U.S. DOJ and SEC Release Second Edition of FCPA Resource Guide
On July 3, 2020, the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) released the second edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act (“Second Edition”), nearly eight years after the first edition (“First Edition”). Like the First Edition, the Second Edition remains informal non-binding guidance, but as such provides key insights into the DOJ and SEC approach to U.S. Foreign Corrupt Practices Act (“FCPA”) enforcement. While the Second Edition contains few dramatic policy shifts, it does provide a significant snapshot of the state of enforcement thinking today.
Notably, the Second Edition incorporates key policies promulgated by the DOJ:
FCPA Corporate Enforcement Policy (“CEP”). The CEP was launched as the FCPA Pilot Program in 2016, then made permanent in 2017 and revised in 2019. It provides a framework that incentivizes voluntary disclosure of potential misconduct, under which companies receive a presumption of declination if they adequately disclose, cooperate, and timely and appropriately remediate. The CEP has undergone several revisions since its inception, which are reflected in new language on the CEP in the Second Edition.
Memorandum on the Selection of Monitors in Criminal Division Matters. The Second Edition includes a new section incorporating 2018 DOJ guidance on the selection of monitors, which emphasizes that monitors should be the exception, not the rule, and lays out factors for determining when a monitor should be appointed.
Policy on Coordination of Corporate Resolution Penalties. Known as the “Anti-Piling on Policy,” this 2018 guidance was the result of long-standing efforts by agencies and investigated companies alike to avoid the imposition of duplicative penalties both between the DOJ and SEC, and with foreign enforcement authorities.
Criminal Division Guidance on the Evaluation of Corporate Compliance Programs. In addition to existing discussions of compliance, the Second Edition also points to the DOJ’s April 2019 guidance (updated June 2020) that lays out how prosecutors should evaluate the effectiveness of corporate compliance programs at the time of the potential misconduct and at resolution.
The Second Edition also:
Updates the statute of limitations and scienter requirements for criminal violations of the FCPA’s accounting provisions. Whereas the First Edition stated that the statute of limitations for criminal violations was five years under 18 U.S.C. § 3282, the Second Edition states that criminal violations of the accounting provisions are “securities fraud” under 18 U.S.C. § 3301 and as such, have a statute of limitations of six years. In addition, the Second Edition clarifies that both companies and individuals must act both “knowingly and willfully” for a criminal enforcement action to be brought under the accounting provisions. In contrast, the First Edition was silent on whether corporations were also subject to the “willfulness” requirement.
Maintains an expansive view of what constitutes “internal accounting controls.” The SEC has taken an increasingly expansive view in recent years of what is covered under 15 U.S.C. § 78m(b)(2)(B), by pursuing enforcement actions in areas not traditionally considered internal controls. Changes to the Second Edition suggest that trend will continue, by repeatedly adding the word “accounting” to “internal controls” and newly stating that “although a company’s internal accounting controls are not synonymous with a company’s compliance program, an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls.”
The Second Edition goes on to state, as previously, that a company’s internal accounting controls must be tailored to its specific risk profile and “take into account the operational realities and risks attendant to the company’s business,” such as the nature of its products or services, the extent of government interaction, and the degree the company operates in countries with a high risk of corruption. This focus on risk and overlaps between internal accounting controls and compliance programs suggests that the SEC will continue to take a broad view of what constitutes violations of the internal accounting control provisions.
Acknowledges new limitations on conspiracy and accomplice liability while otherwise reinforcing the DOJ’s expansive interpretation of the FCPA’s extraterritorial reach. The Second Edition continues to reinforce the DOJ’s expansive assertion of extraterritorial FCPA jurisdiction, despite the Second Circuit’s ruling in United States v. Hoskins, which held that the government cannot use conspiracy or accomplice liability theories to charge foreign defendants who are not themselves “covered persons” under the FCPA (issuers, domestic concerns, and foreign individuals or entities that act in furtherance of an FCPA violation within the territory of the United States). The Second Edition acknowledges Hoskins and removes references to prosecution of co-conspirators, while also construing its decision narrowly, in both breadth and jurisdiction. The Second Edition restricts Hoskins to the Second Circuit and points to a subsequent contrary ruling in the Northern District of Illinois, United States v. Firtash, which followed Seventh Circuit precedent to reject the Second Circuit’s reasoning. In addition, the Second Edition further observes that any limitations imposed by Hoskins apply only to the anti-bribery provisions and not the accounting provisions, which apply to “any person” rather than “covered persons.”
Incorporates new caselaw that constrains the SEC’s disgorgement authority. The Second Edition incorporates new caselaw that restricts the SEC’s disgorgement authority, noting that in Kokesh v. SEC, the U.S. Supreme Court held that disgorgement is a penalty subject to the same five-year statute of limitations as penalties under 28 U.S.C. § 2462. In a new section on disgorgement, the Second Edition briefly mentions the Supreme Court’s recent decision in Liu v. SEC, which held that a disgorgement award that does not exceed a wrongdoer's net profits and is awarded for victims is permissible equitable relief.
Integrates the Esquenazi factors to discuss “instrumentality.” While the FCPA’s definition of “foreign official” includes “any officer or employee of a foreign government or any…instrumentality thereof,” what constitutes an “instrumentality” has been hotly-contested in both courts and negotiations with enforcement authorities. The Second Edition incorporates the well-known decision in U.S. v. Esquenazi, in which the Eleventh Circuit defined “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own” while noting that it is a fact-bound inquiry and providing lists of non-exhaustive factors for what constitutes governmental control and a governmental function. It also notes that other courts have approved jury instructions incorporating similar lists of factors. Both the First and Second Edition make clear, however, that enforcement agencies will continue to interpret the term broadly to include both state-owned and state-operated entities in a variety of industries, and that whether a particular entity constitutes an “instrumentality” requires “fact-specific analysis of an entity’s ownership, control, status, and function.”
Expands the “hallmarks” of an effective compliance program. While both editions extensively discuss the “Hallmarks of Effective Compliance Programs,” the Second Editions adds one: “Investigation, Analysis, and Remediation of Misconduct.” It emphasizes that an effective compliance program must include a well-funded mechanism for timely and thorough investigations into allegations of misconduct and an established means of documenting the company’s response. The Second Edition further requires that a company analyze the root causes of misconduct and integrate “lessons learned” from compliance failures into its policies and trainings to prevent future breaches.
Reinforces a narrow view of the “local law defense.” The Second Edition reinforces the narrow applicability of the “local law defense” to the FCPA, suggesting that the DOJ will continue to reject most attempts at invoking this affirmative defense. The Second Edition discusses the Southern District of New York’s attention to the issue in United States v. Np Lap Seng, noting that the court rejected the defendant’s requested jury instruction that the jury must acquit if the payments were lawful under the foreign country’s laws and regulations, finding that this would be inconsistent with the plain meaning of the FCPA and “would lead to impractical results.”
Incorporates recent DOJ guidance on the treatment of potential liability in the M&A context. DOJ statements in recent years have expressed an understanding of the difficulties inherent in FCPA liability in the M&A context. The Second Edition addresses these by noting that while successor liability will continue to “prevent companies from avoiding liability by reorganizing,” both the DOJ and SEC recognize the benefits of M&A, “particularly when the acquiring entity has a robust compliance program in place and implements that program as quickly as practicable at the merged or acquired entity.”