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What Does DOJ Consider When Deciding Whether to Open an Investigation or Bring Charges?

Whether and how DOJ will commence, decline, or otherwise resolve an FCPA matter is guided by the

Principles of Federal Prosecution in the case of individuals, and the Principles of Federal Prosecution of Business Organizations in the case of companies.

DOJ Principles of Federal Prosecution

The Principles of Federal Prosecution, set forth in Chapter 9-27.000 of the U.S. Attorney’s Manual,288 provide guidance for DOJ prosecutors regarding initiating or declining prosecution, selecting charges, and plea-bar- gaining. The Principles of Federal Prosecution provide that prosecutors should recommend or commence federal prosecution if the putative defendant’s conduct constitutes a federal offense and the admissible evidence will probably be sufficient to obtain and sustain a conviction unless (1) no substantial federal interest would be served by prosecution;

(2) the person is subject to effective prosecution in another jurisdiction; or (3) an adequate non-criminal alternative to prosecution exists. In assessing the existence of a substantial

federal interest, the prosecutor is advised to “weigh all relevant considerations,” including the nature and seriousness of the offense; the deterrent effect of prosecution; the person’s culpability in connection with the offense; the person’s history with respect to criminal activity; the person’s willingness to cooperate in the investigation or prosecution of others; and the probable sentence or other consequences if the person is convicted. The Principles of Federal Prosecution also set out the considerations to be weighed when deciding whether to enter into a plea agreement with an individual defendant, including the nature and seriousness of the offense and the person’s willingness to cooperate, as well as the desirability of prompt and certain disposition of the case and the expense of trial and appeal.289

DOJ Principles of Federal Prosecution of Business Organizations

The Principles of Federal Prosecution of Business Organizations, set forth in Chapter 9-28.000 of the U.S. Attorney’s Manual,290 provide guidance regarding the resolution of cases involving corporate wrongdoing. The Principles of Federal Prosecution of Business Organizations recognize that resolution of corporate criminal cases by means other

than indictment, including non-prosecution and deferred prosecution agreements, may be appropriate in certain circumstances. Nine factors are considered in conducting an investigation, determining whether to charge a corporation, and negotiating plea or other agreements:

•the nature and seriousness of the offense, including the risk of harm to the public;

•the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management;

•the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it;

•the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents;

•the existence and effectiveness of the corporation’s pre-existing compliance program;

•the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or improve an existing one, replace responsible management, discipline or terminate wrongdoers, pay restitution, and cooperate with the relevant government agencies;

•collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution;

•the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance; and

•the adequacy of remedies such as civil or regulatory enforcement actions.

As these factors illustrate, in many investigations it will be appropriate for a prosecutor to consider a corporation’s pre-indictment conduct, including voluntary disclosure, cooperation, and remediation, in determining whether to seek an indictment. In assessing a corporation’s cooperation, prosecutors are prohibited from requesting attorneyclient privileged materials with two exceptions—when a

corporation or its employee asserts an advice-of-counsel defense and when the attorney-client communications were in furtherance of a crime or fraud. Otherwise, an organization’s cooperation may only be assessed on the basis of whether it disclosed the relevant facts underlying an inves- tigation—and not on the basis of whether it has waived its attorney-client privilege or work product protection.291

What Does SEC Consider When Deciding Whether to Open an Investigation or Bring Charges?

SEC’s Enforcement Manual, published by SEC’s Enforcement Division and available on SEC’s website,292 sets forth information about how SEC conducts investigations, as well as the guiding principles that SEC staff considers when determining whether to open or close an investigation and whether civil charges are merited. There are various ways that potential FCPA violations come to the attention of SEC staff, including: tips from informants or whistleblowers; information developed in other investigations; self-reports or public disclosures by companies; referrals from other offices or agencies; public sources, such as media reports and trade publications; and proactive investigative techniques, including risk-based initiatives. Investigations can be formal, such as where SEC has issued a formal order of investigation that authorizes its staff to issue investigative subpoenas for testimony and documents, or informal, such as where the staff proceeds with the investigation without the use of investigative subpoenas.

