Tag Archives: Billy Jacobson

Role of Federal Sentencing Guidelines in FCPA Cases Reply

enforcement, FCPA, US Government • Tags: , ,

Given the tremendous fines imposed upon Siemens AG and Kellogg Brown & Root LLC (“KBR”) in the past 10 months, many have asked how the DOJ calculates criminal fines in FCPA cases and how statutory penalties and the United States Sentencing Guidelines (“U.S.S.G.”) interact in that calculation. We turned to Billy Jacobson, formerly at Justice and now Chief Compliance Officer at Weatherford, for an explanation:

“Despite two separate statutory schemes and the Sentencing Guidelines (all explained below), it is important to realize that the DOJ has tremendous discretion in this area and its decisions will, almost always, boil down to three relatively simple criteria, the first objective and the latter two subjective and dependant on the DOJ’s discretion and judgment: (1) how much the company profited from its corruption; (2) the extent of the company’s cooperation with the government’s investigation; and (3) the quality of the company’s remediation efforts.

The FCPA itself contains penalty provisions: violations of the anti-bribery provisions carry penalties of up to $2 million per violation and accounting provision violations carry fines of up to $25 million. Another statute, however, provides that the fines can be even higher. The Alternative Fines Act—as its name suggests—provides an alternative to most criminal fine thresholds and means that companies may be fined “the greater of twice the gross gain or twice the gross loss [to a person other than the company].” 18 U.S.C § 3571(d); see 18 U.S.C. § 3571(c)(2).

Despite these statutory limits, the Sentencing Guidelines and DOJ’s decision about how those guidelines should be applied usually dictate the fine a company will pay. This is true in cases of a corporate conviction (which usually occur in the context of a plea agreement) and also in cases of deferred prosecution agreements. Both the KBR and Siemens plea agreements provide helpful illustrations of how this works.

In KBR’s plea agreement, the DOJ and the company explained the Sentencing Guideline calculation to which they agreed. First, the parties agreed that “the value of the benefit KBR received in return for the unlawful payments” was $235 million. This amount was used as the “Base Fine.” In most FCPA cases, the Base Fine will be the profit earned as a result of the corrupt conduct. Next, under the theory that to be truly penalized a company must be forced to pay more than simply the amount if profited from the illicit conduct, a “culpability score” must be determined. That score leads to a multiplier that will be applied to the base fine to arrive at a final fine range. Several factors go into determining the culpability score, including the size of the company, whether high-level officials of the company were involved in the conduct and the extent of cooperation by the company. The KBR culpability score resulted in a multiplier range of 1.6 to 3.2. By doing math simple enough even for lawyers, the parties arrived at a fine range between $376.8 and $753.6 million. The final, agreed-upon criminal fine of $402 million fell squarely within this range. (KBR plea agreement)

In the Siemens case, however, DOJ agreed to a fine amount well below the Guidelines range which would have been between $1.35 and $2.7 billion. (The DOJ’s Sentencing Memorandum explains in detail how the parties arrived at the figure, in part, by walking step-by-step through the Sentencing Guidelines). Instead, the DOJ agreed to a $450 million fine. It’s hard to think of a $450 million fine as getting off lightly, but that is at least arguably what happened in this case. In its Sentencing Memorandum, the DOJ explained that it was agreeing to such a large departure from the sentencing range in recognition of several factors, including: Siemens’ assistance in investigations of itself, individuals and other organizations; its payments of penalties in other proceedings; its compliance and remediation efforts; and its “extraordinary rehabilitation.” The DOJ further explained that a downward departure from the Sentencing Guidelines range was warranted, under 18 U.S.C. § 3553(b)(1), because the “mitigating circumstances [were] ‘of a kind, or to a degree, not adequately taken into consideration by the United States Sentencing Commission.’” (Siemens’ sentencing memo)

The discussion above makes obvious that companies will be treated very differently by DOJ depending on their level of cooperation and remediation. While the DOJ has not to my knowledge specifically said this, it can be inferred that prosecutors felt Siemens’ cooperation and remediation was superior to that of KBR. Hence, Siemens was allowed to pay a fine well below the Guidelines range while KBR was not. As explained above, other factors were also at play, but they all lead to the inescapable conclusion that despite two clear statutory schemes and the very detailed Sentencing Guidelines, much in this area depends on the DOJ’s discretion and judgment.”

