Negotiated settlements and the FCPA
When the Department of Justice (DoJ) decides a company has criminally violated the FCPA, the most likely resolution is a negotiated settlement – specifically, a non-prosecution agreement (NPA) or a deferred prosecution agreement (DPA). Those resolutions became common several years ago, and have far outstripped alternatives such as indictments against individuals or companies.
NPAs and DPAs are controversial. A Manhattan Institute report titled ‘Without law or limits: the continued growth of the shadow regulatory state’, published in March, says they reflect executive branch overreach against companies rendered unfairly vulnerable by the collateral consequences they face if indicted. Other critics say the agreements have no deterrent effect and facilitate prosecution based on untested and unjustified legal theories.
Another charge is that these agreements result in fewer prosecutions of the individuals responsible, as NPAs and DPAs are much easier to achieve than criminal convictions and are considered sufficient law enforcement on their own. Perhaps the most common criticism is an overall lack of accountability and transparency, epitomized by the lack of judicial review of the agreements. Even so, only a few individuals, including US District Court Judge Jed Rakoff, have suggested their use be completely terminated.
Despite the criticism, these agreements are increasingly common, chiefly because members of the corporate defense bar persuade companies to pursue them, says Tom Fox, an attorney whose practice focuses on FCPA compliance and risk management. Fox, who admits to being ‘pro-NPA/DPA’, says defense attorneys at a securities docket conference last October publicly suggested an NPA/DPA negotiating strategy: ‘If a plea is required, push it down to a subsidiary, protect senior management, and negotiate the fine.’ That surprised Fox, who says that while this has generally been the playbook, he had never heard it discussed in public before October.
Nonetheless, the defense bar doesn’t give full-throated support to these deals. Stephen Spivack, a partner at Bradley Arant Boult Cummings and chair of its white-collar practice group, acknowledges that NPAs and DPAs are critical tools used to enforce the FCPA. There would be ‘fewer cases if the government didn’t have the NPA or DPA to resolve them’ because of how hard these cases are to prosecute, he explains. Having evidence that certain payments were inexplicably made, hidden or inaccurately described in a company’s books and records isn’t in itself enough to prove a bribe was paid, he notes; that’s the reason the government pursues an NPA or DPA when, in the absence of those options, it would likely not prosecute.
Better than nothing
David Smyth, a partner with Brooks Pierce McLendon Humphrey & Leonard, agrees that NPAs and DPAs allow resolution of cases where indictments would not otherwise be warranted. The staff attorneys at the SEC hate to have nothing to show for all their work, but ‘when you get into the details [of an investigation], some cases are just going to be tougher or easier to bring, and there will be facts rooted in self-reporting, co-operation and the strength of the underlying compliance program that will make some cases less appropriate to prosecute.’ NPAs and DPAs become very appealing to prosecutors in such circumstances because, contrary to doing nothing, they include fines and a negotiated document called a statement of facts, Smyth adds.
Spivack is among those who think the government tends to be more aggressive and bring more cases when it knows those cases won’t go to trial and won’t be subject to judicial review – that is, when the government can use an NPA or DPA. Spivack analogizes the situation to the 1990s, when the federal sentencing guidelines came into full effect. ‘Defendants were pleading guilty to lesser offenses in marginal cases out of fear of receiving a very harsh sentence under the guidelines,’ he says. Despite his belief that the DoJ’s fraud section generally does ‘a very good job of fairly exercising its prosecutorial discretion’, he cites the 2010 Shooting, Hunting and Outdoor Trade Show – or SHOT Show – as an example of FCPA prosecutorial overreach.
‘That case involved a co-operating informer and a sting that led to the prosecution of 22 people, many of whom were either acquitted or had the charges dismissed after a hung jury or before going to trial,’ Spivack says. ‘I’m sure there are companies agreeing to NPAs and DPAs where no one is closely analyzing whether the company would likely be convicted if it went to trial. These firms are looking for certainty and avoiding the risk that goes with a trial.’
Smyth agrees that many of the government’s legal theories in FCPA cases haven’t received pushback because litigation is so expensive that companies see it as more efficient to settle. Two kinds of firms are particularly vulnerable to criminal indictment and thus are most likely to negotiate agreements rather than litigate, says Spivack: publicly traded companies and government contractors. An indictment can hurt a company’s stock price and trigger securities litigation. It can also prevent a contractor from doing further business with the government.
Michael Volkov, a former federal prosecutor and veteran white-collar defense attorney with the Volkov Law Group, dismisses the idea of prosecutorial overreach. ‘It’s untrue to say NPAs and DPAs are allowing the DoJ to bring unjustified cases,’ he says. ‘All these settlements are strong cases, and these agreements are good resolutions for the government and the companies alike.’
That said, Volkov urges companies to litigate rather than settle, when appropriate. One key area to litigate, he believes, is the business nexus test, which is used to determine whether or not a payment is prohibited by the FCPA. To be illegal, the payment has to have been made in order to obtain or retain business. The Fifth Circuit, in the Kay case, said that in some situations paying officials to receive tax benefits can meet the test and be covered by the FCPA. ‘Prosecutors have been pushing this area of the law to the limit and if a company challenges them, it might just win,’ says Volkov.
