DOJ Expands FCPA Self-Reporting Protections to Successor Companies

Financial Services Law

Building on its efforts to encourage self-reporting of Foreign Corrupt Practices Act (FCPA) violations, the Department of Justice (DOJ) announced it will extend protections to voluntary reporting successor companies for preacquisition violations of the target company.

In remarks at a Washington, D.C., conference, Deputy Assistant Attorney General Matthew S. Miner explained that the policy will apply both to situations where corruption is uncovered by the acquirer through due diligence in advance of an acquisition and when a company that is precluded from conducting robust due diligence learns of the conduct after the fact.

What happened

In April 2016, the DOJ launched a one-year pilot program “designed to motivate companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs.” And in 2017 when the pilot ended, the program was formalized in the FCPA Corporate Enforcement Policy, incorporating it into the U.S. Attorneys Manual.

In exchange for voluntarily self-disclosing misconduct and fully cooperating, the program provides a presumption that the company will receive a declination “absent aggravating circumstances involving the seriousness of the offense or the nature of the offender,” such circumstances defined as including involvement in the conduct by executive management, pervasiveness within the corporation, multiple offenses over time or a significant profit having come to the company as a result of the conduct.

The program further provides that even where the company cannot meet the elements necessary for a declination, a first-time offender can receive mitigation credit in the form of a fine reduction of up to 50 percent from the bottom of the applicable Sentencing Guidelines fine range calculation and not be subject to a monitor.

To be eligible for the credit and a pass on requiring a monitor, corporations must meet several criteria: voluntarily disclose the misconduct and all relevant facts related “within a reasonably prompt time after becom[ing] aware of the offense,” fully cooperate with the DOJ investigation, take appropriate actions toward remediation and disgorge all profits resulting from the FCPA violation.

Disclosures that a company is required to make, such as in Securities and Exchange Commission (SEC) filings or other government agency filings, do not constitute voluntary self-disclosure for purposes of the pilot program, and the voluntary disclosure must occur prior to an imminent threat of disclosure or government investigation.

Now, the agency plans to extend the program to companies in the process of acquiring other companies that may have been or may be acting in violation of the FCPA. At the American Conference Institute’s Eighth Global Forum on Anti-Corruption in High-Risk Markets, Miner announced the plan to attendees.

“As our Attorney General and Deputy Attorney General have both made abundantly clear, fighting corruption and ensuring a level playing field for law-abiding companies remains a significant priority for the Department,” he said. “We at the Department fully recognize that even within otherwise good companies, ones with robust compliance programs and strong cultures of compliance, there can exist one or a few bad apples. Similarly, we understand that through acquisitions, otherwise law-abiding companies can sometimes inherit problems that are not of their own making.”

While the DOJ “has made great strides” over the past year and a half with the new approach to corporate enforcement, “one area where we would like to do better is with regard to mergers and acquisitions, particularly when such activity relates to high-risk industries and market.”

Miner recognized that the DOJ/SEC Resource Guide to the FCPA, released in 2012, provides some guidance and states that voluntary disclosure “may” result in a declination to bring an enforcement action.

“While these policies are sound, I know from experience that ‘may’ decline is a significant sticking point for corporate management when deciding whether and how to proceed with a potential merger or acquisition,” he acknowledged. “I want to make it clear that we intend to apply the principles contained in the FCPA Corporate Enforcement Policy to successor companies that uncover wrongdoing in connection with mergers and acquisitions and thereafter disclose that wrongdoing and provide cooperation, consistent with the terms of the Policy.”

Echoing arguments made for years by defense lawyers, Miner noted that “we are working to avoid imposing excessive corporate penalties that harm innocent shareholders, employees, and other stakeholders.”

This approach also provides companies and their advisors greater certainty when deciding whether to go forward with an acquisition or merger when a potential issue is unearthed, as well as in determining how to approach wrongdoing discovered subsequent to a deal, Miner explained.

“We are fully cognizant that in some instances an acquiring company has limited access to a target company’s data and records, perhaps even more so when the target company is in a high-risk jurisdiction,” he told attendees. “In those instances, if an acquiring company unearths wrongdoing subsequent to the acquisition, we want to encourage its leadership to take the steps outlined in the FCPA Policy, and when they do, we want to reward them accordingly for stepping up, being transparent, and reporting and remediating the problems they inherited.”

Miner concluded by reminding his audience that the DOJ is a partner, not just an adversary. “When business and industry work with the Department, rather than against it, our public institutions and our country are stronger for it,” he said.

To read the prepared remarks, click here.

Why it matters

While Miner noted that it is too soon to determine the full impact of the formalization of the FCPA Corporate Enforcement Policy, he said the DOJ was “pleased” to reach the first corporate declination under the policy since the pilot program ended earlier this year. While the policy, Opinion Procedure Releases issued by the DOJ over the years and the DOJ/SEC FCPA Resource Guide all previously implied that these elements would be considered by the DOJ when deciding whether to bring an enforcement action against an acquiring company for preacquisition conduct by the target, Miner’s speech made the DOJ’s practice explicit as the next step in the agency’s effort to “foster a climate in which companies are fairly and predictably treated when they report misconduct” and to encourage “law-abiding companies with robust compliance programs” taking over “problematic companies” to “right the ship by applying strong compliance practices to the acquired company.”