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Thursday
Sep072017

Karen E. Woody: Declinations with disgorgement make me queasy. Here's why

As readers of the FCPA Blog are aware, the Pilot Program requires voluntary self-disclosure and cooperation with the government in order to be eligible for a declination from the DOJ.

Since the Pilot Program's inception, three public companies have disgorged profits to the Securities and Exchange Commission in return for a declination from the DOJ.

In September 2016, however, the DOJ announced that it was providing two different private companies with declinations regarding potential FCPA liability, but required that the two companies disgorge their profits to the Department of Treasury.

These cases represented the first “declinations with disgorgement” that had ever been granted by the DOJ in FCPA enforcement.

Within the past few months, the DOJ has awarded declinations with disgorgement to another two private companies.

What makes these dispositions so novel? After all, disgorgement extracted by the SEC is par for the course in FCPA enforcement. Disgorgement demanded by the DOJ, however, is not, and the implications of issuing “declinations” with the requirement of “disgorgement” are alarming.

To the cynical observer, these declination with disgorgement cases are the equivalent of a corporation “buying” a declination in a corruption case, with the disgorgement amount representing merely the cost of doing international business.

Seen from another point of view, however, these dispositions could be viewed as examples of governmental extortion; meaning, if these “disgorgement” amounts are not paid, the government will threaten continued investigation and possible prosecution. 

Either of these scenarios compromises the integrity of the investigation and the legitimacy of the disposition.

The stated goal of the Pilot Program is to promote greater accountability for individuals and companies involved in FCPA-related misconduct. While intending to incentivize other companies to self-disclose in order to get a coveted declination from the government, these declination with disgorgement cases instead distort the traditional understandings of critical legal terms.

Specifically, these dispositions represent a bastardization of the term “declination,” as well as the term “disgorgement.” In other words, a “declination with disgorgement” is an inherently oxymoronic statement. What is occurring in these dispositions involves neither a declination nor disgorgement. The result, while attractive to companies seeking declinations, as well as government regulators demanding disgorgement, creates confusion around defined legal terms for lawmakers, regulators, companies, and other stakeholders.

Given the fact that this summer brought another two declinations with disgorgement from the DOJ Criminal Division under the Pilot Program, it seems this new type of disposition may be here to stay. But the ramifications of these dispositions may be that public and investor confidence in both corporate and government integrity is undermined, which is particularly ironic given that these cases deal with corruption investigations.

*     *     *

For a more detailed analysis of declinations with disgorgement, see ssrn here.

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Karen E. Woody, pictured above, is an Assistant Professor of Business Law and Ethics at Indiana University Kelley School of Business.

Reader Comments (3)

Government Integrity has become an oxymoron when it involves government agencies with compliance enforcement and/or oversight. In FCA actions, the DOJ unabashedly demands that a government contractor make a settlement offer which will convince DOJ to drop the investigation. Notably a large percentage of DOJ settlements highlight the financial recovery, but also quietly state that there was no finding of liability (the contractor/company/individual paid enough to cause the DOJ to "go away"). OFCCP and DOL use exhaustive and intrusive data requests to "motivate" the contractor to make a compelling financial offer (Google was partially successful in challenging this OFCCP tactic). And DOL has also engaged and re-engaged a statistician whose use of statistics is biased to yield predetermined conclusions (pay inequity). Laws may be well intended, but enforcement tactics distort the facts (make it appear that there are more issues than actually exist; thus reinforcing the need for more oversight).. . .
September 7, 2017 | Unregistered CommenterMichael Steen
FCPA investigations were uncovering misconduct in years leading up to 2016. This happened despite the shady tactics employed by the law firms to withhold "bad" documents, including misapplication of privilege, staffing decisions, "massaging" of translations. There is also issue of whistle blowers and witnesses being located in exotic locales where they would certainly come under duress. And even despite all of this voodoo, multinationals could not get a break.

In 2016, the big break came. The DoJ introduced the Pilot Program to ensure a robust and transparent enforcement targeting FCPA violations. The Program was deemed a success and extended through 2017. Under the Program, MNEs are able to resolve FCPA violations through disclosure and cooperation under more favorable terms and "streamlined" process.

It appears that under this new program government stopped prosecuting and is just collecting rent.

While some might see this as an extortion of MNEs that are merely doing what is customary when conducting business abroad. What seems to be lost in this analysis are the goals of FCPA to combat corruption and the people in those exotic locales are the paying for this whole charade. Of course, there is no shortage of SCUMPROFS to defend MNEs, as the link below shows.

It appears that the DoJ does not care to enforce FCPA and would rather just tax the activity, thereby certifying foreign corruption under US law. Good for US taxpayer, bad for US image aboard that has already been extensively criticized even before the Pilot Program and the pseudo taxation charade. On the positive note, anti-corruption business good is good and other major western players are eager to get in.

Hence, DoJ is in the business of certifying corruption and MNEs are eager to pay.
September 7, 2017 | Unregistered Commenterbeenthere
It is natural that declinations with disgorgement would make those in the anti-corruption business queasy for the stated reasons. I am not so sure about it being bad for the U.S. image abroad. I doubt that many other nations would criticize the U.S. for this practice, at least not too loudly, since many of the O.E.C.D. countries allowed the tax deductibility of bribes and kickbacks during the forty years that the FCPA has been in effect. While this may be seen as "the cost of doing business" in certain countries, at least the U.S. is not subsidizing corruption through tax expenditures. As mentioned, declinations with disgorgement are good for the U.S. taxpayer, it is not a perfect solution, but few things are. Perhaps the real question should be "does this stand as incremental progress in the fight against corruption"? If the anti-corruption business is good, then clearly, the MNEs will make amends for past misdeeds and change their business practices.After all, that is the point, isn't it?
September 10, 2017 | Unregistered Commenterlameslave 13

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