DEFERRED PROSECUTION UNDER THE FOREIGN CORRUPT PRACTICES ACT By: Sue Snyder, Partner, and Kimberly Connors, Associate Jackson Walker, L.L.P. In 1977, in response to findings by the Securities and Exchange Commission ( SEC ) that U.S. companies were paying out hundreds of millions in foreign bribes, 1 Congress passed the Foreign Corrupt Practices Act (the FCPA ). 2 The FCPA bars companies within the United States from bribing foreign officials. Companies found to have violated the FCPA may be fined up to $2 million and be subject to a civil penalty of up to $10,000 per incident. 3 Officers, directors, employees, and agents of these companies who willfully violate the FCPA are also subject to fines up to $100,000, a civil penalty of up to $10,000, and up to five years in prison per incident. 4 Because these amounts are assessed per incident, a single case may include fines well in excess of $2 million. Recently, for example, Willbros Group, Inc. agreed to pay a $22 million fine for violations of the FCPA. 5 Further, jail terms, including those exceeding five years, have been imposed for individual employees found to have violated the FCPA. 6 Since 2007, there has been a marked increase in both the number of FCPA cases being filed by the government and the fines corporations are facing for such violations. These cases may involve both civil and criminal prosecutions. An interesting trend emerging on the criminal side is the increased use of deferred prosecution agreements between the Department of Justice ( DOJ ) and/or the SEC and corporations charged with FCPA violations. In Subsection A, this memorandum will define deferred prosecution agreements and the standard terms incorporated therein. Subsection B will outline the nine factors prosecutors are instructed to consider in determining whether deferred prosecution may be appropriate. Finally, in Subsection C, this memorandum will examine recent deferred prosecution agreements arising out of FCPA violations. A. What is deferred prosecution? The DOJ bears the burden of proving beyond a reasonable doubt that a corporation willfully violated a provision of the FCPA. 7 This burden is significantly greater than the burden in a civil enforcement action brought by the Attorney General or SEC, where the government only has to satisfy the civil standard of proof, or preponderance of the evidence, in order to prevail. The heavy burden borne by the government in criminal cases often leads to the parties entering into plea bargains, including deferred prosecution agreements. 1 S. Rep. No. 95-114, at 3 (1977) 2 15 U.S.C. 78dd-1, et al. 3 Id. 78dd-2(g)(1). 4 Id. 78dd-2(g)(2). 5 May 14, 2008 Agreement between the DOJ and Willbros Group, Inc. ( Willbros Agreement ), which can be found at http://lawprofessors.typepad.com/whitecollarcrime_blog/files/willbros_deferred_agreement.pdf. 6 See generally United States v. Kay, 513 F.3d 432 (5th Cir. 2007) (upholding a 63-month jail sentence of the president of American Rice, Inc. stemming from FCPA violations in Haiti). 7 E.g. id. at 446. 1
Prior to 2003, deferred prosecution agreements were primarily entered into in juvenile or drug cases. 8 However, in a January 20, 2003 memorandum 9 from Larry Thompson, Deputy Attorney General, the DOJ encouraged prosecutors to consider entering into deferred prosecution agreements with corporations charged with criminal offenses. 10 Before the use of deferred prosecution agreements was encouraged, prosecutors dealing with corporate crimes either had to proceed with criminal charges against a corporation, likely destroying the corporation in the process, or let the corporation off without any punishment. 11 The option of entering into deferred prosecution agreements gave prosecutors the chance to take a more attractive middle ground approach. Deferred prosecution agreements are much like the name implies: they are agreements between the DOJ and corporations suspected of committing FCPA violations that defer prosecution for those offenses for a set period of time. At the end of the specified time, if the corporation has complied with the terms of the agreement, the charges against it will be dropped. 12 Criminal charges are still filed, usually in the form of a criminal information - which is similar to an indictment but does not require action by a grand jury - but will be stayed and, if the deferred prosecution agreement is complied with, eventually dismissed. 13 While the terms of a deferred prosecution agreement may be specifically tailored to fit the circumstances of each case, a review of deferred prosecution agreements arising out of FCPA violations reveal the agreements tend to be relatively uniform in content. 