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Carrots and Sticks — DOJ's Self-Reporting Policies

FCPA commentators, like my good friend Howard Sklar, tout the benefits of self-reporting when they discover an FCPA violation.    There is no question that if a company self-reports they will get a break.  What is not clear, and has not changed, is the question — How much?

The Justice Department wants everyone to report potential violations.  Why?  They get another case, another statistic and another investigation resulting in a fine and potential individual targets for criminal cases.  It is not a surprise that DOJ officials have stressed the importance of companies self-reporting.

The problem with this policy is the carrot is not defined.  There is no assurance that equally cooperative companies (in amount and degree) will receive the same benefit.  DOJ tries to achieve consistency but that is a task that is almost impossible to accomplish.  It is a system which really does need some reform, not by Congress, but by the Justice Department itself.

The lack of guidelines and clear rules undermines the Justice Department’s efforts to increase self-disclosure.  Once a company crosses the entrance to the Justice Department and agrees to disclose and cooperate, the company must be prepared for the consequences — the company gives up the ability to control its destiny.  The Justice Department is in the driver’s seat and will dictate the nature of the investigation, the remediation, and the ultimate settlement.  

Companies that learn of a potential violation have to determine if it has a disclosure obligation under the securities law; if not, they have to determine if they should self-report and then disclose the matter.  Assuming the issue does not rise to the level of “materiality” requiring disclosure under the securities laws, then the company may decide not to self-report but to investigate the problem and then fix the problem without informing the government.  In some situations, this may be the right way to handle the issue.  not every violation requires a company to self-report.  Of course, the company is still at risk, a whistleblower may inform the SEC about the issue or a disgruntled employee may do so.  But even in that case the company can report how it identified and fixed the problem.

In the absence of a clear guideline as to the benefit to companies that self-report, companies face a difficult inquiry — they do not know exactly what benefit they may earn for self-reporting.  Companies want certainty and they want to know how much benefit they can earn.  Companies are unlikely to roll the dice in situations where the benefit is unclear.

The Justice Department can follow the lead of the Antitrust Division which has implemented the successful leniency program — not in the details but in principle.  If a company self-reports a violation before any investigation has begun, or a whistleblower complaint has been filed, the company should receive a 50 percent reduction in the overall fine; if a company self-reports a violation after an investigation has begun, or a whistleblower compliant has been filed, the company should receive a 25 percent reduction in the overall fine.  In addition to these reasonable rules, the Justice Department should retain authority to modify these amounts to reward extraordinary cooperation.

It is amazing to me that the Justice Department can ignore a simple and basic improvement to its program which has already been demonstrated to be effective by its sister Antitrust Division.  I can only hope that the Justice Department addresses this issue in its upcoming guidance.

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2 Responses

  1. Howard says:

    They could also follow the example of OFAC, which similarly gives significant leniency for self-disclosure.

    But I’m not sure even setting percentages would satisfy critics of the Department in this area. After all, even then, the DOJ would be the ones determining the benefit.

    And while I think there is a benefit to self-disclosure, I would counsel caution to a company considering it. I don’t always agree with the calculus companies use, but there is a calculus to consider.

  1. May 18, 2012

    […] Carrots and Sticks — DOJ’s Self-Reporting Policies: Michael Volkov, Corruption, Crime & Compliance, calls for clearer guidelines about the benefits companies may receive for self-reporting. […]