The U.S. Department of Justice (DOJ) recently launched a new pilot program (PDF: 51 KB) designed to encourage more corporations to voluntarily report their own violations of the Foreign Corrupt Practices Act (FCPA), but the program does not go far enough to achieve its goals.
The pilot program is the first time that the DOJ has offered specific benefits to corporations that self-report that are unavailable to firms that fail to disclose detected wrongdoing and cooperate only when caught. This is an important reform. Yet closer examination reveals that the benefits detailed in the pilot program are not sufficient to lead corporations to disclose significant wrongdoing that will otherwise likely remain hidden. A company that reports its own significant wrongdoing generally guarantees that it will be punished for a crime that could otherwise go undetected. To achieve its aims, the FCPA Unit must adopt an enforcement practice that widens the gulf between firms that disclose their crimes and those that remain silent but later cooperate to equal or exceed the increased risk of detection and sanction caused by self-reporting.
Importance of Self-Reporting and Need for Reform
The DOJ cannot effectively deter crime unless it increases corporate voluntary reporting because individual wrongdoers are not deterred by threatened criminal sanctions unless they expect to get caught. Corporations are better able to detect their agents’ corrupt payments than is the government. Yet they are reluctant to report it because they can be held criminally liable for their employees’ crimes. In order to effectively deter crime, federal enforcement policy must ensure that a firm’s expected costs are lower if it discloses misconduct than if it only cooperates, since reporting dramatically increases the probability of sanction.
Existing DOJ policy fails to achieve this goal. Under the Principles of Federal Prosecution of Business Organizations and the Organizational Sentencing Guidelines, corporations have little reason to disclose significant wrongdoing. Corporations’ expected criminal settlements are neither reliably nor sufficiently better if they self-report than if they keep quiet and later cooperate. Corporations that detect wrongdoing are often well-advised to remain silent, remediate, and fully cooperate only if the government detects the crime. Corporate self-reporting FCPA violations have fallen steadily since 2010.
Deferred and Non-Prosecution Agreements in FCPA Cases
Pilot Program Requirements
The pilot program is designed to enhance firms’ incentives to self-report by offering higher benefits to firms that report wrongdoing as compared to those that do not, but later cooperate. Under the pilot program, firms that self-report, fully cooperate and remediate are eligible for a smaller fine equal to only 50% of the lower end of the Sentencing Guidelines fine range. They also generally will not be subject to a monitor. Finally, they are potentially eligible for a declination. By contrast, corporations that do not self-report but fully cooperate face a fine that is at least 75% of the lower end of the Sentencing Guidelines fine range. They are unlikely to receive a declination.
Evaluation of the Pilot Program’s Effect on Self-reporting
The pilot program provides corporations with a more predictable reward for self-reporting relative to cooperating. Yet the benefits the program offers to firms that voluntarily disclose are not sufficient, in and of themselves, to outweigh the costs to corporations of disclosing significant misconduct that would likely remain hidden.
The pilot program substantially reduces the fine imposed on firms that report relative to those that do not report or cooperation. But corporations that cooperate and remediate, without self-reporting, can obtain two-thirds of the mitigation granted to firms that self-report without incurring the enhanced liability risk of reporting undetected wrongdoing. This level of mitigation, in and of itself, will not persuade a firm to report any substantial misconduct unless there is at least a one-third risk that the government will detect the wrong if they do not report it.
The FCPA Unit also offers firms that self-report a presumption against being subject to a monitor. Yet in most years since 2010, FCPA Unit generally has not imposed monitors on most firms that did not self-report. Thus, this benefit may not be so alluring.
Finally, under the pilot program, prosecutors in the FCPA Unit may decline prosecution of firms that do not self-report. But corporations that report wide-spread wrongdoing have little reason to expect a declination because the pilot program instructs prosecutors to continue to apply the Principles of Federal Prosecution of Business Organizations. The Principles militate against declination in cases of substantial and wide-spread wrongdoing involving managers – the very type of wrongdoing prosecutors most need to learn about.
Improving Incentives
The FCPA Unit could improve the impact of the pilot program by implementing an enforcement policy that broadens the gap between the sanctions imposed on firms that self-report and those imposed on firms that keep quiet about detected wrongdoing.
Corporations may be more likely to self-report if the Fraud Section announces that the firms with significant misconduct can only get a declination or NPA if they self-report. Corporations would be more inclined to voluntarily report if informed that corporations which detect and fail to self-report are presumptively ineligible for a deferred prosecution agreement unless two conditions are met. First, the firm provides cooperation sufficient to ensure conviction of the most senior people responsible for the crime. Second, the firm is presumptively subject to a monitor. If the FCPA Unit uses these and other tools at its disposal, it could ensure that firms want to come clean. In turn, employees would be much less tempted to bribe in a world in which their employers are likely to detect and report them.
Professor Jennifer Arlen is the Norma Z. Paige Professor of Law at NYU School of Law and is Co-Director of the Program on Corporate Compliance and Enforcement.