Voluntary Disclosures and the Role of FCPA Counsel

Dyncorp International Inc. ("Dyncorp"), a provider of "specialized, mission critical professional and support services for the U.S. military, non-military U.S. governmental agencies and foreign governments" (according to its recent 10-Q filing) (see here) recently disclosed a potential FCPA issue.

Page 19 of its filing states:

"We have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. The payments, which we believe totaled approximately $300,000 in the aggregate, were made to sub-contractors in connection with servicing a single existing task order that the Company has with a U.S. government agency. We have retained outside counsel to investigate these payments. We are in the process of evaluating our internal policies and procedures and are committed to improving our compliance procedures. During the past week, we voluntarily brought these matters to the attention of the U.S. Department of Justice and the Securities and Exchange Commission. We cannot predict the ultimate consequences of these matters at this time, nor can we reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flow. We have not recorded any reserves with respect to this matter." (emphasis added).

This disclosure, along with the more recent disclosure that Dyncorp's Senior Vice President, Chief Compliance Officer and Executive Counsel was terminated (see here) has been covered by the Wall Street Journal (see here and here) and has been discussed elsewhere (see here).

I inject the following question/issue into the conversation (so to speak).

Why did Dyncorp voluntarily disclose to DOJ/SEC conduct that is arguably not even a violation of the FCPA? More broadly, what do such voluntary disclosures of potential FCPA issues say about the potential conflict of interests FCPA counsel has in advising companies as to the important disclosure issue.

First things first.

As readers of this blog likely know, many FCPA enforcement actions result from voluntary disclosures companies make to DOJ and (if an issuer) to SEC.

The reason?

There are some "carrots" out there.

First, "The Principles of Federal Prosecution of Business Organizations" (see here) (a.k.a. the former Thompson Memo which is now included in the US Attorney Manual) state that one of the factors a prosecutor should consider in deciding whether to criminally charge a company is the "value of cooperation" and the "corporation's timely and voluntary disclosure of wrongdoing and its cooperation with the government's investigation..." (see 9-28.700).

Second, Chapter Eight of the Federal Sentencing Guidelines (specifically s. 8C2.5(g)) (see here) will reduce an organization's "culpability score" (which is key in calculating a company's fine upon conviction as well as the company's fine in a settlement) if: "the organization (A) prior to an imminent threat of disclosure or government investigation; and (B) within a reasonably prompt time after becoming aware of the offense, reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct"

See (here) for what Assistant AG Breuer recently told an FCPA audience about voluntary disclosure.

A company deciding whether or not to voluntarily disclose to the government will thus have to weigh the risk of the government finding out about the conduct in the absence of the company's voluntary disclosure (and thus likely assume the risk of a harsher fine/penalty) vs. voluntarily disclosing the conduct to the government, yet being able to take advantage of the above mentioned "carrots".

In weighing these options in the face of evidence of an actual FCPA violation, companies often choose the voluntary disclosure route - although the merits of the voluntary disclosure route and how to assess the leniency are issues subject to debate.

The weighing of these options when confronted with evidence of an actual FCPA violation is one thing.

However, and as demonstrated by Dyncorp's recent disclosure, companies often also voluntarily disclose conduct to DOJ/SEC that may only potentially violate the FCPA.

Perhaps the analysis is similar to that above; however, is there any other area of law where companies (and their counsel) race to Washington to tell the government not about an actual violation of law, but merely about a potential violation of law (save perhaps for the DOJ's antitrust leniency program (see here) which nevertheless involves actual violations)?

Before addressing the issue of what potential conflict of interest FCPA counsel may have in advising companies as to the important disclosure issue (particularly where the disclosure merely involves a potential FCPA violation), a bit about why the conduct Dyncorp disclosed is arguably not even a violation of the FCPA.

I've written before (see here) about the Fifth Circuit's decision in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) on the FCPA's obtain or retain business element and how the court concluded that payments to customs officials to reduce customs duties and sales tax could fall within the FCPA, but that such conduct does not automatically constitute an FCPA violation. The Kay case is one of the few instances in which a court has rendered a substantive FCPA decision.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. However, because these enforcement actions have not been contested, it remains an open question as to under what circumstances such payments can indeed satisfy the FCPA's obtain or retain business element.

Dyncorp's disclosure ("[w]e have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies") involves the type of payments at issue in Kay and one reason why the conduct Dyncorp disclosed is arguably not even a violation of the FCPA is the equivocal nature of the Kay decision (the only case law on this subject).

Here is the real head-scratcher though.

The Dyncorp payments were not made in order to obtain or retain business with any foreign government or foreign government entity, but rather assisted Dyncorp obtain or retain business with the U.S. government.

Has there ever been an FCPA enforcement action where the questionable payments were made to assist the payor in obtaining or retaining business with the U.S. government? To my knowledge no, and if anyone is aware of such an enforcement action please do let me know.

True, the DOJ's "Lay-Person's Guide to the FCPA" (see here) (the DOJ's interpretation of the statute) notes "that the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality."

However, as the Kay court noted, the payments still need to be in connection with foreign business (i.e. seemingly not business with the U.S. government).

