United States: Practice Alert: Implicit Warnings In The DOJ's Declinations With Disgorgement

Last Updated: September 11 2017
Article by Jodi L. Avergun and James A. Treanor

Most Read Contributor in United States, November 2018

Since the DOJ launched the Pilot Program in April 2016 to encourage companies to self-report FCPA violations and cooperate with the feds, the DOJ has published seven declination letters addressed to companies under investigation.

The letters reflect the DOJ's decision to forego prosecution, notwithstanding evidence that the companies -- or, more frequently, their foreign subsidiaries -- made improper payments.

According to the DOJ, its decisions in these cases were based on the companies' compliance with the stated prerequisite factors, including:

  • each company's voluntary-self disclosure of the relevant conduct
  • their cooperation with the DOJ's investigation
  • their compliance enhancements and other remediation efforts, and finally
  • their agreement to disgorge funds obtained as a result of the misconduct.

Companies should review and understand the implications of the DOJ's use of declinations with disgorgement, as we expect the current practice to continue.

Key takeaways of the public declinations with disgorgement letters are:

  1. No bribe is "too remote" from the United States or too small to escape the DOJ's attention. Indeed, much of the alleged misconduct in these cases was carried out by foreign subsidiaries, with no apparent activity in the United States, and without the knowledge or involvement of U.S. executives and employees.
  2. The declinations demonstrate the DOJ's commitment to providing tangible benefits to companies that comply fully with the prerequisites of the Pilot Program.
  3. By demonstrating transparency and highlighting its declination decisions, the DOJ is sending a message to companies that do not voluntarily disclose their FCPA violations: namely, such companies risk criminal penalties far in excess of the disgorgement paid by recipients of DOJ declination letters.

In its recent declinations, the DOJ has implicitly adopted an aggressive -- and, in the FCPA context, judicially untested -- "agency" theory of liability, by suggesting that U.S. companies may be prosecuted for the conduct of their foreign subsidiaries, even in the absence of any showing that the parent companies were involved in or aware of the misconduct.

For example, in the case of Nortek, Inc., the DOJ stated that it had closed its inquiry "despite the bribery by employees of [Nortek's] subsidiary in China. . . ."

The DOJ letter makes no assertion that Nortek or any of its employees were involved in or had knowledge of the approximately $290,000 in payments allegedly paid by the Chinese subsidiary.

Nevertheless, the Nortek declination letter implies that – but for Nortek's voluntary self-disclosure, full cooperation, remediation, and payment of disgorgement to the SEC -- the DOJ would have pursued an enforcement action against the company.

In the case of Johnson Controls, Inc., employees of the company's Chinese subsidiary circumvented existing controls by devising a bribery scheme involving vendors in which certain sales managers had an ownership interest. These sham vendors charged the Chinese subsidiary for fictitious parts and services, thereby creating funds used for bribery and personal enrichment.

As with the Nortek declination letter, there is no assertion in the DOJ's letter to Johnson Controls that the parent company or its employees were involved in or had knowledge of the bribery scheme.

More recently, in June 2017 the DOJ issued a declination letter to Linde North America Inc. and Linde Gas North America LLC , in which the DOJ asserts that "Linde, through a subsidiary," made corrupt payments to high-level officials in the Republic of Georgia.

The Linde letter also makes clear that Linde and its employees were not aware of these payments, stating that "[u]pon discovery of the corrupt arrangements, Linde withheld $10 million" in improper payments.

The letter thus indicates that the DOJ had imputed the actions of the subsidiary to Linde itself, notwithstanding Linde's apparent lack of involvement in, or awareness of, the subsidiary's conduct.

As these examples illustrate, the DOJ's published declinations highlight the benefits of voluntarily disclosing FCPA violations: namely, the avoidance of criminal liability and potentially substantial fines.

A corollary to this positive message, however, is a warning to corporations that fail to disclose misconduct. These companies may face aggressive prosecution, including with respect to conduct largely, or even entirely, confined to a foreign subsidiary.

Company counsel may disagree with the DOJ's agency theory of parent liability, but the mere prospect of enduring a lengthy investigation, and of foregoing self-disclosure credit under the Pilot Program, should encourage a reasoned evaluation of disclosure's costs and benefits.

Previously published in The FCPA Blog.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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