Two years ago, declinations as a means of resolution under the US Foreign Corrupt Practices Act (FCPA) were unprecedented. Declination, being the cleanest and most coveted outcome for an entity under investigation, it is crucial to understand the principal considerations involved in securing this favourable outcome.
Under the FCPA, in certain cases where an investigation does not necessitate a trial, the enforcement agencies may decide to resolve the matter through a negotiated resolution agreement, a deferred prosecution agreement, a non-prosecution agreement or a declination.
A declination may be understood as an instance where, although there exists adequate evidence to initiate a trial, the enforcement agency decides not to pursue the action due to certain “mitigating factors”. In determining whether to bring or decline to bring an action under the FCPA, the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are guided by the principles laid down in the Principles of Federal Prosecution and the Enforcement Manual respectively. Considerations while making such a decision include the nature and seriousness of the offence, antecedents of the entity, strength of the evidence, deterrent effect of the prosecution, potential violations, etc. The enforcement agencies also place heavy reliance on the overall conduct of the entity under investigation. Although declinations have been seen in only a handful of cases, a review of the precedents reveals certain conclusive determinants that are taken into account while granting a declination.
The first declination letters to be publicly released by the DOJ in June 2016 were addressed to Nortek and Akamai Technologies. On discovering certain FCPA-related misconduct, Nortek and Akamai made voluntary disclosures about questionable payments made to government officials by their China-based subsidiaries.
The enforcement agencies concluded that based on the companies’ prompt voluntary self-disclosure, the thorough investigation undertaken, fulsome cooperation, steps taken to enhance their compliance programme and internal accounting controls, full remediation including terminating or disciplining the employees involved in the misconduct, full disgorgement, and other factors, granting a declination was appropriate.
Similarly, a declination was granted to HMT in September 2016. The investigation revealed that HMT through its employees and agents had paid approximately US$500,000 in bribes to government officials in Venezuela and China in order to gain business advantages. In view of HMT’s timely, voluntary self-disclosure, its thorough and comprehensive global investigation, full cooperation in the matter and agreement to continue to cooperate in any ongoing investigations, full remediation, including terminating eight employees and severing business relationships with the Venezuela agent and the China distributor who were involved in the conduct, and other factors, the enforcement agencies declined to prosecute the company.
In June this year, declinations were granted to Linde North America Inc, Linde North America LLC and CDM Smith on similar grounds. Most recently, in August, MTS Systems Corporation said it had been granted a declination by the enforcement agencies. Internal investigations revealed that MTS employees in China and Korea had incurred questionable expenses on gifts, travel and entertainment for certain government officials, and these FCPA violations were self-reported to the DOJ and SEC. Although the DOJ and SEC had not yet publicly released a declination letter, the company said it had been notified by the enforcement agencies that their investigations had been closed without further action.
The instances described above establish the broad parameters that are taken into account to determine whether to bring or decline to bring a prosecution against an entity which has engaged in misconduct under the provisions of the FCPA. The analysis clearly establishes four firm factors that are taken into account while determining whether declining to prosecute would be appropriate: (1) the company’s voluntary self-disclosure, (2) the company’s cooperation with the enforcement agency, (3) the company’s remediation, and (4) the company’s disgorgement of ill-gotten profits. For an entity which might be potentially facing an FCPA investigation, these mitigating factors are crucial for ensuring a favourable outcome in the form of a declination.
Kunal Gupta is a partner and the head of white collar investigations at Cyril Amarchand Mangaldas. Pankhuri Bhatnagar, an associate, assisted in preparing this article.
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