14 First, the corporation must accept responsibility for the FCPA violations for which it stands accused. A statement of facts related to the case is attached to the deferred prosecution agreements, and the corporation is prohibited from publicly contradicting those facts. If the prosecution deferred by the agreement goes forward in the future, the corporation may be prohibited from contesting the facts as laid out in the agreement in court. Second, as part of a deferred prosecution agreement, a corporation should except to pay a criminal fine. The amount varies based on the severity and scope of the charges the corporation is facing, but the amount will likely be in the millions. For example, as part of its deferred prosecution agreement relating to charges of wire fraud and falsification of its books and records, 8 Christopher A. Wray and Robert K. Hur, Corporate Criminal Prosecution in a Post-Enron World: The Thompson Memo in Theory and Practice, 43 AM. CRIM. L. REV. 1095, 1103 (2006). 9 The memorandum may be found at: http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm. Throughout this paper, the memorandum will be referred to as the Thompson Memo. 10 Id. at Part VI. 11 Wray, supra note 8, at 1103. 12 Id. at 1105 06. 13 Id. 14 The following comparison is based on three deferred prosecution agreements relating to FCPA violations: the Sept. 21, 2007 Agreement between the DOJ and Paradigm B.V. ( Paradigm Agreement ), which can be found at http://www.law.virginia.edu/pdf/faculty/garrett/paradigm.pdf; the Mar. 18, 2008 Agreement between the DOJ and Aktiebolaget Volvo ( AB Volvo Agreement ), which can be found at http://lawprofessors.typepad.com/whitecollarcrime_blog/files/newcomb_doc.pdf; and the Willbros Agreement, supra note 5. 2
AB Volvo agreed to pay $7 million as a monetary penalty; 15 Willbros agreed to pay $22 million for paying out monies and falsifying its books and records. 16 Corporations entering into deferred prosecution agreements must recognize that they will be expected to fully cooperate with the DOJ and any other government agency the DOJ may work with for the entire term of the agreement. This cooperation will often require the corporation to turn over documents and internal records that relate to the FCPA violations upon request; while the corporation may still claim attorney-client privilege, the DOJ may consider this in determining whether the corporations has fully cooperated with the DOJ. 17 Forced cooperation is very valuable to the DOJ, who will be better positioned to investigate the individual employees or managers involved in the FCPA violations, as well as any subsidiaries or related companies that might be involved. The corporation, to save itself, may have to provide the government with the evidence needed to secure convictions of people within and entities related to the corporation. If the corporation abides by the terms of its deferred prosecution agreement for the time period defined by the agreement, the DOJ will drop any charges that it could have brought against the corporation for the conduct described in the deferred prosecution agreement. The duration of the deferred prosecution agreements varies by agreement, but corporations should expect the agreement to last at least 18 months; three years is a more common term. 18 On the other hand, if the corporation fails to abide by the terms of the agreement, the DOJ will move forward with prosecution for the FCPA violations, as well as any additional charges that may have accrued. Closely related to the deferred prosecution agreement is the non-prosecution agreement. A non-prosecution agreement involves many of the same requirements as a deferred prosecution agreement, including the payment of a fine, an agreement to cooperate with the DOJ and any related government agency that lasts for a fixed period of time, and a statement of facts setting out the details of the violations for which the corporation stands accused. However, unlike a deferred prosecution agreement, a non-prosecution agreement does not include the filing of a criminal information or indictment; rather, in exchange for the corporation s concessions, the government agrees not to charge and prosecute the corporation. 19 Non-prosecution agreements allow the corporation to avoid the consequences a criminal charge may have on its ability to operate its business, particularly for companies involved in government contracts, but are far more rare than deferred prosecution agreements. 20 The Thompson Memo factors, as discussed 15 See AB Volvo Agreement, supra note 14. 16 See Willbros Agreement, supra note 5. 17 See AB Volvo Agreement, supra note 14. 18 Compare Paradigm Agreement (providing for an 18-month duration of the agreement) with AB Volvo Agreement (three years) and Willbros Agreement (three years and seven days). 19 Wray, supra note 8, at 1105. 20 For an example of a non-prosecution agreement, see the June 5, 2008 Agreement between the DOJ and Faro Technologies, Inc. ( Faro Agreement ), which can be found at http://www.millerchevalier.com/files/upload/faroagreement.pdf. Faro Technologies, Inc. entered into a nonprosecution agreement following allegations it had violated the FCPA with regards to the company s dealings with Chinese government officials. In exchange for avoiding prosecution, Faro agreed to pay a $1.1 million fine. Faro s 3