The Kay court framed the issue as follows: "...how attenuated can the linkage be between the effect of that which is sought from the foreign official in consideration of a bribe (here, tax minimization) and the briber's goal of finding assistance or obtaining or retaining foreign business with or for some person, and still satisfy the business nexus element of the FCPA?" (emphasis added).

Later in the opinion, the Kay court framed the issue as follows: "...the question whether the defendants' alleged payments constitute a violation of the FCPA truly turns on whether these bribes were intended to lower ARI's cost of doing business in Haiti enough to have a sufficient nexus to garnering business there or to maintaining or increasing business operations that ARI already had there, so as to come within the scope of the business nexus element as Congress used it in the FCPA." (emphasis added).

In holding "that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage" (emphasis added), the Kay court still nevertheless focused on business in a foreign country (... "the FCPA's legislative history instructs that Congress was concerned about both the kind of bribery that leads to discrete contractual arrangements and the kind that more generally helps a domestic payor obtain or retain business for some person in a foreign country...) (emphasis added).

The Kay court's focus on foreign business is consistent with the FCPA's extensive legislative history which also focuses on payments made to secure foreign business, not business with the U.S. government.

This provides another reason why Dyncorp's disclosure of "certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies" in "connection with servicing a single existing task order that the Company has with a U.S. government agency" is arguably not even a violation of the FCPA.

So the question remains, why did Dyncorp disclose this conduct - conduct that could only potentially violate the FCPA?

This leads to the final issue/question - what potential conflict of interest does FCPA counsel have in advising companies as to the important disclosure issue (particularly where the disclosure only involves a potential FCPA violation)?

By raising this issue/asking this question, I am not accusing Dyncorp's counsel of anything (I don't even know which firm is representing Dyncorp). Rather, I ask this question in the context of the Dyncorp's disclosure because it seems to present (for the above reasons) the perfect "case" in which to raise this lurking issue / ask this lurking question (even though the same question could legitimately be asked in connection with other corporate voluntary disclosures of conduct that could potentially violate the FCPA).

It truly is the "elephant in the [FCPA] room" in my estimation.

Here is the potential conflict of interest as I see it. FCPA counsel has every incentive (it would seem) to nudge a corporate client to make the disclosure.

Simply stated, no disclosure, the "case" (for all practical purposes) is over and thus no more billable hours.

Conversely, with the disclosure the "case" continues meaning more billable hours.

Often times if a voluntary disclosure is made the "case" continues for several more years as DOJ (and if applicable) SEC will demand a wide range of factual information and documents involving the conduct at issue.

Morever, often times the "case" gets expanded because a favorite question of the enforcement agencies is something along the following lines - "if Business Unit A was involved in this conduct in Country A, how do we know that Business Unit A was not also involved in this conduct in Country B, and, more broadly, how do we know that the Company (in general) was also not involved in this same conduct in Countries C,D, and E (all FCPA high-risk jurisdictions)?

Because cooperation with the government's investigation is a prominent factor a prosecutor weighs in deciding whether to criminally charge a business entity under the above described "Principles of Prosecution", a corporate client invariably (yet reluctantly) will accept FCPA's counsel's recommendation to broaden the "case" to demonstrate cooperation with the DOJ/SEC's investigation.

Next thing the company knows, it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) to travel around the world to answer DOJ/SEC's questions even though the voluntary disclosure that got this whole process started involved conduct that may not actually violate the FCPA.

Because FCPA counsel's "worldwide review" will often not be deemed credible unless it comes back to DOJ/SEC with at least something of concern or suspicion, FCPA counsel will often disclose several small, non-material, practically meaningless issues which also could potentially violate the FCPA.

DOJ/SEC, to demonstrate the thoroughness of its investigation, will often include these "tag-along" facts in the ultimate resolution documents (most often a non-prosecution or deferred prosecution agreement).

Thus, disclosure often times leads to significantly more work, and more billable hours for FCPA counsel. Because FCPA counsel is able to demand premium billing for its services given the high-profile, sensitive nature of the issue, the disclosure decision is literally a several hundred thousand / multimillion dollar issue for FCPA counsel and could mean the difference between several more months / years of work and no additional work.

To be clear, I am not suggesting any actual conflict of interest by Dyncorp's counsel (or any other FCPA counsel for that matter).

Rather, I am pointing out that a potential conflict of interest is present in FCPA counsel's disclosure advice given the significant difference in billable hours hinging on the disclosure decision.

This potential conflict of interest is hardly ever discussed, and this is not surprising given that few "outside" of the FCPA bar (given the opaque nature in which FCPA enforcement actions are resolved) even know how the disclosure and resolution process actually works to ask the question.

Here is another issue that is hardly ever discussed.

The same enforcement officials who often encourage the voluntary disclosure route, and speak of the credit that will be given to a company when it voluntarily discloses, are the same individuals who often rotate in and out of government service and the FCPA bar. Again, I am not suggesting any actual conflict of interests by these individuals.

However, these potential conflict of interest issues (i.e. the "elephants in the [FCPA] room") should not be shoved aside in analyzing why there are so many FCPA voluntary disclosures (including of conduct that may only potentially violate the statute) and why FCPA enforcement is indeed the unique creature that it is.