Dilemma of Self-Reporting: The FCPA Experience
One of the most challenging questions faced by white-collar defense counsel and their clients is whether to report voluntarily, that is, to "self-report," information about the misconduct of a client company or individual. The issue is a particularly thorny one for companies which, unlike individuals, cannot resist the production of incriminating information by asserting Fifth Amendment rights, and which are obliged to make decisions based on the interests of shareholders, not current management.
As a practical matter, the decision about self-reporting commonly boils down to an assessment of three issues: (i) whether the client is obligated to report the misconduct—for example, under federal securities laws and the rules of industry self-regulatory organizations;1 (ii) the likelihood of exposure, through government investigation, journalistic inquiry, whistleblowing or otherwise; and (iii) the possible benefit of self-reporting and, concomitantly, the risk of additional sanction from failing to self-report wrongful behavior if it is later discovered. Because clients and counsel often need to make these assessments with little hard and sure information, the judgments and analysis are sometimes very difficult.
Federal authorities seek to influence private decision-making with a carrot-and-stick approach. The Department of Justice and Securities and Exchange Commission, for example, declare that self-reporting will be rewarded and will yield reduced sanctions and, at the same time, that failing to divulge information voluntarily will lead to enhanced penalties.2 One of the clearest expressions of this carrot-and-stick policy comes in the field of the Justice Department's criminal enforcement of the antitrust laws, where the department gives complete amnesty to the first party to report a criminal antitrust conspiracy but does not offer leniency to parties that subsequently self-report the same violation.3 Another high-profile effort to encourage self-reporting—the Internal Revenue Service's voluntary disclosure program for offshore financial accounts—though not offering amnesty, provides explicit and substantial financial incentives to self-report.4 Yet these programs are the exception; complete amnesty and clear, calculable financial incentives from the government are rarely available when clients consider whether to self-report.
In this article, we address the dilemma of self-reporting in the context of the government's recent focus on criminal and civil violations of the Foreign Corrupt Practices Act (FCPA). Through speeches and publications the government has declared its strong commitment to FCPA enforcement and the dire consequences of failing to self-report violations of the law. At the same time, the benefit received from FCPA self-reporting has been difficult to discern, as illustrated by two recent FCPA investigations in the news, involving Ralph Lauren Corp. and Avon Products Inc. Notwithstanding government pronouncements about the rewards of self-reporting, the dilemma remains quite real: Is it worth it to self-report?
Government's FCPA Message
In November 2012, the SEC and the Justice Department released the Resource Guide to the U.S. Foreign Corrupt Practices Act. The guide refers to the "high premium on self-reporting, along with cooperation and remedial efforts in determining the appropriate resolution of FCPA matters."5
Senior government officials have emphasized the importance of self-reporting and the flipside—the danger of learning of misconduct and not telling the government. Charles Duross, deputy chief of the Justice Department's FCPA Unit, recently said that "[t]he risk of getting caught…is greater today than any point previously," and opined that a company's decision whether to self-report potential violations was "kind of a no-brainer."6 In November 2013, Andrew Ceresney, codirector of the SEC's Division of Enforcement, warned that "if we find the violations on our own, the consequences will surely be worse than if you had self-reported the conduct."7 These recent remarks echo past statements to the effect that significant credit would be given for a company's self-reporting of FCPA violations.8
The written policies of both the Justice Department and the SEC likewise suggest that voluntary disclosure will be viewed favorably when charging decisions are made. In its Principles of Federal Prosecutions of Business Organizations, the Justice Department includes in the analysis whether the company made a voluntary and timely disclosure of relevant information.9 In the Seaboard Report, a company's self-reporting of misconduct is part of the SEC's determination of whether a company has cooperated and, more broadly, whether a company should be treated with leniency for "good corporate citizenship."10 In this respect, executive branch policy is consistent with the federal Sentencing Guidelines for Organizations, which, in its discussion of Compliance and Ethics Programs, calls for consideration of "self-reporting and cooperation with authorities."11
Securing favorable treatment is hardly a trifling matter when facing possible FCPA sanctions. Companies face fines of up to $2 million for each violation of the anti-bribery provisions and additional fines for each violation of the statute's accounting provisions, while individuals too are subject to substantial fines and imprisonment for violations of the anti-bribery and accounting provisions.12 No wonder so few companies and individuals go to trial on FCPA charges.
Ralph Lauren Corporation
The FCPA case against Ralph Lauren Corporation has been held out as an example of credit being given for prompt, voluntary disclosure. In 2010, the company found evidence of bribes by its Argentine subsidiary to government officials, through intermediaries, to ease getting its goods through Customs without the required paperwork and inspections.13 Ralph Lauren promptly reported its findings to the government, adopted remedial measures, including firing its customs broker, and cooperated with the government's investigation.
In April 2013, Ralph Lauren entered into a non-prosecution agreement with the SEC and Justice Department, agreeing to pay more than $700,000 in disgorgement and interest to the SEC and $882,000 in penalties to the Justice Department. According to the SEC's Acting Director of Enforcement George S. Canellos, "The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC."14
While, on the surface, the benefit from Ralph Lauren's self-reporting appears substantial, particularly given the massive disgorgement and penalties now routinely imposed on companies, questions have been raised about just how much credit the company was given for promptly going to the government. Critics point out that the government could have declined prosecution altogether. As stated in an alert by Covington & Burling, "it is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in the FCPA Resource Guide."15
The facts warranting declination seemed substantial. The misbehavior at issue was isolated in a single foreign operation and limited in scope and duration. According to the non-prosecution agreement filed in the case, the conduct was discovered when the company distributed its FCPA policy to employees—revealing the company's active and real compliance efforts—which elicited concerns in the Argentine subsidiary about the company's third-party customs broker. Despite these mitigating facts, the government opted for an NPA rather than simply declining prosecution, which required Ralph Lauren to publicly acknowledge wrongdoing, and which may expose it to private lawsuits and unfairly harm its reputation.