below, would also apply to determine whether a corporation may be offered a non-prosecution agreement; however, the more severe or widespread a violation appears to be, the less likely the DOJ will be willing to consider a non-prosecution agreement. In reality, unless a criminal charge would prevent a corporation from doing its business, the difference between a non-prosecution agreement and a deferred prosecution agreement is largely a matter of public perception. The corporation will still have to pay a fine and agree to cooperate with the DOJ in its investigation. A non-prosecution agreement allows the corporation to present to the public that it was never charged with a crime; however, if the corporation does not abide by the terms of its non-prosecution agreement, the statement of facts it admitted to as part of the agreement will be used against it in its subsequent prosecution. The DOJ, which is concerned with deterring corporations from violating the FCPA, will likely prefer to use a deferred prosecution agreement because the stigma of a criminal charge, even one that is eventually dismissed, will provide added incentive for corporations to monitor their actions abroad. B. Who is offered deferred prosecution? The Thompson Memo advised U.S. Attorneys that they should consider a variety of factors in determining whether to bring federal criminal charges against a corporation. Since that time, there has been a trend towards corporations accused of FCPA violations entering into deferred prosecution agreements with the DOJ. 21 In addition to the general factors prosecutors are to consider, 22 the memorandum listed nine additional factors prosecutors should consider before moving forward with criminal charges against a corporation: 23 1. The Nature and Seriousness of the Offense. Clearly, the prosecutor will consider the risk of harm to the public created by the culpable conduct in determining if deferred prosecution is a viable option in a particular case. However, corporations who may have run afoul of the FCPA as well as other federal laws should be aware that the prosecutor must consider the policy goals of all federal enforcement agencies involved in a particular case. Deferred prosecution may not comport with the policy goals of all agencies involved in a particular investigation; therefore, deferred prosecution may not be possible as to all of the potential charges a corporation may be facing. There is not much corporations can do to influence this factor in their favor after the wrongdoing has been committed. However, corporations who discover conduct in violation of the FCPA should be aware that rapid and complete disclosures may better position the corporation to receive deferred prosecution. willingness to cooperate with the DOJ and implement a stronger corporate compliance program factored into the decision to forego prosecution. 21 Note that the SEC also has enforcement power under the FCPA. While this memorandum focuses on deferred prosecution agreements entered into by the DOJ, the SEC may also consider deferred prosecution as an alternative to a criminal trial. 22 These factors may be found in the United States Attorneys Manual ( USAM ), and include: the sufficiency of the evidence; the likelihood of success at trial; the probably deterrent, rehabilitative, and other consequences of conviction; and the adequacy of non-criminal approaches. USAM 9-27.220, et seq. 23 Unless otherwise noted, the source for the information in Subsection B is the Thompson Memo. 4
