Last week the Justice Department (DOJ) announced a resolution of the long standing Foreign Corrupt Practices Act (FCPA) enforcement action involving Telefonaktiebolaget LM Ericsson (Ericsson), a multinational networking and telecommunications equipment and services company headquartered in Sweden. The matter was stunning in the total amount of fines and penalties assessed, coming in at over $1 billion, consisting of a criminal fine assessed by the DOJ at just over $520 million. Separately, the Securities and Exchange Commission (SEC) assessed profit disgorgement of nearly $540 million. Over the next several blog posts, I am considering the Ericsson FCPA enforcement action. Today, I consider the criminal penalty sustained by Ericsson, its actions during the pendency of the enforcement action which led to a double whammy in its fine calculation and cost the company an additional $95 million above what it could have paid as a criminal penalty.
The documents reference herein consist of the following:
- DOJ Press Release (Press Release);
- SEC Complaint against Ericsson (SEC Compliant);
- DOJ Deferred Prosecution Agreement with Ericsson (DPA);
- Ericsson Egypt Ltd. Plea Agreement (Ericsson Egypt Plea Agreement);
- DOJ Superseding Information with Ericsson Egypt (Ericsson Egypt Information); and
- DOJ Information with Ericsson (Ericsson Information)
What Ericsson Failed To Do
Ericsson did not self-disclose its FCPA violations to either the DOJ or SEC. Even without this step, Ericsson was eligible for a considerable discount under the FCPA Corporate Enforcement Policy (the Policy). Under the Policy, “If a company did not voluntarily disclose its misconduct to the Department of Justice (the Department) in accordance with the standards set forth above, but later fully cooperated and timely and appropriately remediated in accordance with the standards set forth above, the company will receive, or the Department will recommend to a sentencing court, up to a 25% reduction off of the low end of the U.S.S.G. fine range.” This means there is significant monetary incentive to both fully cooperate and timely remediate. However Ericsson did not meet either of the requirements and therefore did not receive a full 25% discount to which they were eligible. It only received a credit of 15% discount. So what were Ericsson’s failures?
According to the DPA, Ericsson “did not receive full credit for cooperation and remediation pursuant to the FCPA Corporate Enforcement Policy, [citation omitted], because it did not disclose allegations of corruption with respect to two relevant matters, produced certain relevant materials in an untimely manner, and did not timely and fully remediate, including by failing to take adequate disciplinary measures with respect to certain executives and other employees involved in the misconduct”. Unpacked, there are two key areas of failure by Ericsson during the investigation.
First, apparently it did not disclose matters involving bribery and corruption that it either uncovered during the investigation or was otherwise aware of during this time frame. The DOJ was able to find out about these two other matters through other means. With the company’s illegal conduct extending into 2016 and even 2017, it may well have been the illegal conduct was ongoing while the internal investigation was ongoing. The next failure in the cooperation phase was in producing documents in an “untimely manner”. While we can leave the non-use of plain English in DPAs for another discussion; it is mandatory that any company under FCPA investigation not delay in its production documents for witnesses for interviews.
Ericsson also fell short in its remediation. Although the company’s compliance program was substandard at the times of the incidents in question, Ericsson did enhance “its compliance program and internal accounting controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement (“Corporate Compliance Program”)”. However the company fell short in its remediation and failed to receive full credit for its failure to take disciplinary actions against executives and employees involved in the bribery and corruption at issue.
What Ericsson Did to Obtain Credit Under the Policy
On the flip side of these failure, Ericsson obviously did some actions during the investigation which allowed it to receive the 15% discount available under the Policy. According to the DPA, these actions included “conducting a thorough internal investigation; making regular factual presentations to the Fraud Section and the Office; providing facts learned during witness interviews conducted by the Company; voluntarily making foreign-based employees available for interviews in the United States; producing extensive documentation, including documents located outside of the United States as well as translations of foreign language documents; and proactively disclosing some conduct of which the Fraud Section and the Office were previously unaware”.
Even with these actions, there were real costs to Ericsson for its failure to fully cooperate and extensively remediate. These costs are identified in two separate components of the penalty calculation. The first is under the calculation under the US Sentencing Guidelines. Please note this calculation under the US Sentencing Guidelines is separate and apart from the discounts available under the Policy. Under the US Sentencing Guidelines (U.S.S.G. § 8C2.5), a company can receive a reduction of its Culpability Score up to an amount of five if “The organization fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct”.
The Penalty Calculation
Ericsson could have received a reduction of up to five but only received a reduction of two under this prong. This made the overall Culpability Score 8, which it could have been reduced to 5. Because of this Culpability Score of 8, the base fine multiplier was between 1.6 to 3.2 leading to a fine range of $612,529,920 to $1,225,059,840. From there the 15% discount was applied to the low end of the fine range. However if the Culpability Score had been 5, the base fine multiplier would be been between 1.0 to 2.0 and that would have led to a potential fine range of $382,831,200 to $765,662,400.
Now if Ericsson had received the full 25% credit available to it under the Policy, the low end of the fine range could have been reduced by over $95 million so that the final DOJ penalty could have been as low as approximately $287 million. For its recalcitrance in failing to fully cooperate and remediate; Ericsson paid an additional $95 million in criminal penalties.
The Double Whammy
What is equally important is double whammy Ericsson put on itself for its conduct during the investigation. First under the US Sentencing Guidelines, it did not receive the full reduction available to it under the Culpability Score so that the multiplier was increased. Second, Ericsson did not receive the full discount available to it under the FCPA Corporate Enforcement Policy so that it did not receive the full decrease which was potentially available under the Policy. All of this translated into an additional $95 million in criminal penalty. The Ericsson FCPA enforcement action demonstrates that there are real monetary benefits to fully cooperating and engaging in full remediation during an investigation.
Join me tomorrow for some concluding thoughts on lessons learned for the compliance practitioner.
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© Thomas R. Fox, 2019