Last week there were two declinations issued by Department of Justice (DOJ) for Foreign Corrupt Practices Act (FCPA) matters. The matters involved two Texas based, privately held companies. The first was HMT LLC (HMT) which makes above-ground liquid storage tanks for the oil and gas industry. The second was NCH Corporation (NCH) which produces cleaning products. Both companies received declinations under the new FCPA Pilot Program, which was announced last April.
What made these enforcement actions most interesting was that they were the first declinations; where a declination to prosecute was granted, yet there were no fines and penalties assessed against the companies yet both were required to disgorge the profits generated by their illegal conduct. HMT disgorged $2.7 million in profit from its illegal acts and NCH disgorged $335,000 from its ill-gotten gains. While this category of declination was used for the first time in DOJ enforcement action; it was not the first time it had been discussed by the DOJ. Indeed, one might have wondered why it took nearly six months for this type of disgorgement to appear after the DOJ announcement of the FCPA Pilot Program.
When the FCPA Pilot Program was announced, most of the attention was given to the three prongs to receive credit: (1) self-disclosure, (2) extensive cooperation, and (3) thorough remediation. However, in both the Press Conference announcing the initiative and the written release, entitled “The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance” (FCPA Pilot Program Guidance), the DOJ made clear there was a fourth requirement. As stated in the FCPA Pilot Program Guidance, “Moreover, to be eligible for such credit, even a company that voluntarily self-discloses, fully cooperates, and remediates will be required to disgorge all profits resulting from the FCPA violation.” It does not get much clearer than this statement.
As noted above both HMT and NCH were privately held businesses, not issuers under the Act and neither was subject to the Accounting Provisions of the FCPA. Previous FCPA enforcement actions, where there a was declination granted, involved companies which were issuers subject to the Accounting Provisions, enforced by the Securities and Exchange Commission (SEC). The companies who previously received declinations under the FCPA Pilot Program, Nortek, Akamai Technologies, and Johnson Controls all disgorged their ill-gotten profits in their respective SEC resolutions. In the cases of HMT and NCH, there could not be any SEC resolution as there is no SEC jurisdiction. Yet, to meet the fourth requirement of the FCPA Pilot Program, the companies were required to return their illegally obtained profit.
Former federal prosecutor Mike Volkov is probably the person who most often reminds us that the DOJ clearly signals its intentions. However, in FCPA Pilot Program the DOJ laid out in writing what was required and these two companies met all four requirements, thereby obtaining a declination. It should not be a surprise to anyone who read the FCPA Pilot Program Guidance to expect this was coming precisely in this type of case, where there was no SEC jurisdiction. Yet, there was more in these declinations which serve as lessons for the compliance practitioner.
According to its declination letter, “From February 2011 until mid-2013 the company had provided to Chinese government officials cash and other things of value, including gifts, meals, and entertainment, in order to influence the officials’ purchasing decisions.” These bribes were recorded in the company’s accounting records as, among other things, “customer maintenance fees,” “customer cooperation fees,” and “cash to customer,”. The company also “paid expenses for several employees of an NCH China government customer for a 10-day trip to various cities in the United States and Canada, only one half-day of which involved business related activities. The remainder of the trip involved sightseeing and other non-business activities. NCH paid approximately $12,000 for the non-business related expenses incurred by the officials during their trip, notwithstanding that NCH knew that: (1) the officials worked for a government entity; (2) NCH China had a sales bid pending before that entity while details of the trip were being discussed with the customer (although the bid was lost before the trip was taken); (3) various expenses were not for legitimate business activities; and (4) NCH had been advised that the proposed 10-day trip might violate the FCPA.”
According to its declination, from 2002 to 2011 the company had a “sales agent who was retained to promote and sell HMT’s products in Venezuela (“Venezuela agent”) illegally paid bribes to Venezuelan government officials in order to persuade Petroleos de Venezuela, S.A. (“PDVSA”), Venezuela’s state-owned and state-controlled energy company (an “instrumentality” under the FCPA), to purchase HMT products. To fund these bribes, the Venezuela agent frequently quoted prices to PDVSA that were substantially higher than the price HMT had quoted to the Venezuela agent. PDVSA paid the inflated prices to HMT, which kept the amount it had quoted the Venezuela agent and paid the Venezuela agent the remainder, purportedly as commission and subcontracting fees. HMT paid the Venezuela agent by wiring the purported commissions and subcontracting fees from its bank account in Texas to bank accounts designated by the agent in Panama, Curacao, and other locations.”
The factors listed which enabled both companies to receive declinations were similar. According to both declination letters, both companies:
- Voluntarily self-disclosed the FCPA violations;
- Thoroughly and comprehensively investigated the matter;
- Provided full cooperation in the investigation, including providing of all known relevant facts about the individuals involved in or responsible for the misconduct, and both agreed to continue to fully cooperate in any ongoing investigations of individuals arising from this matter;
- As noted both agreed to disgorge to the Department all profits earned from the illegal conduct;
- Both took steps to enhance their compliance programs and their internal controls;
- Both companies fully remediated. NCH Corporation terminated or took disciplinary action against the employees involved in the misconduct, including senior managers and lower-level employees involved in the misconduct, as well as high-level executives at company’s headquarters in the United States who oversaw the subsidiary in which the China misconduct occurred. HMT LLC also sanctioned ten employees through suspensions, pay freezes, bonus suspensions, and reductions of responsibilities, and severed business relationships with the Venezuela agent and the China distributor who were involved in the conduct. HMT also severed business relationships with seven other agents/distributors based on the findings of its investigation.
One can only say the FCPA Pilot Program is working and working well. With these two declinations the question of how privately owned businesses would be treated under the FCPA Pilot Program and the fourth requirement for profit disgorgement has been answered, although the answer was laid out in writing all along. For any Chief Compliance Officer (CCO) or compliance practitioner, these declinations should be studied closely to understand how the bribery schemes were funded and how the entities involved obtain such an outstanding result.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2016