Why the Justice Department Is Shortening Some Monitorships

Editor's Note: Compliance Week is pleased to introduce our newest columnist, Thomas Fox, a lawyer who specializes in Foreign Corrupt Practices Act compliance and a former general counsel. He will give his perspective on timely and significant FCPA issues that arise in the anti-corruption world.

One of the significant developments in Foreign Corrupt Practices Act enforcement in 2013 was what appears to be a subtle, yet significant, shift in the Justice Department's use of external corporate monitors under deferred-prosecution agreements.

There has been significant debate about the use of external monitors over the past few years, and this year the Department of Justice crafted a new form of monitorship that may help to answer some of these criticisms through a mechanism that fosters the Justice Department's goal of compliance with the terms and conditions of corporate FCPA resolutions. Mike Volkov, a defense attorney and former federal prosecutor, wrote that the “DoJ's flexibility on this issue has given it some breathing room to impose more stringent compliance requirements on companies.”

The use of an external monitor in any FCPA resolution had traditionally been for either the full term of the settlement—usually three years—­or no external monitor was required. Several FCPA resolutions allowed companies to self-monitor their compliance within the DPA and report to the Justice Department at regular intervals, typically annually. It was not the conduct that involved the underlying FCPA violation that appeared to be the deciding factor, but rather the company's actions during the FPCA investigation and leading up to the enforcement actions that led to the decision to require a corporate monitor or not.

In four FCPA enforcement actions over the past two years, however, the Justice Department has agreed to a monitorship of only 18 months, while the term of the DPA was three years. In February 2012, for example, medical device company Smith and Nephew entered into a three-year DPA for its FCPA violations, but was only required to install a corporate monitor for 18 months. In this matter, the company had used distributors as a mechanism for paying bribes to doctors and hospital officials to obtain sales of the company's products. Due to the company's extraordinary cooperation and extensive remediation, however, it received a 20 percent discount off the low end of the fine range as set out in the U.S. Sentencing Guidelines.

In March 2012, BioMet, a medical instruments manufacturer, also entered into a three-year DPA that included a corporate monitorship of 18 months. The Justice Department prominently cited the company's self-disclosure, extraordinary cooperation, and extensive remediation in the agreement. As with Smith and Nephew, these factors were enough to earn BioMet a 20 percent discount off the low end of the fine range.

After these two agreements to require a corporate monitor for only half the length of the DPA, the DoJ resumed its either-or dichotomy on monitors; it either required an external monitor for the entire length of the DPA or the settling company was allowed to self-monitor its progress of compliance with the DPA and report back to the Justice Department.

Two cases from last spring seemed to demonstrate what the Justice Department considered when making a decision on whether to require an external monitor. The first was the DPA with Parker Drilling. This case involved some very bad circumstances, with documented C-suite and outside counsel involvement in the bribery scheme. Yet no external monitor was required. The answer would seem to have been due to the cooperation and extensive remediation by the company during the pending FCPA investigation and enforcement action. The lack of an external monitor requirement spoke directly to the commitment of the company to compliance, and to the quality of its compliance program moving forward.

There have now been four examples of an external monitorship at a time frame one-half of the term of the DPA. These shortened lengths have been in a variety of industries, including medical devices, ATMs, and the energy service industry.

The Parker Drilling FCPA settlement can be contrasted with the resolution of the Total SA FCPA enforcement action to show the types of conduct that the Justice Department and Securities and Exchange Commission take into account when making a decision to require an external monitor. While executives at Total may not have acted as egregiously as those at Parker Drilling, its ongoing cooperation and remediation appear to have been several steps below that of Parker Drilling. For its lack of effort, Total was required to have an external monitor for both the DPA secured with the Justice Department and the civil action filed by the SEC.

Interestingly, there was little discussion by the compliance community of this shortened length of monitorship or demonstration of increased flexibility. This changed in a fairly dramatic manner, when Diebold settled an FCPA enforcement action in October through a DPA with the Justice Department and a civil complaint with the SEC that specified an 18-month requirement for an external monitor.

The bribery conduct of Diebold was longstanding and apparently well recognized in the company. Yet, after the investigation commenced, the company engaged in extensive remediation. While there was not the significant reduction off the low end of the fine range demonstrated in the BioMet and Smith and Nephew cases, the Justice Department clearly had some confidence that Diebold only needed 18 months to demonstrate its compliance with the terms and conditions of the DPA and its continued commitment to compliance.

Last month, Weatherford settled a long FCPA investigation that also included charges of export control violations and violations of the Oil-for-Food program. The conduct of the company had been quite serious in terms of violations of these statutes and its cooperation with the Justice Department had certainly been less than sterling, with the destruction of documents and attempts to hide company employees who were in fact witnesses, from government investigators.

Nevertheless, the company made a significant turnaround not only with its cooperation but in its attitude toward compliance. It brought in a top-notch chief compliance officer, who greatly expanded the company's compliance program and compliance function. Through these efforts, the company was able to get a shortened 18-month external monitor period.

There have now been four examples of an external monitorship at a time frame one-half of the term of the DPA. These shortened lengths have been in a variety of industries, including medical devices, ATMs, and the energy service industry. The key elements in each of these cases were not only the far-reaching cooperation by the company involved, but extensive remediation of its compliance program and function. The DPAs also point to a key feature of a “best practices” compliance program that the Justice Department has focused on recently: compliance programs that are designed to not only detect but prevent FCPA violations going forward.

Another significant point raised by the use of these shortened periods for external monitorships is flexibility. Clearly the Justice Department is responding to some of the criticisms regarding monitors over the past few years. Brandon Santos, in an article entitled “DPAs, NPAs And The Hybrid Corporate Monitor,” said that “DoJ FCPA unit head Chuck Duross spoke favorably about this new approach regarding the length of external monitorships at the 2013 ACI International Conference on the Foreign Corrupt Practices Act” due to the flexibility it can bring when crafting a DPA to meet its needs and requirements in enforcement of the FCPA.

This new type of external monitorship shows the Justice Department will consider novel or at least new arguments when addressing resolutions of FCPA enforcement actions. For the attorney negotiating the terms of a DPA, creative advocacy still plays a large role. For the in-house compliance practitioner, this means that the more and greater remediation that you engage in during the pendency of an FCPA investigation, the more likely it will pay off in reduced costs at the end of the day. More than simply remediation, however, it will be the quality of your remediation which the Justice Department will judge, together with your commitment to doing business in compliance with the FCPA going forward. All of these factors should lead the compliance community to embrace this new development in the length of external monitorships.