Among those who follow Foreign Corrupt Practices Act (FCPA) enforcement practices, there’s been a spate of commentary on a few recent cases in which the Department of Justice (DOJ) has resolved FCPA cases with a formal decision not to prosecute (a “declination”) that includes, as one of the reasons for (and conditions of) the declination, the target company’s agreement to disgorge to the U.S. Treasury the profits associated with the (allegedly) unlawful conduct. Disgorgement is a civil remedy rather than a criminal penalty (as the U.S. Supreme Court recently emphasized); it is often employed by the Securities and Exchange Commission (SEC), which has civil FCPA enforcement authority over issuers on U.S. exchanges. Until recently, however, the DOJ – which has civil FCPA enforcement authority with respect to non-issuers, and criminal enforcement authority in all FCPA matters – had not sought disgorgement very often, and the recent “declination-with-disgorgement” resolutions appear to be something new, at least in the FCPA context.
Not everyone is happy with this development. Last week, for example, Professor Karen Woody posted an interesting commentary over at the FCPA Blog (based on a longer academic paper) on why the emergence of declinations-with-disgorgement in FCPA cases is an “alarming” development that makes her “queasy.” Professor Woody is an astute and knowledgeable FCPA commentator, and I’m hesitant to disagree with her—especially since I’m not really an FCPA specialist in the way that she is—but I’m having trouble working up a comparable level of alarm. Indeed, my knee-jerk reaction is to view the declination-with-disgorgement as a useful mechanism, one that would often be the most appropriate one to employ to resolve FCPA violations by a company that is not subject to SEC jurisdiction, and eliminating this mechanism might force the DOJ to employ a worse alternative.
Let me start by laying out the affirmative case for declinations-with-disgorgement, and then I’ll turn to Professor Woody’s concerns.
The case for declinations-with-disgorgement is actually pretty straightforward. A basic principle of the U.S. criminal enforcement system is the importance of prosecutorial discretion—the idea that not every case that can be prosecuted should be prosecuted. This is partly due to resource constraints, but it’s also grounded in the idea that criminal prosecution isn’t always in the interests of justice. Consider, for example, an impressionable teenager, with no prior criminal record, who is goaded by friends into shoplifting a few items from a local store, and who afterwards feels so guilty that she confesses and returns the items. Even though criminal prosecution is possible, many prosecutors might decide bringing charges would be inappropriate, and would let the kid off with a stern warning. The same reasoning can apply, with some adaptation, to corporations, which can be strictly liable for the acts of their employees. Indeed, many have argued that the DOJ should decline to prosecute companies for FCPA violations by a rogue employee, so long as the company made its best efforts to prevent such violations from occurring, promptly detected and reported the violation, disciplined the employee appropriately, cooperated fully with the government investigation, and implemented new internal control measures to prevent such violations from recurring. Not everyone would agree on which cases merit declinations, but the rationale is straightforward.
OK, so far so good. Sometimes a party may be technically criminally liable, but not worthy of punishment. But what if that party received a benefit from the crime? Wouldn’t it be a bit bizarre to say that a party should escape prosecution for her crime, but can nonetheless retain the benefits of the crime? It’s all well and good if our hypothetical teenage shoplifter confesses and expresses contrition, but I suspect most prosecutors wouldn’t even consider dropping the charges until she agrees to give back what she stole. As with the shoplifter, so too with the corporation: It’s great if the corporation voluntarily self-discloses, fires the employee who paid the bribe to the foreign official, and cooperates with the investigation… but if the corporation earned an extra $2 million due to the FCPA violation, shouldn’t it have to surrender those illicit profits? It seems self-evident that an appropriate resolution of the matter entails an equitable remedy (restitution or disgorgement, depending on whether we can identify a victim who is the proper owner of the illicitly acquired assets). Furthermore, it also seems more than reasonable to make the potential defendant’s acceptance of the equitable remedy a precondition for the decision to drop the criminal charges, not least because we can’t reasonably conclude that the responsible party has expressed genuine contrition and accepted responsibility if that party insists on retaining the ill-gotten gain. (As Hamlet’s King Claudius ruefully acknowledged, he cannot be forgiven—in his case by God—for his foul murder “since I am still possessed / of those effects for which I did the murder.” The answer to Claudius’s rhetorical question, “May one be pardoned and retain th’ offense?” must be no, as much for modern FCPA cases as for Shakespearian fratricide.)