2. The Pervasiveness of Wrongdoing within the Corporation. 24 This factor addresses the rogue employee situation. Certainly, if a large number of employees are committing even minor violations of the FCPA, or an employee is committing violations that are condoned by management, then the corporation is less likely to receive deferred prosecution. However, if the violation is the result of an isolated incident by a single employee, without the knowledge of management, then the prosecutor will be more willing to offer deferred prosecution as an alternative to criminal charges. The Thompson Memo indicates prosecutors should pay particular attention to any knowledge or involvement of management regarding the FCPA violation. If members of management were aware of the violation or condoned it, what level of management were they? The higher up the managerial ladder the knowledge rises, the more likely it is that the corporation will face criminal charges for the violation. While the two extremes discussed in this factor are easy to identify, the corporation is at the mercy of prosecutorial discretion for the numerous situations that fall in between; therefore, as discussed below, the existence of a good corporate compliance program is important to ensure that violations are not widespread and that management is trained as to the requirements of the FCPA. 3. The Corporation s History of Similar Conduct. The Thompson Memo charges corporations with the responsibility of learning from its mistakes. If a corporation has a history of troubles related to the FCPA, or related conduct, it is less likely to avoid criminal prosecution through deferred prosecution. A corporation s past history includes any criminal, civil, or regulatory actions brought against it. Further, when looking at a corporation s past history, the corporate structure is irrelevant; if the prior bad conduct arose in a subsidiary or separate division, it will still be considered as the conduct of the corporation as a whole. 25 As with the second factor, a corporation s past history cannot be influenced at the time a present violation is discovered or charged. Therefore, corporations who have had legal troubles in the past need to be aware that it is less likely they will get the option of deferred prosecution for present violations of the FCPA. For such corporations, the need for a comprehensive and effective compliance program is even more critical to ensure that any subsequent violations are isolated and promptly discovered and dealt with. 4. The Corporation s Timely and Voluntary Disclosure of Wrongdoing and its Willingness to Cooperate in the Investigation. The Thompson Memo recognizes that a prosecutor s success in identifying the persons who actually commit FCPA violations, as well as procuring evidence against such persons, may largely depend on a corporation s willingness to cooperate. Therefore, a corporation who cooperates with a FCPA investigation is less likely to be subject to criminal charges. 24 The pervasiveness element of this factor is drawn from the United States Sentencing Guidelines. See U.S. SENTENCING GUIDELINES MANUAL 8C2.5 & cmt. 25 See U.S. SENTENCING GUIDELINES MANUAL 8C2.5(c) & cmt. 5
The degree of cooperation will be taken into account in deciding whether a corporation should be offered deferred prosecution. While not an absolute requirement, a corporation who does not waive its attorney-client and work product privilege will be less likely to receive deferred prosecution. Further, a corporation that offers continuing support to culpable employees, such as by advancing attorneys fees or failing to sanction culpable behavior, will be less likely to be considered cooperative. Corporations facing potential FCPA discipline must walk a thin line between protecting employees and not wanting to appear uncooperative. Particularly when a member of uppermanagement or even an officer of the corporation is accused of violating the FCPA, corporations may struggle with the conflicting loyalty to their employee and what is best for the corporation as a whole. As these deferred prosecution agreements have played out, it has become clear that the DOJ is serious about bringing charges against culpable employees. For example, after entering into a deferred prosecution agreement with Willbros, the DOJ subsequently brought charges against an executive and a consultant affiliated with, among other charges, violations of the FCPA. 26 If convicted, each faces up to 35 years in prison and fines of at least $250,000. 27 Two other employees have already pleaded guilty stemming from the same FCPA violations. 28 As the timeliness and level of cooperation are among the few things the corporation will have the ability to influence at the time the violation is discovered, it must act prudently and make decisions that are in the best interest of the corporation. A failure to act quickly may be perceived by the DOJ as an act of bad faith and will make it less likely that a corporation will receive deferred prosecution. 