This article was reprinted with permission
from FCPA Professor
Much of what is written about Foreign Corrupt Practices
Act enforcement these days seems to be mere carrying forward of
DOJ and SEC statements, as if those comments represent a universal truth.
Last year at this time, Morgan Stanley's so-called
"declination" dominated the conversation. Why was it a
"declination"? It seemed simply because the DOJ said it was, even
though a bit of independent analysis would quickly reveal that there was
likely no criminal case to be made against Morgan
Stanley based on the DOJ's own allegations and comments from the judge who
sentenced Garth Peterson. (See here for
the prior post "Stop Drinking the Kool-Aid").
Last week, the DOJ and SEC announced double
non-prosecution agreements against Ralph Lauren Corporation ("RLC"). (See
the prior post). Because it was the SEC's first use of an NPA in the
FCPA context, the SEC portion of the enforcement action received the most
Why did the SEC use an NPA to resolve RLC's alleged
scrutiny? The SEC said that it was because RLC voluntarily
disclosed, provided extensive and thorough cooperation, and implemented various
Sensing an avalanche of FCPA Inc. information
carrying forward the SEC's comments, I noted in this
post last Tuesday as follows.
"Of course, these are not distinguishing factors.
Many SEC FCPA enforcement actions are the result of corporate voluntary
disclosures where companies are likewise commended on the information and
cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively
the same thing. In the recent Philips SEC enforcement action, the SEC
said substantively the same thing."
The RLC enforcement action was released during the early
days of a new era of SEC leadership and one law firm alert on the
action stated that "the SEC's enforcement division is clearly using
the NPA with RLC as an opportunity to do some cheerleading for the Enforcement
Cooperation Initiative" (see here for
more of that initiative launched in January 2010).
Many FCPA Inc. industry participants picked up the
pom-poms are started cheering alongside the SEC.
One headline read - "Self-Reporting FCPA
Violations Pays Off: Just Ask Ralph Lauren."
Another headline read - "Another Example Of The Benefits
Of FCPA Self-Reporting."
A law firm alert stated as follows. "The NPA in
this case resulted from Lauren's prompt self-reporting and extensive cooperation.
Prior to the Lauren NPA, the SEC seemed to provide limited credit to public
companies for cooperation in FCPA investigations."
Another law firm alert stated as
follows. "With the announcement of the Ralph Lauren resolution
... the SEC and DOJ have taken pains to highlight that beyond self-disclosure,
the expedient and thorough reporting of a potential violation, real-time
cooperation, and implementation of effective remedial measures may yield more
positive results for companies subject to the FCPA."
As is often the case, the FCPA Inc. material then
closed with marketing pitches concerning FCPA compliance services.
Many others highlighted that the SEC mentioned that
"Ralph Lauren Corporation has ceased operations in Argentina" and "is in the
process of formally winding down all operations there" to make the causal
inference that RLC did this because of the FCPA enforcement action and/or
risk associated with the FCPA. However, as noted in my post last
Tuesday, a few minutes of internet research will quickly reveal that
RLC made the decision in August 2012 to suspend and wind-down its Argentine
operations based on import controls put on foreign companies and associated
foreign currency controls intended to control one of highest rates of inflation
in the world. In doing so, RLC joined several other luxury
brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier,
Yves Saint Laurent, Hermes, and Louis Vuitton - to have abandoned or are
considering leaving Argentina.
Against the backdrop of misses, it was refreshing to
read a hit - Covington & Burling's release titled "The Ralph
Lauren Case: Inadequate Rewards for Exemplary Corporate
Cooperation." The alert states, in pertinent part, as follows.
"Although the government will no doubt cite these NPAs as
an exemplar of the benefits of self-reporting and cooperation, we think they
reaffirm the importance of careful consideration before a company decides to
self-report potential unlawful conduct.
Based on the facts recited in the SEC NPA, Ralph Lauren
appears to have held itself to an extremely high standard of compliance. On its
own initiative, the company adopted a new Foreign Corrupt Practices Act policy
and distributed it to employees, which led some Argentine employees to raise
concerns about the company's customs broker. The company immediately conducted
an internal investigation, which ultimately uncovered improper payments and
gifts to government officials. Within two weeks of this discovery, Ralph Lauren
self-reported its findings to both the SEC and the DOJ. The NPA also highlights
that Ralph Lauren adopted numerous remedial measures, including firing its
customs broker and implementing further enhancements to its compliance program,
cooperated extensively with the SEC, and undertook a world-wide review of its
operations that uncovered no other violations.