In determining whether to open an investigation and, if so, whether an enforcement action is warranted, SEC staff considers a number of factors, including: the statutes or rules potentially violated; the egregiousness of the potential violation; the potential magnitude of the violation; whether the potentially harmed group is particularly vulnerable or at risk; whether the conduct is ongoing; whether the conduct can be investigated efficiently and within the statute of limitations period; and whether other authorities, including federal or state agencies or regulators, might be better suited to investigate the conduct. SEC staff also may

consider whether the case involves a possibly widespread industry practice that should be addressed, whether the case involves a recidivist, and whether the matter gives SEC an opportunity to be visible in a community that might not otherwise be familiar with SEC or the protections afforded by the securities laws.

For more information about the Enforcement Division’s procedures concerning investigations, enforcement actions, and cooperation with other regulators, see the Enforcement Manual at http://www.sec.gov/divisions/ enforce.shtml.

Self-Reporting, Cooperation, and Remedial Efforts

While the conduct underlying any FCPA investigation is obviously a fundamental and threshold consideration in deciding what, if any, action to take, both DOJ and SEC place a high premium on self-reporting, along with cooperation and remedial efforts, in determining the appropriate resolution of FCPA matters.

Criminal Cases

Under DOJ’s Principles of Federal Prosecution of Business Organizations, federal prosecutors consider a company’s cooperation in determining how to resolve a corporate criminal case. Specifically, prosecutors consider whether the company made a voluntary and timely disclosure as well as the company’s willingness to provide relevant information and evidence and identify relevant actors inside and outside the company, including senior executives. In addition, prosecutors may consider a company’s remedial actions, including efforts to improve an existing compliance program or appropriate disciplining of wrongdoers.293 A company’s remedial measures should be meaningful and illustrate its recognition of the seriousness of the misconduct, for example, by taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated.294

The Principles of Federal Prosecution similarly provide that prosecutors may consider an individual’s willingness

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to cooperate in deciding whether a prosecution should be undertaken and how it should be resolved. Although a willingness to cooperate will not, by itself, generally relieve a person of criminal liability, it may be given “serious consideration” in evaluating whether to enter into a plea agreement with a defendant, depending on the nature and value of the cooperation offered.295

The U.S. Sentencing Guidelines similarly take into account an individual defendant’s cooperation and voluntary disclosure. Under § 5K1.1, a defendant’s cooperation, if sufficiently substantial, may justify the government filing a motion for a reduced sentence. And under § 5K2.16, a defendant’s voluntary disclosure of an offense prior to its discovery—if the offense was unlikely to have been discovered otherwise—may warrant a downward departure in certain circumstances.

Chapter 8 of the Sentencing Guidelines, which governs the sentencing of organizations, takes into account an organization’s remediation as part of an “effective compliance and ethics program.” One of the seven elements of such a program provides that after the detection of criminal conduct, “the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.”296 Having an effective compliance and ethics program may lead to a three-point reduction in an organization’s culpability score under § 8C2.5, which affects the fine calculation under the Guidelines. Similarly, an organization’s self-reporting, cooperation, and acceptance of responsibility may lead to fine reductions under § 8C2.5(g) by decreasing the culpability score. Conversely, an organization will not qualify for the compliance program reduction when it unreasonably delayed reporting the offense.297 Similar to § 5K1.1

for individuals, organizations can qualify for departures pursuant to § 8C4.1 of the Guidelines for cooperating in the prosecution of others.

Civil Cases

SEC’s Framework for Evaluating Cooperation by

Companies

SEC’s framework for evaluating cooperation by companies is set forth in its 2001 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, which is commonly known as the Seaboard Report.298 The report, which explained the Commission’s decision not to take enforcement action against a public company for certain accounting violations caused by its subsidiary, details the many factors SEC considers in determining whether, and to what extent, it grants leniency to companies for cooperating in its investigations and for related good corporate citizenship. Specifically, the report identifies four broad measures of a company’s cooperation:

•self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an appropriate tone at the top;

•self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins, and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulatory agencies, and to self-regulatory organizations;

•remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and

•cooperation with law enforcement authorities, including providing SEC staff with all information relevant to the underlying violations and the company’s remedial efforts.