That, then, is the nutshell case for allowing declinations-with-disgorgement in FCPA cases. To me at least, the case seems quite strong. Why, then, are astute scholars like Professor Woody “queasy” about this mode of resolution? So far as I can tell, she makes two main arguments, one of which has to do with prosecutorial behavior, another of which has to do with terminology.
The prosecutorial behavior argument goes like this: There may be cases where criminal prosecution of the corporation is in fact appropriate, but if the government can secure a disgorgement remedy as part of a settlement, the government will be too eager to drop the criminal case—the corporation, Professor Woody suggests, will “buy” a declination. Alternatively, she goes on to say, maybe we’ll have the opposite problem: Overzealous prosecutors will use the threat of criminal prosecution to extort disgorgements that are higher than what the company ought to pay.
But these arguments prove too much, in that precisely the same objections could be lodged against the much more longstanding practice of resolving FCPA matters through deferred prosecution agreements, non-prosecution agreements, or plea bargains. Now, to be sure, many critics have made precisely those objections (see, for example, here and here). I don’t happen to agree with their criticisms of settlement practices in FCPA cases. But that’s neither here nor there for the moment, because the question is whether declinations-with-disgorgement present a unique or distinctive risk of abuse, and I just don’t see it.
In addition, while the scenarios Professor Woody lays out are hypothetical possibilities (ones, it’s worth remembering, that seem to contradict each other), I’d need to see more persuasive evidence of prosecutorial bad faith or perverse incentives before I’d be prepared to chuck a mechanism that would otherwise seem like the best way to resolve an important subset of cases. After all, if we ditch declinations-with-disgorgement, what exactly do Professor Woody and other critics think the DOJ should do when confronted with a case (involving a non-issuer) in which there’s been an FCPA violation by a rogue employee, which generated substantial profits for the company, but where the company otherwise did absolutely everything right. Should the DOJ prosecute the company anyway? Maybe – but in addition to seeming possibly unfair, this might substantially undermine incentives to self-disclose violations in the future. Should we decline prosecution but let the company retain the profits derived from the FCPA violation? That also seems like a bad solution, one that creates its own perverse incentives. I can’t think of any attractive resolution in such cases that’s not some version of declination-with-disgorgement.
Now, Professor Woody might seize on that “some version of” qualifier and say that’s part of her point: She seems to think that the terms “declination” and “disgorgement” are both inappropriate when they’re linked in this sort of settlement. (She calls it a “bastardization” of the terms.) Here, I’ll confess I’m confused both as to her argument and to why it matters. A decision not to bring criminal charges is a declination, whatever it’s conditioned on. And disgorgement is the appropriate term for the civil remedy required in these cases. And remember, the DOJ absolutely has civil enforcement authority against non-issuers, which so far as I know are the only companies involved in the declination-with-disgorgement cases so far. In her longer paper, Professor Woody suggests that the DOJ has implied that the disgorgement remedy in these cases is part of its criminal enforcement authority, because the announcements have come from the Criminal Division. (The release is on the Criminal Division’s letterhead, she observes.) But I suspect that’s just a consequence of the fact that the DOJ’s FCPA Unit is housed in the Criminal Division, even though the DOJ also has civil FCPA enforcement authority over non-issuers. Whose letterhead should DOJ use for an exercise of its civil FCPA enforcement authority, in the absence of an FCPA Unit in the Civil Division? And why are we making such a big deal over letterhead anyway, if the DOJ (a) can insist on disgorgement as part of a civil settlement, and (b) can reasonably condition the dropping of criminal charges on the satisfactory resolution of the civil case?
So I guess I just don’t understand the case for why declinations-with-disgorgement represent a unique and distinctive problem. But it’s quite possible I’ve missed something important here, or misunderstood the nature of the critique, and I’d be more than happy to hear more about this.
For a historical perspective, as highlighted in the below post, the DOJ frequently invoked powers expressly granted to it in the FCPA by bringing civil enforcement actions against non-issuers.
Indeed, between 1991 and 2001 approximately 35% of all DOJ corporate FCPA enforcement actions were civil actions. However, the last time the DOJ invoked this express statutory remedy was in 2001.
In short, the express statutory remedy that the DOJ is seeking is there, but the DOJ has ignored this by creating (yet another) new FCPA resolution vehicle.
Professor Mike Koehler