Better Late Than Never: A Voluntary Self Disclosure Case Study

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As previously reported, the Department of Justice (DOJ) has announced comprehensive corporate criminal enforcement policy changes utilizing both “carrots” and “sticks” to encourage companies to voluntarily self-disclose potential wrongdoing. 

As Acting Assistant Attorney General Nicole M. Argentieri recently stated, “while early reporting is best, self-reporting late is always better than never, whether in the M&A context or otherwise. There are significant benefits available under our policies, in terms of both penalty reductions and the form of the resolution.”

A recent Non-Prosecution Agreement between a Company and DOJ provides useful guidance on how these policies are enforced.

The Facts

In January 2018, a Company self-reported to DOJ its discovery of an eight-year bribery scheme in which the Company, through its third-party sales agents and subsidiary employees, paid government officials for favorable business arrangements with state-owned oil refineries in Vietnam, Indonesia, and India. The arrangements resulted in a profit of approximately $98.5 million. The Company discovered this wrongdoing around August 2016, and then conducted an internal investigation. Approximately nine months later, the Company disclosed its misconduct to DOJ. All told, discovery to disclosure took 16 months. DOJ determined that this amount of time did not meet the “reasonably prompt” standard necessary for the Company to qualify for benefits under the Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy. Nonetheless, DOJ gave significant weight to the Company’s other actions as part of its voluntary self-disclosure, including:

1. disclosing the misconduct before it would have otherwise been discovered;  
    
2. making regular and detailed presentations to DOJ about the misconduct;  
    
3. proactively identifying and providing information previously unknown to DOJ, including producing translated documents originally located in other countries in compliance with foreign data privacy laws; and 
    
4. voluntarily making foreign-based employees available for DOJ interviews in the U.S. 

The Company also received credit under the voluntary self-disclosure policy, despite its untimely reporting, because it engaged in extensive and timely remedial measures, including:

1. commencing remedial measures before being required to do so by DOJ, including strengthening its compliance program, retraining employees, and transforming its business model and risk management process to reduce corruption risks; and 
    
2. disciplining employees involved in the misconduct, including withholding approximately $763,000 in bonuses originally allocated for employees who engaged in the misconduct (or who knew or were willfully blind to it) in compliance with DOJ’s recently implemented Compensation Incentives and Clawbacks Pilot Program (Clawback Program).

For DOJ, these Company actions offset its untimely disclosure. DOJ found the Company was entitled to the benefits of its voluntary self-disclosure policy, including a three-year non-prosecution agreement without the imposition of a monitor. The Company agreed to modify its compliance program, including its internal controls, compliance policies, and procedures to ensure that it maintains: (1) an effective system of internal accounting controls designed to ensure the making and keeping of fair and accurate books, records, and accounts; and (2) a rigorous anticorruption compliance program.

In addition to its corporate reforms, the Company was also required to pay a criminal penalty of $98.2 million and forfeited an additional $98.5 million in profits. The penalty reflects a 45 percent discount from the bottom of the otherwise-applicable U.S. Sentencing Guidelines fine range. Pursuant to the Clawback Program, the Company received an additional penalty discount of $763,000. Finally, the Non-Prosecution Agreement resolved a concurrent U.S. Securities and Exchange Commission (SEC) investigation into the Company for the same misconduct for $103.6 million; however, the Company received a credit of $81.9 million, since the Company already forfeited its tainted profits to DOJ. 

Takeaways

• Timeliness is Vital. Sixteen months, and possibly nine months (the time from investigation completion to disclosure) is too long. DOJ expects faster reporting times, which means internal investigations need to move apace. However, even if a company delays disclosure, it may still receive credit if it fully complies with the other aspects of the self-disclosure policy.  
   
• Cooperation Quality Matters. In this case, the Company disclosed all material facts, made additional facts available upon knowledge thereof, met frequently with the government, made foreign employees available in the U.S. for interviews, promptly responded to all subpoenas and inquiries, and, in general, made conducting the cross-border investigation easier for DOJ to navigate. The Company received substantial benefits in exchange for the quality of this level of cooperation. 
   
• Remediation & Compliance Count. DOJ viewed positively and ultimately rewarded the Company for proactively adopting remedial measures before being compelled to do so. 
   
• The Clawback Program Works. The Company complied with the Clawback Program and saw a reduction in its penalties in proportion to the value of the bonuses it withheld: $763,000. Companies should prepare for this contingency now by making sure the necessary contractual groundwork is laid in employment agreements and incentive provisions.  
   
• GC and Compliance Office Certifications. DOJ required the Company to adopt a Corporate Compliance Program as part of the Non-Prosecution Agreement. Moreover, DOJ required the Company’s CEO and CFO to certify, pursuant to 18 U.S.C. § 1001, that the Company: (1) disclosed all evidence regarding the misconduct, (2) understands it has forthcoming disclosure and compliance obligations, and (3) will put into place an anti-corruption compliance program that meets the requirements set forth in Non-Prosecution Agreement. Far from a tool of empowerment, this requirement could be a Sword of Damocles hanging over each of these executives’ heads. Therefore, having independent, experienced outside counsel for these officers to consult with and obtain advice from before agreeing to such a certification is wise.