Since every enforcement matter is different, this analytical framework sets forth general principles but does not

limit SEC’s broad discretion to evaluate every case individually on its own unique facts and circumstances. Similar to SEC’s treatment of cooperating individuals, credit for cooperation by companies may range from taking no enforcement action to pursuing reduced sanctions in connection with enforcement actions.

SEC’s Framework for Evaluating Cooperation by

Individuals

In 2010, SEC announced a new cooperation program for individuals.299 SEC staff has a wide range of tools to facilitate and reward cooperation by individuals, from taking no enforcement action to pursuing reduced sanctions in connection with enforcement actions. Although the evaluation of cooperation depends on the specific circumstances, SEC generally evaluates four factors to determine whether, to what extent, and in what manner to credit cooperation by individuals:

•the assistance provided by the cooperating individual in SEC’s investigation or related enforcement actions, including, among other things: the value and timeliness of the cooperation, including whether the individual was the first to report the misconduct to SEC or to offer his or her cooperation; whether the investigation was initiated based upon the information or other cooperation by the individual; the quality of the cooperation, including whether the individual was truthful and the cooperation was complete; the time and resources conserved as a result of the individual’s cooperation; and the nature of the cooperation, such as the type of assistance provided;

•the importance of the matter in which the individual provided cooperation;

•the societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct, including the severity of the individual’s misconduct, the culpability of the individual, and the efforts undertaken by the individual to remediate the harm; and

•the appropriateness of a cooperation credit in light of the profile of the cooperating individual.

Corporate Compliance Program

In a global marketplace, an effective compliance program is a critical component of a company’s internal controls and is essential to detecting and preventing FCPA violations.300 Effective compliance programs are tailored to the company’s specific business and to the risks associated with that business. They are dynamic and evolve as the business and the markets change.

An effective compliance program promotes “an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”301 Such a program protects a company’s reputation, ensures investor value and confidence, reduces uncertainty in business transactions, and secures a company’s assets.302 A well-constructed, thoughtfully implemented, and consistently enforced compliance and ethics program helps prevent, detect, remediate, and report misconduct, including FCPA violations.

In addition to considering whether a company has self-reported, cooperated, and taken appropriate remedial actions, DOJ and SEC also consider the adequacy of a company’s compliance program when deciding what, if any, action to take. The program may influence whether or not charges should be resolved through a deferred prosecution agreement (DPA) or non-prosecution agreement (NPA), as well as the appropriate length of any DPA or NPA, or the term of corporate probation. It will often affect the penalty amount and the need for a monitor or self-report- ing.303 As discussed above, SEC’s Seaboard Report focuses, among other things, on a company’s self-policing prior to the discovery of the misconduct, including whether it had established effective compliance procedures.304 Likewise, three of the nine factors set forth in DOJ’s Principles of Federal Prosecution of Business Organizations relate, either directly or indirectly, to a compliance program’s design and implementation, including the pervasiveness of wrongdoing within the company, the existence and effectiveness of the company’s pre-existing compliance program, and the company’s remedial actions.305 DOJ also considers the U.S.

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Sentencing Guidelines’ elements of an effective compliance program, as set forth in § 8B2.1 of the Guidelines.

These considerations reflect the recognition that a company’s failure to prevent every single violation does not necessarily mean that a particular company’s compliance program was not generally effective. DOJ and SEC understand that “no compliance program can ever prevent all criminal activity by a corporation’s employees,”306 and they do not hold companies to a standard of perfection. An assessment of a company’s compliance program, including its design and good faith implementation and enforcement, is an important part of the government’s assessment of whether a violation occurred, and if so, what action should be taken. In appropriate circumstances, DOJ and SEC may decline to pursue charges against a company based on the company’s effective compliance program, or may otherwise seek to reward a company for its program, even when that program did not prevent the particular underlying FCPA violation that gave rise to the investigation.307

DOJ and SEC have no formulaic requirements regarding compliance programs. Rather, they employ a common-sense and pragmatic approach to evaluating compliance programs, making inquiries related to three basic questions:

•Is the company’s compliance program well designed?

•Is it being applied in good faith?

•Does it work?308

This guide contains information regarding some of the basic elements DOJ and SEC consider when evaluating compliance programs. Although the focus is on compliance with the FCPA, given the existence of anti-corruption laws in many other countries, businesses should consider designing programs focused on anti-corruption compliance more broadly.309