Today’s guest post is from Professor Karen Woody, at Indiana University’s Kelley School of Business:
Last year, the US Department of Justice (DOJ) announced a new “Corporate Enforcement Policy” (CEP) that would apply to Foreign Corrupt Practices Act (FCPA) cases, among others. A key feature of the CEP was the offer of leniency—in the form of a “declination”—so long as the company met certain conditions, including voluntary disclosure of the violation, full cooperation, and disgorgement of any ill-gotten gains from the unlawful conduct. While the basic contours of the DOJ’s new policy are reasonably clear, the use of the term “declination” has created some confusion and uncertainty. Is a “declination” merely a decision not to prosecute? Is it something more? Does it depend?
This confusion is illustrated by Maddie McMahon’s post last month, in which she argued that declinations granted pursuant to the CEP are indeed a “new” kind of enforcement action, distinct from a simple decision not to prosecute. And the DOJ has to some extent fostered that understanding: As Maggie points out, the CEP itself states (somewhat enigmatically), “if a case would have been declined in the absence of such circumstances [of compliance with the CEP], it is not a declination pursuant to the Policy,” which seems to imply that there still may be DOJ declinations, in addition to distinct declinations “pursuant to the CEP.” But in fact the CEP does not create a new mechanism for resolving FCPA cases (or other corporate enforcement actions). What it does do (confusingly and unhelpfully) is use the same term—“declination”—to describe two distinct, but familiar well-established, types of resolution.
To see this, it is critical to distinguish two types of cases for which the DOJ might issue a “declination” pursuant to the CEP: (1) unilateral declinations, where any required disgorgement is made in a separate settlement with the Securities and Exchange Commission (SEC); and (2) “declinations with disgorgement,” in which the SEC lacks jurisdiction and the disgorgement required to qualify for a “declination” under the CEP is made as part of an agreement between the company and the DOJ.
- For declinations that fall into the first category, there are no practical differences between the traditional use of the term “declination” (a unilateral decision not to prosecute) and these “declinations pursuant to the CEP.” The only possible difference is that the “new” CEP declinations are published on the DOJ’s website; otherwise, these declinations are simply decisions not to prosecute. While Maddie’s post suggests that these declinations are a new type of enforcement action, manifested by an agreement by the DOJ not to prosecute so long as the company meets the stated CEP criteria, in fact the declination letters—which are not signed by anyone representing the company—are not “agreements,” but rather unilateral determinations by the DOJ that it is not appropriate to prosecute the company, at least under current circumstances. (The DOJ retains the discretion to prosecute in the future if “additional information or evidence becomes available.”) Although the declination letters do use the term “agreement” when discussing the company’s cooperation in any ongoing investigations, there is no legally-binding contract between the DOJ and the company. There is nothing particularly novel about this. Moreover, in these cases (at least the ones we’ve seen so far) the reason the DOJ has decided not to prosecute is that the company has entered into a settlement with the SEC, and paid whatever disgorgement is required under the CEP as part of that SEC settlement. Because these DOJ declinations are merely decisions not to prosecute, the traditional term “declination” is entirely appropriate, and not at all novel.
- In other cases under the CEP, though, the SEC did not have jurisdiction over the companies, so disgorgement through a settlement with the SEC was not an option. So, the DOJ has resolved the matter through a “declination with disgorgement,” in which the company agrees to pay disgorgement as a condition for the DOJ not prosecuting the case. (There’s an argument that the DOJ lacks the legal authority to demand disgorgement, but I will not pursue that issue here.) I am in full agreement with Maddie that these so-called “declinations with disgorgement” are enforcement actions, rather than merely decisions not to prosecute—and so they are not “declinations” in the traditional sense. However, while Maddie and others have suggested that “declinations with disgorgement” are novel, in fact declinations with disgorgement are merely non-prosecution agreements (NPAs) by another name. They are contracts, signed by representatives of both the DOJ and the company, in which the company agrees to a stipulation of facts and the DOJ agrees not to prosecute so long as the company satisfies certain specified conditions (including disgorgement). As Maddie notes, some commentators have characterized these dispositions as “NPAs lite”—but it is unclear to me why we shouldn’t just call them NPAs, full-stop.
In sum, so-called “declinations’ under the CEP are not really a new form of resolution to FCPA enforcement actions: Declinations in the first category are no different from traditional declinations—unilateral decisions not to prosecute—with the only differences under the CEP being the policy decision to publish the decisions, and to issue a declination only when the company has reached a settlement, which includes appropriate disgorgement, with the SEC in a related SEC action. Declinations in the second category are just NPAs with a euphemistic label.
This misuse of the term “declination” for this second category (NPAs in disguise) is problematic, mainly because it’s confusing and inconsistent with how the term is normally used. I suspect that one reason everyone is willing to go along with this nonsensical terminology is because most of the major players have a political incentive to act as if these NPAs are really declinations, even though they’re clearly not: The DOJ can claim it is adequately policing the FCPA while at the same time advertising its leniency to companies that disclose and cooperate, while the lawyers representing the corporation can claim in these cases that they secured a “declination” (which sounds better than an NPA, for some reason). But really, all this does is sow confusion, as commentators like Maggie struggle to articulate the essential features of this allegedly “new” vehicle for resolving FCPA, when in fact there’s nothing (legally) new under the CEP.