One of the oft-made criticisms regarding the Department of Justice (DOJ) around its enforcement of the Foreign Corrupt Practices Act (FCPA) is its the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) somehow pervert the course of justice. Some of the criticisms include: DPAs and NPAs are either too harsh or too lenient; DPAs and NPAs let corporations off too easily or they are too unfair to corporations; DPAs and NPAs are inherently unfair as they give the DOJ too much leverage in any negotiation or that the DOJ uses them as a way to simply seek bigger fines and to not go after the real culprits, i.e. rogue employees; the fines levied under DPAs and NPAs are too great or too small, but whichever it is, there is not appropriate judicial oversight; and my personal favorite, the DOJ needs to ‘trial-lawyer up’ and go to trial against big bad corporations which violate the FCPA to really show ‘em they mean business.
Speaking from the perspective of a former in-house type, I have argued that corporations desire DPAs and NPAs because they bring certainty. Not only in ending an enforcement action but also in knowing your obligations going forward; and they bring certainty in setting the fines and penalties to be paid for a FCPA violation. And, of course, if you enter into a DPA or NPA you bring your corporate client the certainty that you will not ‘Arthur Anderson’ your organization out of existence.
However there are other reasons why the use of DPAs and NPAs has been positive and that is the effect on companies. In a recent paper, entitled, “The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance: Evidence from 1993-2013 “”, authors Wulf A. Kaal and Timothy Lacine looked precisely at that issue. In an exhaustive study they reviewed all publicly available DPAs and NPAs from 1993 to 2013. The authors found that in a wide variety of categories 97.41% of the publicly available DPAs and NPAs “mandated substantive governance improvements” in the corporations that entered into them. Any time you have 97% improvement in anything, I would say someone must have been doing something right, somewhere, somehow. From the thesis of their article, it would appear that what the DOJ is doing right is using DPAs and NPAs to positively impact corporate governance.
What were some of the changes brought about through the use of DPAs and NPAs? In the area of Board governance there were provisions including mandating changes requiring additional reporting obligations for the Board; required changes to existing Board committee structure of the entity, often creating new board committees. Other changes included increased Board monitoring obligations, the addition of independent director(s) and changes pertaining to management of the entity. In addition to more Board involvement, under a number of DPAs and NPAs, a settling company’s senior management was required to provide additional oversight and involvement with the compliance function. Similarly monitoring obligations have generally increased with many DPAs and NPAs containing specific provisions that related to ongoing monitoring requirements.
Both the Chief Compliance Officer (CCO) position and the compliance function were significantly impacted by many of the DPAs and NPAs. Many contained provisions relating to a new, improved or expanded compliance program. Additionally, many DPAs and NPAs contained provisions pertaining to improved compliance communications and training requirements in the compliance function. Internal controls and required improvements pertaining to books and records were also noted. Of course, if a company did not have a Code of Conduct or CCO, they were required.
The authors have also identified additional and continuing oversight factors. They note that DOJ “involvement suggest that prosecutors can promote an ethical corporate culture through enhanced compliance measures in N/DPAs. Under this theory, the DOJ’s expansionary tendencies in N/DPAs are a mere extension of legally mandated compliance requirements. In fact, corporate governance of the respective entity plays a major role in federal prosecutors’ charging decisions. The increased role of independent private sector oversight may help address the increased complexity of corporate crime and dwindling public funds. Given their education and experience as well as their ability to fill a void left by the system, prosecutors may be uniquely qualified to institute corporate governance changes.”
I think this ongoing DOJ oversight is not to be underestimated as a positive effect for compliance. Clearly if an external monitor is required there will be at least annual reporting to the DOJ on the company’s implementation of the terms and conditions of its settlement. But even if the DOJ does not require an external monitor there is always a requirement that the settling company report to the DOJ on the extent of its compliance efforts. The best practice would suggest that an independent third party make this assessment but even if it is not accomplished in such a manner, there is still DOJ oversight.
While the DOJ has pronounced that they are not involved in industry sweeps, the reality is that some industries have been hit with more FCPA enforcement actions than others. If there are a large number of FCPA settlements using DPAs and NPAs in one industry, it can have the effect of increasing both the knowledge of compliance and sophistication of compliance programs within that industry. I have personally witnessed this in the energy industry in Houston where compliance is now driven as a business solution to the legal problem of FCPA compliance. Scott Killingsworth calls this Private-to-Private compliance solutions. I call it business solutions to legal problems. Whatever you might wish to name it, these FCPA enforcement actions have increased the prevalence of compliance programs in the energy industry.
The authors also believe that through the use of DPAs and NPAs, the DOJ is better able to communicate its expectations of what it expects in the way of a best practices compliance program. They state that Boards, “management and corporate counsel may see these preexisting measures as a roadmap for preparing for future investigations and handling the eventual investigation.”
Finally, the authors provide a very interesting insight as to the power of DPAs and NPAs, which is not often discussed in the FCPA context. They contend that use of DPAs and NPAs, as corporate governance tools, “may be preferable to changes to federal law.” They explain, “Compared with more meaningful congressional governance reform, N/DPA-related governance reform is relatively “cheap” for corporations because comparatively few board and management positions are adversely affected. Furthermore, N/DPA-related governance reform is a measure supported by most corporate insiders as it is seen as beneficial for investors. Until regulators belatedly realize the threat posed by particular industry practices, as identified in N/DPAs, and consider acting upon it, N/DPA-related governance reform is entity specific and increases the availability of relevant, decentralized, and institution specific information for regulatory action. Preemptive remedial measures preceding the execution of N/DPAs and associated N/DPA feedback effects can create the framework for anticipatory dynamic regulation as a regulatory supplement.”
This last concept speaks to the transactional cost of changing not only laws surrounding corporate governance but the reform of a corporation for itself. The key stakeholder unit of investors certainly profits by having more and better corporate governance, as does the corporation itself. I found the authors’ work to be a welcome addition to the ongoing debate on DPAs and NPAs.
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© Thomas R. Fox, 2014