5. The Existence and Adequacy of the Corporation s Compliance Program. The existence of a corporate compliance program is not enough to justify deferred prosecution; clearly, the program was not working to its full potential if there was a violation of the FCPA. However, the Thompson Memo recognizes that a corporation cannot be reasonably expected to prevent every possible violation through its compliance program. What the prosecutors are looking for in this factor is a compliance program that is designed to maximize its effectiveness, and that is enforced by management. The program has to be more than general policy statements or informal instructions; corporations must put the effort into creating a comprehensive system designed to actively protect against potential FCPA violations. Corporations seeking to implement adequate compliance programs should ensure that corporate directors are not merely a rubber stamp for officer recommendations; this also entails providing directors with adequate information to make independent and well-reasoned decisions. Internal audits must be detailed and independent, so as to provide the necessary information to decision-makers within the corporation. The crux of this requirement is that the corporation must have more than a plan that looks good on paper; there must be adequate staff and systems in place to implement the program effectively. 26 Press Release, Department of Justice, Former Willbros International Executive and Consultant Charged in $6 Million Foreign Bribery Conspiracy (Dec. 19, 2008) (available at http://www.usdoj.gov/criminal/pr/press_releases/2008/12/12-19-08willbros-guilty.pdf). 27 Id. 28 Id. 6
6. The Corporation s Remedial Actions. While a corporation s willingness to make restitution after a violation of the FCPA has occurred by no means precludes subsequent criminal prosecution, such action indicates the corporation rejects the culpable conduct and is committed to prevent future violations. While monetary remedial actions are possible, disciplining those responsible for the violation is a vital part of the restitution process. The willingness to discipline must extend beyond the rank-and-file employees to all levels of corporate management. Further, a corporation who refuses to disclose information about an employee s culpable conduct will likely not be viewed as taking favorable remedial action. 7. Collateral Consequences. While any criminal charge or conviction has negative consequences on innocent parties, this factor recognizes that the number of potential innocent third parties affected by a corporation s criminal conviction is potentially very large. In addition, a criminal conviction may prevent a corporation from participating in some federally funded programs, or bidding on federal projects. Therefore, prosecutors are encouraged to consider the potential consequences of a criminal conviction before moving forward with criminal charges. This factor is closely related to the second factor of the Thompson Memo, pervasiveness of the wrongful conduct. Where the FCPA violations are wide-spread or reach the upper levels of corporate management, it is more likely that persons who might otherwise be considered innocent third parties will have benefited from the wrongful conduct, such as where the conduct results in an increase in a corporation s stock prices. In such cases, it is less likely that deferred prosecution will be available. 8. The Adequacy of the Prosecution of Individuals Responsible for the Corporation s Malfeasance. While the Thompson Memo does not explain this factor in any detail, it has been interpreted as requiring the prosecutor to look at whether the prosecution of those individuals whose conduct is the basis of the charges against the corporation will satisfy the government s interest in deterring future violations, exacting retribution for the violations that have occurred, rehabilitating the violators, and seeking restitution from those who violate the FCPA. 29 A corporation that can show it has an adequate compliance program in place and has trained its employees as to the requirements of the FCPA will be more likely to receive deferred prosecution under this factor. As the culpable individual acted against company policy and contrary to company training, the government goals will be satisfied through the prosecution of that individual; there would be no need to also convict the corporation. 9. The Adequacy of Remedies Such As Civil or Regulatory Enforcement Actions. Alternative enforcement provisions may prompt prosecutors to offer deferred prosecution as to potential criminal charges. These alternative remedies may be in the form of civil or regulative enforcement actions, but such alternatives may not always be considered an adequate alternative. In determining adequacy, the prosecutor will consider what sanctions are available under the alternative remedy; the likelihood that such a sanction would be imposed; and what effect the alternative remedy would have on federal law enforcement interests. 29 See Wray, supra Note 8, at 1106. 7
