WLF Legal Opinion Letter
The FCPA & "Voluntary Disclosure": An Enigmatic Threat To Due Process
By Michael Volkov
October 7, 2011 (Vol. 20 No. 20)
The government's aggressive enforcement of the Foreign Corrupt Practices Act (FCPA) has generated significant controversy, leading to calls for reform. The business community wants to see Congress amend the FCPA, and non-profit corruption fighters argue that Congress should leave the law alone. While this debate goes on, one of the more important issues for reform never sees the light of day -- the Justice Department's (DOJ) "voluntary disclosure" process.
The decision of whether or not to disclose a potential FCPA violation to the DOJ and the Securities and Exchange Commission has significant implications for a company. It may result in hefty fines, remedial steps across the company, and possibly the agreement to hire an independent monitor for several years to watch over a company's entire business operations.
This so-called "voluntary" process is the engine fueling DOJ's record fine collections for FCPA violations. Company after company walks through the doors of the Justice Department, confesses their sins, and then argues about the proper resolution. But the voluntary disclosure process remains shrouded in mystery even though such cooperation can result in new DOJ enforcement policies for the FCPA. This is not a good development for the administration of justice. The process requires effective and fair enforcement through the consistent application of policies and results.
FCPA practitioners know the drill. Clients lose all leverage when they enter the voluntary disclosure process. Once a company enters into the voluntary disclosure process, the Justice Department sits as the prosecutor, judge, and jury. No company can go to trial. No company can challenge the Justice Department's interpretation and enforcement positions regarding the meaning of the FCPA. Unfortunately, when reviewing these plea settlements, federal judges have been unwilling to question the Justice Department's interpretations of the law. As a result, the Justice Department has started to cite as precedent its own decisions respecting the outer reaches of the law.
These are not new issues in the criminal enforcement world. Criminal defendants face a similar decision every day in the justice system: Should a defendant plead guilty? Should the defendant cooperate? Such decisions require weighing the potential punishment after a trial, a guilty plea, or a guilty plea with cooperation. Once the potential benefits are clarified, the risks of each choice are weighed against the potential benefits. To assist in this process, prosecutors and defense counsel try to provide some guidance. In some districts, the U.S. Attorney's Office has adopted rules for guideline calculations so that defendants know the potential risks and benefits, including specific formulas for cooperation.
The decision to disclose an FCPA violation involves an important calculation. On the one side -- what is the scope and extent of the violation? Is it systematic across the organization, or isolated to a particular country or office? How significant is the violation in the scheme of the overall business? What would be the likely punishment for such violation(s)?
On the other side -- what is the risk that such conduct will be discovered by the government? Unlike many other crimes, the likelihood that the U.S. government will detect foreign bribery activity is low. There is not a line of victims or readily apparent harms. Auditors can sometimes discover questionable entries and potential bribery conduct, but financial accounting standards generally are ineffective because of the focus on "material" transactions.
But even without accounting audits, there are significant risks that a disgruntled employee, a whistleblower, or a competitor may raise complaints that a company is engaging in illegal bribery activity. Most of the significant FCPA cases have been started through a whistleblower or disgruntled employee. That risk will be even greater in response to the SEC's whistleblower bounty program.
Unfortunately, the Justice Department fails to provide transparency to the voluntary disclosure process which would ensure that all parties are treated consistently and fairly. As a result, DOJ becomes a virtual Star Chamber, defining and enforcing the FCPA without any meaningful judicial review. The Justice Department and the SEC need to adopt and disseminate standards and policies governing the voluntary disclosure process, or Congress needs to provide some mandatory disclosure process to assist companies. The absence of such standards is unfair, breeds disparate treatment of similarly situated companies, and undermines the fair administration of justice.
Michael Volkov is a partner in the Washington, D.C. office of the law firm Mayer Brown LLP. A former federal prosecutor, Mr. Volkov also authors The White Collar Defense and Compliance blog (http://michaelvolkov.blogspot.com/).