DOJ’s FCPA Pilot Program: Lights, Camera, Action!

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Just two months after the U.S. Department of Justice (DOJ) issued the Foreign Corrupt Practices Act (FCPA) Enforcement Plan and Pilot Program, two companies have attained full mitigation credit and a declination of prosecution for meeting the standards as outlined in the Pilot Program.

The speed with which these declinations were issued – in conjunction with non-prosecution agreements (NPAs) issued by the U.S. Securities & Exchange Commission (SEC) – suggests that the DOJ is serious about using the Pilot Program to encourage companies to self-disclose FCPA violations. In addition, the corresponding NPAs issued by the SEC suggest that, even though the Pilot Program only applies to the DOJ, the DOJ and the SEC may be aligned on dispositions of FCPA matters that implicate the Pilot Program.

Background. Issued by the DOJ on April 5, 2016, the Enforcement Plan and Pilot Program has three primary components. The first two – an increase in FCPA law enforcement resources and a renewed emphasis on international cooperation – appear intended to show the DOJ’s commitment to vigorous enforcement of the FCPA, although those two components simply summarized developments previously announced.

The third and most noteworthy component is the Pilot Program, by which companies can obtain mitigation credit beyond that contemplated under the U.S. Sentencing Commission Guidelines if they take the following steps:

  • Submit a voluntary self-disclosure in coordination with a comprehensive internal investigation.
  • Cooperate fully with the DOJ in presenting findings of the investigation, including identifying and making available to the DOJ individuals involved in misconduct.
  • Fully remediate, including taking corrective actions to protect against future violations.
  • Disgorge all profits.

Mitigation credit may take many forms, including a reduction in any fine imposed against the company, a less onerous form of resolution with the company, or a determination that a monitor need not be imposed.

Declinations. On June 7, 2016, the DOJ announced its intention to decline prosecution against two companies – Akamai Technologies and Nortek, Inc. – under the parameters of the Pilot Program. (On the same day the SEC announced it would be entering into NPAs with the two companies.) As described below, these dispositions provide a first glimpse of how the Pilot Program operates in practice.

Akamai Technologies. Akamai, a U.S. cloud service provider based in Cambridge, Massachusetts, has operations around the world, including in China. The company’s wholly-owned Chinese subsidiary, Akamai-China, contracts with third-party channel partners to deliver cloud services to end users. 

According to publicly available information, from 2012 through 2015, an Akamai-China regional sales manager worked with a channel partner to obtain and retain business by bribing several end customers, some of which were state-owned entities. Akamai-China paid approximately $155,500 to customer employees and $32,000 in gifts to Chinese government officials.

Among the facts that served as the basis for the declination and NPA were the following:

  • After receiving a complaint in December 2014 from an Akamai-China sales representative regarding the improper payments, Akamai commenced an investigation and self-reported its investigation to the DOJ and SEC within weeks.
  • The regional sales manager who was involved in the bribes was placed on administrative leave shortly after being interviewed by Akamai, and later resigned in April 2015.
  • Akamai disciplined additional employees the company determined should have prevented violations of company policies.
  • The company terminated its relationship with the channel partner involved in the scheme.
  • Akamai enhanced its compliance program and training, including:
    • Implementation of an improved due diligence process for channel partners,
    • Appointment of a chief compliance officer and compliance team, and
    • Adding more detailed expense review and approval requirements in China.

In addition, Akamai agreed to disgorge $652,452, with prejudgment interest of $19,433, that the government concluded had been wrongfully obtained through the improper payments.

Nortek, Inc. Nortek, based in Providence, Rhode Island, is a manufacturer and seller of products for residential and commercial construction. According to the SEC, the company’s wholly-owned subsidiary Linear China provided gifts and issued more than 400 payments totaling approximately $290,000 to Chinese officials between 2009 and 2014 to obtain preferential treatment regarding regulatory oversight and customs duties, taxes and fees. (Unrelated to the Pilot Program, we think it notable that this is yet another example of the government enforcing the FCPA with respect to payments to obtain regulatory approvals and advantages as opposed to payments to more directly obtain or retain business.)