Even though he believes the DoJ brings strong cases, he adds that ‘the use of NPAs and DPAs has facilitated a cottage industry of extracting fines from companies. They’ve been turned into a money-making and headline-generating machine.’
Volkov is among those who think the use of NPAs and DPAs has led to fewer prosecutions of individuals, a development he views negatively. NPAs and DPAs are ‘a quick and dirty way to close an investigation’ that would otherwise have continued to focus on individuals, prosecution of whom needs to be ramped up by the DoJ. Last year, Leslie Caldwell, the DoJ’s top criminal prosecutor, sent a message ‘that to gain co-operation credit, companies will have to come clean about the individuals involved,’ Volkov notes. Caldwell has promised to use fewer DPAs and seek more guilty pleas coupled with DPA-like regulations of the firm’s behavior, he adds: ‘That’s important because then if the agreement is violated, it’s a probation violation – much more serious than simply reinstating a prosecution.’
Volkov flags the December 2014 Avon case as a bellwether of how serious the DoJ is about increasing individual prosecutions. ‘If the three individuals whose conduct was outlined are not prosecuted, it’s hard to see a set of facts in which the DoJ would bring a case,’ he says. The Avon case, in which a staff member of the internal auditor detected illegal bribes that the CFO and auditor subsequently decided to cover up, was settled too recently to be able to deduce the DoJ’s intention, but Volkov says that if cases are coming, ‘the prosecutions should occur sometime this year.’ Fox agrees that ‘what happens to the three Avon executives will be an indication of the DoJ’s future prosecution of senior management.’
There is concern about Caldwell’s focus on increasing companies’ co-operation with the DoJ to build more cases against individuals. Smyth and Fox say it has exacerbated tension that already exists between companies and employees during an investigation, and that employees in these situations lack criminal procedural safeguards.
The DoJ isn’t the only federal agency signaling increased toughness in this area, says Smyth: ‘Andrew Ceresney [director of the SEC’s enforcement division] is pretty aggressive; he’s more aggressive than his predecessors.’ As evidence of this, Smyth cites Ceresney’s remarks on not caring about litigation risk, that being unwilling to lose some cases means the SEC isn’t being aggressive enough.
‘Some of the brunt of that aggression is being imposed on lower-level, less well-funded defendants that under prior regimes would not have been prosecuted,’ Smyth notes. ‘I don’t think that’s limited to the FCPA context.’
Error in judgment
Opinions vary as to whether judges should scrutinize these settlement agreements. Jim Copland, director of the Manhattan Institute’s Center for Legal Policy and author of the institute’s report, supports judicial review as long as it is coupled with substantive rules to guide judicial discretion. Smyth agrees, seeing lack of judicial scrutiny of these arrangements as a problem. Pointing to the SEC’s use of administrative actions, which avoid all judicial scrutiny, he says ‘the lack of judicial scrutiny is bad not just for [the firms] but also for the regulator, as it chips away at its authority and legitimacy.’
By contrast, Spivack opposes judicial scrutiny to the extent that it means judges are second-guessing whether a settlement is good or bad. ‘If there was a process where judges regularly second-guessed DPAs, I think you’d find more NPAs,’ he asserts. ‘That’s because companies want certainty, and if DPAs were being scrutinized and modified by judges, I think the DoJ and the companies it was investigating would seek the path of least resistance by entering into more NPAs.’
Fox concedes that without judicial oversight there is no scrutiny of whether the legal theory is correct or whether the size of the fine or penalty is appropriate. But he says an agreement between two parties ‘would only be a problem if the resolution wasn’t negotiated but was instead dictated by the DoJ.’
Volkov is unsure whether NPAs and DPAs are effective deterrents to corruption, but Spivack believes ‘FCPA settlements, whether by plea, conviction, NPA or DPA, have enormous impact; every company that does business overseas takes note.’
In view of signs that both the DoJ and SEC are more vigorously enforcing the FCPA, and the hardships that public companies and government contractors face in resisting settlements, the attorneys agree a strong compliance program constitutes good risk management. ‘It’s the best chance you have at getting a good resolution, whether that’s a declination, an NPA or an inexpensive DPA,’ Fox says.
Because NPAs and DPAs generally require that a company improve and enhance its compliance program in detailed ways, Spivack suggests that companies model such programs; in effect, the DoJ has given them its seal of approval.
Smyth urges all companies that have sales overseas to implement a strong compliance program, regardless of the company’s size. He points to the government’s prosecution of Smith & Wesson in 2014 as a cautionary tale for all small and medium- sized businesses with a comparative lack of experience in overseas sales. ‘The SEC could only point to $11,000 worth of guns the company had bribed the Pakistani police with, and the settlement included a $1.9 million penalty,’ says Smyth, who adds that there are a lot of companies that could potentially make the error of paying bribes as small as $11,000.
Smyth urges companies to adopt compliance programs, but says they should be ‘appropriate for the company’s size and complexity’ and need not bankrupt the company.