It is difficult to imagine a set of facts more deserving
of a non-public declination based on the criteria outlined by the SEC and the
DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by
the corporation itself; a thorough internal investigation of the misconduct;
implementation of remedial measures, including termination of employees engaged
in wrongdoing and improvements in internal controls and compliance programs; and
voluntary disclosure to the DOJ and/or the SEC.
The Ralph Lauren NPAs are far less advantageous to
the company than a declination, which would have involved no public allegations
of wrongdoing and no fines. By contrast, in addition to paying approximately
$1.6 million in penalties and disgorgement, under the DOJ NPA, the company had
to publicly admit and accept responsibility for the illegal conduct, which
potentially exposes it to shareholder lawsuits and reputational damage.
The company also was required to agree to toll the statute of limitations,
implement further extensive changes to its compliance program, and submit
annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is
found to have breached any of the terms of the agreements - determined solely
by the SEC or the DOJ - it may still face the original charges by both
agencies, plus potentially new charges based on any information collected
during the course of the NPAs.
The benefits to the government from entering into these
NPAs are clear. NPAs - unlike deferred prosecution agreements and SEC
injunctive actions - are not filed with any court, thus escaping the kind of
judicial scrutiny that has recently been given to some SEC settlements.
Moreover, the SEC and DOJ are able to emphasize, once again, the importance of
voluntary disclosure and cooperation, while still requiring significant ongoing
obligations on the part of the company.
The benefits to Ralph Lauren, on the other hand, are less
clear. It is likely that the government applied a discount when deciding what
sanctions to impose based on the company's self-reporting and cooperation.
However, it is not at all clear that any such discount was sufficient to cover
the incremental investigative and other costs incurred by the company as a
result of the self-report, and the additional burdens the company has agreed to
shoulder by entering into the NPAs. For other companies contemplating whether
to self-report potential FCPA violations, the case reinforces the importance of
closely evaluating the risks and rewards of potential outcomes, especially
given the government's apparent reluctance to grant a declination even when
presented with a textbook case of extraordinary cooperation."
Covington & Burling of course is the law firm former
Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here
for the prior post). Breuer was not listed as an author of the alert, but
several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of
Breuer's DOJ senior leadership team) are listed as authors.
The RLC enforcement action involved, per the DOJ /
SEC allegations, payments by one person in one of RLC's approximate
95 subsidiaries. The payments at issue, involving customs issues,
likey did not even violate the FCPA as Congress intended. [For
more on what Congress intended - including, as to alleged payments to
ministerial officials, see my article "The Story of
the Foreign Corrupt Practices Act.'). Indeed, when the government has
been put to its ultimate burden of proof in cases occurring outside the
context of procurement, the government has an overall losing record.
(See this prior
post). In the only case that the government has won in
this context, - the Fifth Circuit decision in U.S. v. Kay- the decision
was equivocal and the Court recognized that "there are bound to be
circumstances" in which a custom or tax reduction merely increases the
profitability of an existing profitable company and thus, presumably, does not
assist the payer in obtaining or retaining business." Indeed, the
Court specifically rejected the DOJ's contrary argument and stated as follows.
"[I]f the government is correct that anytime operating costs are reduced the
beneficiary of such advantage is assisted in getting or keeping business, the
FCPA's language that expresses the necessary element of assisting in obtaining
or retaining business would be unnecessary, and thus surplusage - a conclusion
that we are forbidden to reach."]
Against this backdrop and as a further sign of
just how backwards the FCPA conversation of late has become, the Society
of Corporate Compliance & Ethics (SCCE) released this statement
praising the DOJ and SEC for its handling of the RLC action.
SCCE representatives stated as follows.
"As with the recent Morgan Stanley case, the government
has made it clear that companies who take compliance seriously and are
committed to finding, fixing, and solving legal and regulatory problems are in
a far better position than those who do not invest in real, robust, and
effective compliance programs. I can think of no better proof of the value of
strong compliance and ethics programs than the DOJ's and SEC's recent actions."
"When the government visibly acknowledges and credits
internal compliance efforts, Boards and management take note of their tangible
value and are reminded of the need to support empowered, independent compliance
officers and functions."
When the DOJ (and now the SEC) use resolution vehicles
that are not subject to one ounce of judicial scrutiny, this is not something
to praise, it is something to lament.
When the DOJ and SEC take action against an entity (one
of the world's most admired companies according to this recent
Fortune list) that had an isolated instance of conduct that likely did not
even violate the FCPA as Congress intended, this is not something to
praise, it is something to lament.
When the DOJ and SEC extract approximately $1.6
million from an entity that acted like a responsible corporate citizen upon
learning of an issue, and then imposes
annual government reporting obligations on that company, and
otherwise "muzzles" the company, this is not something to praise, it is
something to lament.
Read more articles on the FCPA by Mike
Koehler at FCPA
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