In announcing the declination and NPA, the government highlighted the following:

  • Nortek discovered the improper payments during an internal audit in 2014, then launched an internal investigation to better understand the improper payments.
  • The company made a preliminary disclosure to the DOJ and SEC prior to concluding its investigation.
  • The company terminated all five individuals involved in the misconduct, including Linear China’s managing director and chief financial officer.
  • The company strengthened its compliance program, including:
    • Augmenting training,
    • Adding a compliance committee, and
    • Adjusting its internal audit schedule to prioritize areas susceptible to corruption.

In addition, Nortek agreed to disgorge $291,403, with prejudgment interest of $30,655, that the government concluded had been wrongfully obtained through improper payments.

Takeaways. At least for the moment, these two matters illustrate what DOJ has determined to be mitigation efforts worthy of full credit and declination of prosecution. In that regard, we would highlight the following:

  • Timely self-disclosure: Both Akamai and Nortek apparently made prompt disclosures to the government soon after discovering the FCPA misconduct and before completing their internal investigations.
  • Employee discipline: Both companies took tangible steps to discipline the employees involved, including senior employees in the case of Nortek.
  • Cooperation: Both companies provided extensive cooperation to the government, e.g., sharing internal investigation findings, translating documents into English and making witnesses available for interviews.

Perhaps most importantly, these two matters indicate that the Pilot Program can work as the government intended. While both Akamai and Nortek were penalized monetarily, each was only required to disgorge funds the government deemed to have been obtained illegally. Both NPAs stipulate that the companies are not charged with violations of the FCPA (and of course the DOJ effectively reached the same result by declining to prosecute). After years of uncertainty about how much credit the DOJ and SEC actually gave to companies that self disclose and cooperate, it will be very interesting to see how many more companies take advantage of the Pilot Program as a result of these public declinations.

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Just two months after the U.S. Department of Justice (DOJ) issued the Foreign Corrupt Practices Act (FCPA) Enforcement Plan and Pilot Program, two companies have attained full mitigation credit and a declination of prosecution for meeting the standards as outlined in the Pilot Program.

The speed with which these declinations were issued – in conjunction with non-prosecution agreements (NPAs) issued by the U.S. Securities & Exchange Commission (SEC) – suggests that the DOJ is serious about using the Pilot Program to encourage companies to self-disclose FCPA violations. In addition, the corresponding NPAs issued by the SEC suggest that, even though the Pilot Program only applies to the DOJ, the DOJ and the SEC may be aligned on dispositions of FCPA matters that implicate the Pilot Program.

Background. Issued by the DOJ on April 5, 2016, the Enforcement Plan and Pilot Program has three primary components. The first two – an increase in FCPA law enforcement resources and a renewed emphasis on international cooperation – appear intended to show the DOJ’s commitment to vigorous enforcement of the FCPA, although those two components simply summarized developments previously announced.

The third and most noteworthy component is the Pilot Program, by which companies can obtain mitigation credit beyond that contemplated under the U.S. Sentencing Commission Guidelines if they take the following steps:

  • Submit a voluntary self-disclosure in coordination with a comprehensive internal investigation.
  • Cooperate fully with the DOJ in presenting findings of the investigation, including identifying and making available to the DOJ individuals involved in misconduct.
  • Fully remediate, including taking corrective actions to protect against future violations.
  • Disgorge all profits.

Mitigation credit may take many forms, including a reduction in any fine imposed against the company, a less onerous form of resolution with the company, or a determination that a monitor need not be imposed.

Declinations. On June 7, 2016, the DOJ announced its intention to decline prosecution against two companies – Akamai Technologies and Nortek, Inc. – under the parameters of the Pilot Program. (On the same day the SEC announced it would be entering into NPAs with the two companies.) As described below, these dispositions provide a first glimpse of how the Pilot Program operates in practice.