Caveat Emptor: Getting a Grip on Pre-M&A Due Diligence 1

Due diligence, FCPA • Tags: , , , , , ,

It’s been a busy year for Billy Jacobson. Last year, he was working FCPA cases as Assistant Chief of the Fraud Section at the Department of Justice. More recently, he became a partner in the Washington office of Fulbright & Jaworski. And then, to complete the hat-trick, he joined Weatherford International as Vice President and Chief Compliance Officer. It’s safe to conclude that he has seen most FCPA challenges from all angles. We asked Billy to talk about due diligence specifically in the context of international mergers and acquisitions and he sent this summary of a recent article posted here.

* * *

“In today’s increasingly aggressive enforcement climate, it is a legal and business imperative for entities to conduct thorough due diligence prior to consummating a merger or acquisition. Due diligence should further two primary, related goals: (1) learning as much as possible about the target in order to properly evaluate and address any anti-corruption risks and (2) creating a due diligence file sufficient to withstand later scrutiny. That is easy in theory, but how much diligence is enough? Based upon how FCPA liability may be imposed on acquirers, significant applicable enforcement actions, recent DOJ guidance, and practical experience, I’ve attempted to answer that question in the article “Caveat Emptor: Why and How FCPA Due Diligence Should Be Conducted Prior to Mergers and Acquisitions.” The article is summarized below.

The threshold step of any pre-merger or acquisition due diligence is to identify risk areas. The risk areas can be categorized as environmental considerations, including the level of corruption in the country where the target is based, and specific organizational considerations, including the target’s anti-corruption policies, procedures, and internal controls. Early identification of these risk areas facilitates the identification of initial red flags and further serves as a guidepost for ongoing fact-finding.

Fact-finding, the most expensive and time-consuming portion of due diligence, should consists of several steps. First, the acquirer should conduct initial, high-level and in-person interview(s) with target management before a review of documents and accounting records to understand the target’s operational and financial structure and to learn of potential problem areas. Second, the acquirer should examine and assess the target’s anti-corruption compliance procedures and internal controls. The lack of anti-corruption compliance procedures and/or internal controls speaks volumes about the potential risk. The existence of anti-corruption policies and/or internal controls is great, but an acquirer should conduct an assessment of whether and how they actually work. Third, unless the target has no, or minimal, business with government customers, the acquirer should conduct a forensic review of the target’s books to identify suspicious payments to third parties. The forensic review should cover, among other areas, petty cash accounts, travel and expense records, and approved vendor lists for potential red flags including, but not limited to, large and/or round-dollar payments, patterns of recurring payments, payments to employees outside of the payroll system, third-country payments, and payments with unacceptable descriptors.

Depending on the nature of the questions and/or red flags raised during the fact-finding steps described above, the acquirer should follow-up as needed with supplemental interviews, additional review of accounting records, or even selected searches of electronic and hard copy data. The acquirer should then evaluate the facts and judge whether a potential risk should be classified as a yellow light or a roadblock, depending on the anticipated nature, likelihood, and severity of consequences associated with the risk. If the anticipated risk is low, the acquirer may decide to proceed with the transaction. If the risk is high, the acquirer should think long and hard before proceeding with the transaction.

If problems are discovered within the target, the acquirer should consider whether to alert the government prior to the acquisition in an effort to avoid liability flowing to the acquirer. The acquirer must also, of course, consider how to remediate the problems found within the target if the acquisition proceeds. Additionally, the acquirer should integrate its anti-corruption policies, procedures, and accounting controls into the former target. This includes training personnel of the former target as quickly and as extensively as practicable, and where necessary, completing due diligence on any issues not finalized in the pre-acquisition due diligence. The acquirer should also continue to monitor the former target’s compliance with its representations and warranties and the acquirer’s anti-corruption policies, procedures and internal controls by, among other methods, conducting reviews or audits, requiring personnel to annually certify their compliance, and where needed, appropriately disciplining rogue personnel.

While the above-summarized steps are neither convenient nor inexpensive, acquirers must adapt to the current enforcement environment. Conducting robust due diligence demonstrates adherence to applicable anti-corruption laws and will more than pay for itself if the acquirer is able to avoid buying itself a big legal liability.”