Executives Investigated Under FCPA Can Fear Less

Altering an unwritten policy, the DOJ eases pressure on companies to fire executives involved in FCPA wrongdoing.
Alice Hsieh and Daniel Patrick WendtJanuary 9, 2017
Executives Investigated Under FCPA Can Fear Less

On top of the fines or imprisonment that await violators of the Foreign Corrupt Practices Act, there has been an additional, less-visible penalty: Companies facing FCPA investigations have been expected to terminate the employment of executives tied to any alleged misconduct, or otherwise separate them from the company.

Daniel Patrick Wendt

Daniel Patrick Wendt

This hidden penalty saddles executives (even those with long, tenured careers) with sudden but officially unexplained departures from companies. It’s been driven in large part by the Department of Justice, which has often viewed an investigated company’s willingness to separate from wrongdoers as a demonstration of its commitment to compliance going forward and hence an important factor in deciding the terms of any resolution to the case.

Recently, however, the DOJ has signaled a shift in its expectations with respect to discipline against executives — at least, for those whose alleged misconduct does not constitute criminal activity. Rather, the department may be open to range of discipline that is less severe than terminations and separations.

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The “Filip Factors” — set out in a 2008 memorandum by Mark Filip, then a U.S. Deputy Attorney General, and subsequently formalized in the U.S. Attorneys’ Manual on Principles of Federal Prosecution of Business Organizations — established as a general principle that the DOJ will determine whether to prosecute a company based in part on the company’s remedial actions. These include efforts “to replace responsible management” and “discipline or terminate wrongdoers.”

Until fairly recently the DOJ has emphasized that companies are expected to discipline senior executives and not just rely on terminating lower-level employees. For example, Assistant Attorney General Leslie Caldwell stated at a conference in November 2015 that “the department does not look favorably on situations in which low-level employees who may have engaged in misconduct are terminated, but the more senior people who either directed or deliberately turned a blind eye to the conduct suffer no consequences.”

Technically, the DOJ does not and cannot instruct companies to separate from employees. However, those entering into negotiations with the DOJ are expected to provide a “Filip Factors presentation.” There is often pressure on the company during this process to improve its remediation summary by specifying that all relevant personnel —senior or junior — have been separated from the company.

But the DOJ is now signaling that a company can demonstrate a strong commitment to remediation of FCPA problems without necessarily terminating the employment of senior executives. This shift is evident in recent case resolutions and public statements by DOJ officials.

Cases in Point

In 2016, the DOJ entered into resolutions with LATAM and Och-Ziff Capital Management, even though those companies’ current CEOs (and in the case of Och-Ziff its then-CFO, Joel Frank, who has since retired) were sufficiently involved in the underlying misconduct that they separately reached civil resolutions with the SEC.

Alice Hseih

Alice Hsieh FCPA

Also, the DOJ recently entered into a resolution with Embraer, despite noting that the company had not disciplined a senior executive “who was aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions.”

These resolutions stand in contrast to the DOJ’s 2011 prosecution of Lindsey Manufacturing, its president, and its CFO, Keith Lindsey. The DOJ obtained verdicts against the company and the two executives, although the court later vacated these verdicts.

With respect to LATAM, a cease-and-desist order by the Securities and Exchange Commission against CEO Ignacio Cueto Plaza alleged that Cueto authorized payments in 2006 and 2007 to an Argentine consultant. And he did so knowing that the consultant might pass some portion of the money to union officials in Argentina for settling a dispute with the unions representing airline workers, the SEC charged.

As for Och-Ziff, on the same day that the DOJ and SEC announced resolutions with the company, the SEC announced settlements with Frank and with the hedge fund’s then-and-current CEO, Daniel Och, over charges related to improper activities in the Democratic Republic of Congo and Libya.

According to the SEC Order for Och, he “personally approved the expenditure of funds in two transactions with Och-Ziff’s partner in the DRC in which bribes were paid,” while Frank “approved the expenditure of Och-Ziff funds in transactions in which bribes or improper payments were made.”

The Order noted that both Och and Frank “were aware of the high risk of corruption in transactions with Och-Ziff’s DRC partner in light of his reputation and connections to high level DRC government officials.” Och agreed to pay nearly $2.2 million to settle the charges, while Frank agreed to additional proceedings “to determine what, if any, civil penalties” he will face.

Obviously, in the case of Och-Ziff, it is reasonable to speculate that the DOJ and the company may have both understood during the negotiations that given the nature of hedge funds, the firm likely planned to insist on retaining Daniel Och.

The settlements with LATAM and Och-Ziff appear to have been the first resolutions that the DOJ has entered into with companies whose sitting CEOs were involved in misconduct but stayed on in their positions. The settlement with Embraer similarly indicates that the DOJ is willing to conclude negotiations even when the employment of involved senior managers continues.

It is unclear what price these companies may have paid, via negotiations, to retain their leadership but one could argue that the price was steep. Och-Ziff and Embraer both received 20% discounts off the fine range established under sentencing guidelines — while greater discounts are often negotiated. And LATAM paid a fine that was 25% higher than the range established under the sentencing guidelines, which is quite extraordinary.

LATAM paid the DOJ and SEC a combined total of $44 million to resolve their liabilities; Och-Ziff paid a combined $412 million to the two agencies; and Embraer paid a combined $205 million, subject to some future reductions.

Moreover, under the separate resolutions with the DOJ, LATAM was required to engage compliance monitors for 27 months and the other two companies were required to do so for three years.

They Said It

The DOJ’s unwritten policy shift is also evident from public statements by DOJ officials at the end of 2016.

Addressing the American Conference Institute’s FCPA conference on Dec. 1, Fraud Section Chief Andrew Weissman indicated that the DOJ no longer expects employee terminations by companies that find other sufficient methods for holding employees to account. Daniel Kahn, chief of the department’s FCPA unit, made similar comments at the conference, in particular pointing to compensation adjustments as a form of discipline that may suffice in some instances.

These developments indicate that companies likely now have more flexibility in determining remediation and discipline programs that will pass inspection at the DOJ.

Daniel Patrick Wendt is a member and Alice Hsieh a senior associate at law firm Miller & Chevalier in Washington, D.C. Wendt’s practice is focused on the FCPA and U.S. customs law, while Hsieh is focused on FCPA and corporate anti-bribery compliance.