Akamai Technologies. Akamai, a U.S. cloud service provider based in Cambridge, Massachusetts, has operations around the world, including in China. The company’s wholly-owned Chinese subsidiary, Akamai-China, contracts with third-party channel partners to deliver cloud services to end users. 

According to publicly available information, from 2012 through 2015, an Akamai-China regional sales manager worked with a channel partner to obtain and retain business by bribing several end customers, some of which were state-owned entities. Akamai-China paid approximately $155,500 to customer employees and $32,000 in gifts to Chinese government officials.

Among the facts that served as the basis for the declination and NPA were the following:

  • After receiving a complaint in December 2014 from an Akamai-China sales representative regarding the improper payments, Akamai commenced an investigation and self-reported its investigation to the DOJ and SEC within weeks.
  • The regional sales manager who was involved in the bribes was placed on administrative leave shortly after being interviewed by Akamai, and later resigned in April 2015.
  • Akamai disciplined additional employees the company determined should have prevented violations of company policies.
  • The company terminated its relationship with the channel partner involved in the scheme.
  • Akamai enhanced its compliance program and training, including:
    • Implementation of an improved due diligence process for channel partners,
    • Appointment of a chief compliance officer and compliance team, and
    • Adding more detailed expense review and approval requirements in China.

In addition, Akamai agreed to disgorge $652,452, with prejudgment interest of $19,433, that the government concluded had been wrongfully obtained through the improper payments.

Nortek, Inc. Nortek, based in Providence, Rhode Island, is a manufacturer and seller of products for residential and commercial construction. According to the SEC, the company’s wholly-owned subsidiary Linear China provided gifts and issued more than 400 payments totaling approximately $290,000 to Chinese officials between 2009 and 2014 to obtain preferential treatment regarding regulatory oversight and customs duties, taxes and fees. (Unrelated to the Pilot Program, we think it notable that this is yet another example of the government enforcing the FCPA with respect to payments to obtain regulatory approvals and advantages as opposed to payments to more directly obtain or retain business.)

In announcing the declination and NPA, the government highlighted the following:

  • Nortek discovered the improper payments during an internal audit in 2014, then launched an internal investigation to better understand the improper payments.
  • The company made a preliminary disclosure to the DOJ and SEC prior to concluding its investigation.
  • The company terminated all five individuals involved in the misconduct, including Linear China’s managing director and chief financial officer.
  • The company strengthened its compliance program, including:
    • Augmenting training,
    • Adding a compliance committee, and
    • Adjusting its internal audit schedule to prioritize areas susceptible to corruption.

In addition, Nortek agreed to disgorge $291,403, with prejudgment interest of $30,655, that the government concluded had been wrongfully obtained through improper payments.

Takeaways. At least for the moment, these two matters illustrate what DOJ has determined to be mitigation efforts worthy of full credit and declination of prosecution. In that regard, we would highlight the following:

  • Timely self-disclosure: Both Akamai and Nortek apparently made prompt disclosures to the government soon after discovering the FCPA misconduct and before completing their internal investigations.
  • Employee discipline: Both companies took tangible steps to discipline the employees involved, including senior employees in the case of Nortek.
  • Cooperation: Both companies provided extensive cooperation to the government, e.g., sharing internal investigation findings, translating documents into English and making witnesses available for interviews.

Perhaps most importantly, these two matters indicate that the Pilot Program can work as the government intended. While both Akamai and Nortek were penalized monetarily, each was only required to disgorge funds the government deemed to have been obtained illegally. Both NPAs stipulate that the companies are not charged with violations of the FCPA (and of course the DOJ effectively reached the same result by declining to prosecute). After years of uncertainty about how much credit the DOJ and SEC actually gave to companies that self disclose and cooperate, it will be very interesting to see how many more companies take advantage of the Pilot Program as a result of these public declinations.

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