Regulatory: Deciding whether to voluntarily disclose a potential FCPA violation

The advantages and disadvantages to self-reporting

One of the most difficult and consequential decisions a company faces when presented with a corruption allegation is the decision whether or not to self-report to the government. On the one hand, Foreign Corrupt Practices Act (FCPA) enforcement officials uniformly cite voluntary self-disclosure as one of the most critical elements of the government’s decision to award cooperation credit. On the other hand, companies risk unnecessary costs and negative publicity when self-reporting where the underlying facts may not otherwise warrant an enforcement action. Compounding the issue is the fact that companies generally achieve the maximum benefit from self-reporting when they contact the government at the earliest stages of the investigation—often before all the facts are known.

There is no guarantee that self-reporting will lead to leniency or a declination. With that said, there have been no FCPA declinations reported by the Department of Justice (DOJ) or the Securities and Exchange Commission (SEC) which did not result from self-reporting. It is difficult to imagine a scenario in which the government would award complete cooperation credit to a company whose FCPA issues came to light through the government’s or others’ independent efforts. In the past, that might not have been as significant of a concern for most companies. Companies naturally have an informational advantage over the government, and may have taken comfort in the fact that unreported issues were likely to remain off the government’s radar. The whistleblower incentives created as part of the Dodd-Frank Act, the creation of the SEC's and Commodities Futures Trading Commission’s whistleblower offices, and the high profile of many recent FCPA cases have changed the landscape significantly, increasing the likelihood that potential corruption issues will in some way come to light. In addition, both the SEC and the DOJ have stated that their investigators are actively pursuing leads independent of external disclosures. Local prosecutors and regulators outside the U.S. have, in addition, turned their attention to corruption issues and become more eager to bring cases under their own laws. Companies must assume that the probability is greater now that a corruption issue will come to the government’s attention, regardless of whether the company itself makes a voluntary disclosure, and must take that assumption into account in any calculations regarding the potential need for self-reporting.

One of the most crucial elements of the decision to self-report is timing. No company wants to walk in to the government with half-formed allegations and underdeveloped facts; however, companies hoping to maximize their cooperation credit should consider that the government wants and expects voluntary disclosure of potential FCPA issues relatively soon after the issues come to light. For example, the recent DOJ and SEC nonprosecution agreements with Ralph Lauren Corp. both trumpeted the company’s timely self-reporting—apparently only two weeks after the company uncovered the existence of a potential issue. Companies are best served by addressing the question of self-reporting at the earliest stages of an FCPA investigation. Ideally, this type of initial evaluation can be conducted in a quick and efficient manner, without engaging in a costly and fully-blown investigation. Companies should respond swiftly to corruption-based concerns, master the relevant facts in as effective a manner as possible, and quickly evaluate their potential liability in order to determine whether voluntary disclosure is appropriate.

Not all potential problems, however, are appropriate for disclosure. After investigation, allegations of misconduct may not result in a determination that illicit activity has occurred. Problematic payments may not be sufficiently material to amount to an FCPA violation (though companies should be aware of different standards for liability under other jurisdictions’ anti-corruption laws; for example, the U.K. Bribery Act of 2010). Prematurely attracting the government’s attention may, as a practical matter, shift the burden to the company to prove the absence of a corruption problem. Enforcement officials may feel the need as a matter of basic human nature to seek some type of resolution to a case where they have invested significant time and effort. Companies need to weigh the potential benefits of cooperation against the significant costs of initiating a potentially unwarranted government investigation.

In addition to cooperation credit, companies must evaluate a broad spectrum of potential consequences related to self-reporting when deciding how to proceed. Considerations include any collateral civil liability, the likelihood of involvement by foreign enforcement officials, the effect on foreign business relationships and contracts, and the potential impact on the company’s investors, personnel, business units, and other lines of business.

The decision to voluntarily disclose a potential FCPA issue to the government is not an easy one, but it is a decision that can be made somewhat easier by addressing corruption allegations as soon as they arise. Companies that commit time and resources to investigating corruption issues quickly and efficiently put themselves in the best position possible to properly evaluate the need to voluntarily self-report a potential FCPA violation.

Contributing Author

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Timothy P. Peterson

Tim Peterson is a partner in Murphy & McGonigle’s Washington, DC office.  Mr. Peterson previously served as Senior Counsel in the SEC’s Division of Enforcement,...

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Contributing Author

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Robertson Park

Rob Park is a partner in Murphy & McGonigle’s Washington, DC office.  Mr. Park spent 20 years in the Fraud Section of the Criminal Division...

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