More Analysis of the FCPA’s Lurking “Elephant in the Room”: Voluntary Disclosure

This article originally appeared on Professor Koehler’s FCPA Professor website (www.fcpaprofessor.com) and is reprinted with his permission.

Voluntary disclosure (i.e. picking up the phone and calling the DOJ and/or SEC (if applicable) to schedule a meeting, during which a company’s lawyers disclose conduct that could potentially implicate the FCPA, even though the enforcement agencies, in many cases, would never find out about the conduct) is a tough issue.

In a November 2009 speech to an FCPA audience (see here), Assistant Attorney General Lanny Breuer acknowledged that the decision of whether to make a voluntary disclosure is “sometimes a difficult question” [...] a question I grappled with as a defense lawyer.”

The Gibson Dunn Year End FCPA Report (the subject of yesterday’s post see here) has this to say about voluntary disclosure:

“To be sure, a company that voluntary discloses a potential FCPA violation to DOJ and the SEC will be better situated than one that otherwise finds itself across the table from the government having not disclosed the conduct.”

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“On the other hand, there is substantial debate about just how “tangible” the benefits of voluntary disclosure truly are.”

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“Although some corporate defendants that self-reported misconduct have certainly received relatively lenient treatment, it is not clear that voluntary disclosure was the reason for any particular settlement term.”

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“Although it is certain that companies do receive some benefit for self-reporting FCPA violations, the real question is whether the company considering a voluntary disclosure is better off for having made the disclosure, which is not necessary one-and-the-same. Because voluntary disclosure makes the government aware of alleged improper conduct that it otherwise may have never discovered on its own, the likelihood of the government uncovering the misconduct through other means, such as a whistleblower, foreign government investigation, tip from a competitor or business partner, or industry-wide investigation, is a critical factor in determining whether to make a voluntary disclosure.”

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“Given the multitude of factors to consider when making a voluntary disclosure decision, it is often challenging to make such a significant decision with any degree of confidence that a particular course of action is the right one. This task is made even more difficult by the uncertainty of obtaining any particular benefits for disclosing.”

As raised in a prior post (see here), a company’s decision in deciding whether or not to voluntarily disclose conduct to the enforcement agencies that could potentially implicate the FCPA is made even more difficult given the potential conflict of interest FCPA counsel has in advising the company as to the important disclosure issue – particularly where the disclosure only involves a potential FCPA violation.

I raised this lurking “elephant in the room” question in connection with Dyncorp International’s recent disclosure of potential FCPA issues.

One could raise the same question in connection with Team Inc.

In August 2009, Team (a Texas-based provider of specialty industrial services) disclosed (here) that an internal investigation conducted by FCPA counsel “found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises.”

The release further noted that “[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. We have voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter.”

In the prior post, I noted that a voluntary disclosure often sets into motion a series of events and the next thing the company knows it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) even though the voluntary disclosure that got the whole process started involved conduct that may not actually violate the FCPA.

Fast forward to yesterday as Team disclosed (here) as follows:

“As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope. The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million.”

A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company’s annual consolidated revenues?

Wow!

Double-wow because the payments may not even violate the FCPA because they were made to “employees of foreign government owned enterprises” (see here for several prior posts on the enforcement agenices untested and unchallenged interpretation of the “foreign official” element)!

Others have scratched their heads about this as well (see here and here).

Of course, the FCPA does not contain a de minimis exception and of course the FCPA contains books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company’s overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company’s books and records or made in the absence of any internal controls.

But then again, the FCPA books and records and internal control provisions would be implicated if a Team employee took his Cousin Randy to the company’s corporate suite for the ballgame but recorded the costs as “marketing expenses” on his reimbursement request causing the company to misrecord the payment. Yet, no one would suggest disclosing this potential FCPA violation!

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The above post was contributed to Corporate Compliance Insights by Mike Koehler, an Assistant Professor of Business Law at Butler University. It was reprinted from his blog FCPA Professor.

Mr. Koehler is also CCI’s Featured FCPA Columnist. He has a wide range of experience and expertise on this emerging topic, and he contributes regularly to our discussion of current FCPA matters.

Follow the link to his bio page to learn more about Mike Koehler.