While no one factor is dispositive, the factors that related to preventative action and prompt response to discovered wrongdoing will certainly be given weight by the prosecutor in determining whether a corporation should be offered deferred prosecution. Some of the factors, such as the corporation s history of wrongful conduct or the collateral consequences of a criminal conviction, are facts the corporation will be presented with at the time of the allegations. Having an adequate and effective compliance program in place, voluntarily disclosing any wrongful conduct discovered by the corporation, and responding to any violations with prompt remedial actions are steps a corporation can take, and should take, to minimize the risk of actual criminal prosecution when an issue arises. C. The realities of deferred prosecution In 2002, the DOJ brought four enforcement actions under the FCPA; in 2007, that number quadrupled to sixteen. 30 While the DOJ has not released its numbers for 2008, this activity appears to be continuing to increase. Examples of deferred prosecution agreements are interesting to observe. For instance, in the fall of 2007, DOJ entered into two deferred prosecution agreements with agreed fines of greater than $1 million. 31 Factors involved in these cases included the companies prompt investigation or voluntary disclosure and full cooperation. 32 In the spring of 2008, DOJ entered into two additional deferred prosecution agreements. 33 These fines were $4 million and $22 million. 34 The DOJ has acknowledged that the corporations complete cooperation with the investigation and their enhanced compliance programs factored into the DOJ s decision to offer deferred prosecution. 35 Conclusion In light of the increase in FCPA enforcement activity, the most important thing a corporation can do is ensure that it is not violating the FCPA. It can do this through the implementation of a strong and effective corporate compliance program that involves, among other things, training those employees most likely to deal with foreign officials and allows for independent audits that permit directors and other corporate decision makers to have access to all the facts necessary to make unbiased decisions. Importantly, this kind of compliance program must be actually implemented with adequate personnel to make the program effective. 30 FACT SHEET: THE DEPARTMENT OF JUSTICE PUBLIC CORRUPTION EFFORTS, Mar. 27, 2008, available at http://www.usdoj.gov/opa/pr/2008/march/08_ag_246.html (last visited Feb. 18, 2009). 31 Press Release, Department of Justice, Textron Inc. Agrees to $1.15 Million Fine in Connection with Payment of $600,000 in Kickbacks by its French Subsidiaries under the United Nations Oil for Food Program (Aug. 23, 2007) (available at http://www.usdoj.gov/opa/pr/2007/august/07_crm_646.html); Press Release, Department of Justice, Paradigm B.V. Agrees to Pay $1 Million Penalty to Resolve Foreign Bribery Issues in Multiple Countries (Sept. 24, 2007) (available at http://www.usdoj.gov/opa/pr/2007/september/07_crm_751.html). 32 Id 33 Press Release, Department of Justice, Flowserve Corporation to Pay $4 million Penalty for Kickback Payments to the Iraqi Government Under the U.N. Oil for Food Program (Feb. 21, 2008) (available at http://www.usdoj.gov/criminal/pr/press_releases/2008/02/02-21-08flowserv-agree.pdf); Press Release, Department of Justice, Willbros Group Inc. Enters Deferred Prosecution Agreement and Agrees to Pay $22 Million Penalty for FCPA Violations (May 14, 2008) (available at http://www.usdoj.gov/opa/pr/2008/may/08_crm_417.html). 34 Id. 35 E.g. Press Releases, supra Notes 31 and 33. 8
While it is unrealistic to believe that a corporate compliance program, even one that is detailed and properly implemented, can stop every potential FCPA violation, having one in place will also serve to protect the corporation from criminal prosecution if such a violation does occur. The compliance program, along with the other Thompson Memo factors, do not absolve the corporation of wrongdoing; however, they open the door to deferred prosecution agreements that allow the corporation to answer to the DOJ without facing the often dire consequences a criminal conviction brings for a corporation. The question that remains is: what effect will these agreements have on the corporation? We have seen the results of deferred prosecution agreements used in other cases whereby the existence of the agreement has impacted licensure and insurance costs. Also, the potential unrest over the possibility a corporation may provide additional information against its own employees and subsidiaries is an issue of which corporations must be aware. Time will tell if deferred prosecution agreements are an avenue corporations will increasingly seek when faced with charges stemming from violations of the FCPA. 9