Practices Act (FCPA). Ralph Lauren adopted a new FCPA compliance policy in February 2010 and a few months later some employees at the Argentine subsidiary learned of the policy and notified the company of a problem at the subsidiary. Following an investigation that lasted a couple of weeks, the company reached out to law enforcement. The gentle treatment from law enforcement reflects prosecutors’ gratitude for the company’s quick response.
Indeed, George S. Canellos, Acting Director of the SEC's Division of Enforcement, was positively gushing. ‘When they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC and providing exceptional assistance in our investigation,’ he said. ‘[The deal shows] we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.’
While the Justice Department has been using non-prosecution and deferred prosecution agreements for years in an effort to stop companies from bribing foreign officials, the SEC has no such history. That’s true even though a policy embracing deferred prosecution and non-prosecution agreements has been in place since January, 2010. Instead, the SEC typically makes deals that involve it simultaneously filing charges and a settlement agreement under which the settling company neither admits nor denies the charges. In fact, since the announcement of the Enforcement Cooperation Initiative in January, 2010, the SEC has entered 39 charge-and-settle deals involving companies’ violations of the FCPA. In fact, the Ralph Lauren non-prosecution agreement was the SEC’s first in the FCPA context, and it has only entered one FCPA deferred prosecution agreement.
Although a “non-prosecution” agreement sounds significantly more lenient than filing charges against a company—and would be, if filing charges led to an extended prosecution that resulted in conviction—in practice there are few differences. In both cases, the SEC alleges a factual record it claims it can prove, and, if true, that record would support convictions. The SEC also negotiates a deal that includes the company paying money and agreeing not to break the law again. In both cases the deal may include 'express undertakings' that require the company to prepare and submit reports, implement new policies, and the like.
Two key differences between these agreements and ones that settle charges are that the company avoids the stigma of being actually charged, and both the SEC and the government avoid having a judge review their deal. Unlike agreements to settle charges, a non-prosecution agreement need not be submitted to court for approval. That aspect may be particularly appealing to the SEC now, given that some of its recent settlements have been rejected, at least temporarily, by skeptical judges.
The SEC sees a ‘significant substantive difference’ between charge-and-settle deals and NPAs. ‘When the Commission issues a cease-and-desist order, there's a finding that the company violated the law,’ says Kara Brockmeyer, chief of the FCPA unit. ‘Similarly, when we file a settled action in federal district court, the judge enters a final judgment enjoining the defendant from further violations of the law.’
Avoiding judicial scrutiny is troubling, notes FCPA expert Professor Mike Koehler of the Southern University of Illinois School of Law, because the SEC and Justice Department deals already get too little scrutiny. ‘Whether it's the SEC policy of neither admit nor deny settlements, the SEC offering a [Deferred Prosecution Agreement] to Tenaris two years ago, or this latest example with Ralph Lauren, the general lack of transparency and judicial scrutiny of most corporate FCPA enforcement actions is a matter of significant public policy concern.’
It’s impossible to tell why the SEC did what it did in this or other cases, he adds. ‘Why was Ralph Lauren offered an NPA? The SEC says it was because of the company's voluntary disclosure, cooperation and remedial measures. But such factors are often found in many SEC FCPA enforcement actions, so these are not distinguishing factors.’
The disheartening bottom line, says Koehler is that ‘law enforcement, whether civil or criminal, shouldn't be easy, but that is what these agreements are designed to do - make law enforcement easy.’
The SEC doesn’t agree. ‘What an NPA allows us to do is to signal to the world that once it identified the problem, this company really did things the right way,’ says Brockmeyer.