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DOJ Begins New Practice of Disgorgement Without Prosecution

The Department of Justice (DOJ) announced its FCPA Pilot Program in April of this year as a way of encouraging companies who had engaged in violations of the Foreign Corrupt Practices Act (FCPA) to fully and promptly self-report those violations. While it was not entirely clear what the implications of the Pilot Program would be, this past week saw the DOJ’s announcement of the resolution of investigations into two companies which included a whole new approach to FCPA matters: the DOJ’s announcement that it would decline to prosecute those companies while at the same time requiring that those companies disgorge profits from the alleged FCPA violations.

The two “declination” letters, directed to NCH Corporation and HMT LLC, both based in Texas, detailed the FCPA violations by both privately-held companies and the amounts to be disgorged, and also included details of the steps taken by both companies to cooperate with the DOJ under the pilot program leading to the DOJ’s declination to prosecute. NCH was in the business of selling cleaning products to the Chinese government and allegedly provided $40,000 in gifts (including travel costs) to Chinese officials in order to generate profits of $335,342, which it was required to disgorge to the DOJ. HMT sold storage tanks used in the petroleum and gas industries and paid approximately $500,000 in bribes to Venezuelan and Chinese authorities to secure profits of $2,719,412, and was required to disgorge those profits as a result.

How the Companies Demonstrated Cooperation with the DOJ

In both of the letters to NCH Corporation and HMT LLC, the DOJ laid out numerous steps that the companies took in internally investigating and self-reporting the FCPA violations that were factors in the DOJ’s decision not to prosecute:

  1. Self-disclosure: Both companies voluntarily reported the violations in a timely manner to the DOJ.
  2. Self-investigation: Both companies completed a “thorough and complete global investigation of the matter.”
  3. Full cooperation: Each company cooperated with the DOJ by providing all relevant facts – including “all known facts about the individuals involved” – and pledged to provide continuing cooperation.
  4. Disgorgement: NCH and HMT both agreed to “disgorge all profits earned from the illegal conduct.”
  5. Compliance Enhancement: Both companies took steps to enhance their respective compliance and internal accounting controls.
  6. Full Remediation: The letter to NCH indicated that disciplinary actions, including termination, were taken against individuals involved in the misconduct, including lower-level employees, senior managers, and high-level executives. The letter to HMT indicated that eight employees, including two regional managers, were terminated at the company; ten employees were disciplined through pay freezes, suspensions, bonus reductions, and demotions; and that numerous relationships with agents/distributors were severed based on the investigation.

What We Can Learn From the NCH and HMT Letters

With these two newly announced agreements with NCH and HMT, the DOJ is clearly demonstrating its willingness to help companies avoid the negative consequences of a criminal prosecution while still allowing the for the DOJ to collect millions of dollars in revenue. In a sense, both the DOJ and the companies win as a result of the companies doing everything they can to conduct their own internal investigations and hand over those results to the government.

The big losers in these deals are all of the employees and managers terminated and otherwise penalized by the companies in their efforts to avoid criminal prosecution. Oftentimes employees and managers are simply taking direction from on high when engaging in allegedly illegal sales efforts and acting not to profit themselves individually but the greater interests of the company, calling into question the fairness of these results. As the FCPA Pilot Program continues along in providing encouragement to companies to self-report, employees are well-advised to take action to protect their own legal interests along the way.

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