Vedder Price

Vedder Thinking | Articles Declinations with Disgorgement: The DOJ's Recent Approach in FCPA Enforcement

Newsletter/Bulletin

On September 29, 2016, the U.S. Department of Justice (DOJ) issued declination letters informing two privately-held Texas companies, HMT, LLC (HMT) and NCH Corporation (NCH), that they will not be prosecuted for violations of the Foreign Corrupt Practices Act (FCPA). According to the "letter agreement" issued to HMT, HMT agreed to disgorge nearly $2.7 million in profits to the DOJ as a result of HMT's employees and agents having paid approximately $500,000 in bribes to government officials in Venezuela and China.1 Similarly, according to the "letter agreement" issued to NCH,NCH agreed to disgorge nearly $335,000 in profits generated as a result of its Chinese subsidiary bribing Chinese officials with cash, gifts, meals and entertainment.2

What makes these "letter agreements" noteworthy is that they were the first declination letters issued since the launch of the DOJ's pilot program (Pilot Program) on April 5, 20163 in which: (i) a declination letter was issued; (ii) no fines or penalties were assessed against the companies; and (iii) the DOJ required the companies to disgorge any ill-gotten profits. While it may appear that the DOJ introduced a new tool—declinations with disgorgement—in resolving FCPA investigations of HMT and NCH, the fact that the DOJ required HMT and NCH to disgorge ill-gotten profits is not surprising given the requirements of the Pilot Program, as well as the fact that the DOJ often cooperates with the U.S. Securities and Exchange Commission (SEC) in investigating and resolving FCPA investigations.

When the Pilot Program was initially announced by the DOJ, much attention was given to the following three requirements for receiving full cooperation credit: (i) whether the company voluntarily self-disclosed; (ii) the degree to which the company cooperated in the DOJ's investigation; and (iii) the company's remediation efforts. However, previously issued declination letters, as well as the DOJ's Pilot Program Guidance, highlight a fourth critical requirement for obtaining full cooperation credit—the company's disgorgement of any profits received as a result of its FCPA violations. Indeed, the Pilot Program Guidance states that "even a company that voluntarily self-discloses, fully cooperates, and remediates will be required to disgorge all profits resulting from the FCPA violation."4

Furthermore, since the launch of the Pilot Program, the DOJ had issued three other declination letters to Nortek, Inc. (Nortek), Akamai Technologies, Inc. (Akamai) and Johnson Controls, Inc. (Johnson Controls). While the declination letters issued by the DOJ to Nortek, Akamai and Johnson Controls did not require the companies to disgorge ill-gotten profits, in each instance, the DOJ viewed each company's disgorgement to the SEC as a positive factor in its decision not to prosecute.5 In contrast, HMT and NCH are privately held companies, and as a result, the declination letters issued by the DOJ to these two companies required disgorgement.

Therefore, a key takeaway from the declination letters issued to HMT and NCH is that if the company is an issuer and subject to the jurisdiction of the SEC, the SEC will likely seek disgorgement through a non-prosecution agreement. In contrast, if the company is privately held like HMT and NCH, the DOJ may pursue and require disgorgement from the company. Furthermore, it appears likely that, even when a company voluntarily discloses, fully cooperates and remediates, that company will likely still need to disgorge profits (whether to the DOJ or the SEC) in order to be eligible for the full range of mitigation credit available under the Pilot Program.

Another notable takeaway from these recent declination letters is that, whether a company is dealing with the DOJ or the SEC, both agencies are committed to encouraging voluntary self-disclosure, timely cooperation and remediation, and both will require the same level of cooperation and disgorgement in order to be eligible for the full range of mitigation credit. Indeed, recent joint efforts by the DOJ and the SEC have led to an increase in FCPA enforcement actions and related declinations in 2016.6 Recent settlements and declinations further demonstrate that the DOJ and the SEC will reward companies that voluntarily disclose misconduct, fully cooperate and appropriately remediate. However, while recent declinations may not have contained undertakings or admissions by companies, the declinations were publically released and included detailed allegations of wrongdoing by the companies. As a result, companies should consider the potential reputational backlash that may stem from a declination letter issued by the DOJ.

Self-reporting and cooperation with regulators is not a "check-the-box" strategy. Whether proactive or reactive, once a company decides to cooperate, it should be prepared to present the DOJ and/or the SEC with evidence of a thorough internal investigation, remedial efforts taken in response to the issues identified by the company, and improvements to internal processes implemented as a result of the conduct that was uncovered during an internal investigation. In addition, the declination letters issued to HMT and NCH highlight the need for companies to engage experienced counsel to navigate cooperating with the DOJ and the SEC, including options for potentially disgorging ill-gotten profits.

Click below to download the complete newsletter featuring this article.


1 DOJ Declination Letter to HMT, LLC (Sept. 29, 2016), available at https://www.justice.gov/criminal-fraud/file/899116/download.
2 DOJ Declination Letter to NCH Corporation (Sept. 29, 2016), available at
https://www.justice.gov/criminal-fraud/file/899121/download.
3 On April 5, 2015, the DOJ announced its one-year FCPA enforcement pilot program intended to encourage voluntary self-disclosure, timely cooperation and remediation.
4 See Memorandum from Andrew Weissmann, Chief (Fraud Section), U.S. DEP’T OF JUSTICE, The Fraud Section's Foreign Corrupt Practices Act Enforcement Plan and Guidance (Apr. 5, 2016), available at
https://www.justice.gov/opa/file/838386/download.
5 DOJ Declination Letter to Nortek, Inc. (June 7, 2016), available at
https://www.justice.gov/criminal-fraud/file/865406/download; see also DOJ Declination Letter to Akamai Technologies, Inc. (June 7, 2016), available at https://www.justice.gov/criminal-fraud/file/865411/download; DOJ Declination Letter to Johnson Controls (June 21, 2016), available at https://www.justice.gov/criminal-fraud/file/874566/download.
6 SEC Enforcement Actions: FCPA Cases available at
https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml; see also https://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2016.



Professionals



Martin McElligott

Associate