In the second quarter the Department of Justice (DOJ) issued two declinations which demonstrated that the DOJ Pilot Program is alive and well. Linde Gas and CDM Smith, both received declinations to prosecute by meeting the four prongs of the Pilot Program; (1) self-disclosure, (2) extensive cooperation, (3) extensive remediation, and (4) profit disgorgement. These cases demonstrate the clear advantages of self-disclosure as both companies had engaged in conduct which was clearly violative of the Foreign Corrupt Practices Act (FCPA). 

I. Linde Gas

Linde acquired Spectra Gases, Inc. (Spectra Gases) in October 2006. In November 2006, it purchased certain assets from the National High Technology Center (NHTC) of the Republic of Georgia. One of the keys to this purchase was a piece of equipment called the ““boron column,” which were used to produce boron gas.” Sales of boron gas after the acquisition helped fund the purchase price and payout to Spectra executives who stayed on after Linde purchased Spectra Gases. 

Unfortunately, the three Spectra executives who stayed on were in cahoots with corrupt offices from the NHTC who made the sales agreement with Linde. Part of the Earn-Out by the former Spectra (now Linde) officials was paid to these corrupt government officials, both directly and through certain third parties. But the funding scheme to pay the bribes was quite creative and demonstrates once again to the compliance practitioner the myriad ways in which funds can be generated to pay bribes. 

For reasons not made clear, Linde did not purchase the boron column outright but allowed the former Spectra executives and the corrupt NHTC officials to form two new entities to own and operate the boron column, Spectra Investors LLC (Spectra Investors) and Spectra Gases Georgia, which was wholly owned by Spectra Investors. Spectra Investors was owned 51% by the corrupt NHT officials and 49% by the Spectra Gases executives who now worked for Linde. Spectra Gases Georgia was formed as a separate management company, by the NHTC officials, which was claimed to provide services to Spectra Investors for which it would receive recompense. Of course, there was no evidence of services being delivered under this arrangement as it was simply a mechanism to funnel monies to the corrupt officials. 

As a result of the ownership structure of Spectra Investors, with 51% being owned by corrupt NHTC officials and the management services contract, the corrupt NHTC officials received “approximately 75% of the profits generated by the boron column” while Spectra Gases received 25% of the profits. Clearly even with bribery and corruption, it was a bad business deal. In January 2010, Linde dissolved Spectra Gases and became its successor-in-interest and at some point later discovered the illegal conduct. Prior to the time of the dissolution, Spectra Gases had “received approximately $6,390,000”. After Linde became the direct owner, it “received approximately $1,430,000 as a result of the corrupt” actions. 

While there is a dearth of fact about how the matter came to the attention of Linde and when it disclosed the matter to the DOJ, the decision to decline to prosecute was based on the following factors: (1) Linde’s timely self-disclosure; (2) a “thorough, comprehensive and proactive investigation” [emphasis supplied]; (3) Linde’s full cooperation and meeting the Yates Memo requirement for disclosing all known relevant facts about the “individuals involved in or responsible for the misconduct”; (4) full profit disgorgement; (5) Linde’s enhancement of its compliance program and internal controls; and (6) Linde’s full remediation, including termination or discipline of the three Spectra executives and lower-level employees involved in the misconduct; termination of the fraudulent management contract between the corrupt NHTC officials and Spectra Investors and termination of the Earn-Out payment due to the former Spectra executives who became Linde employees. The company also made the following payments. 

This was yet another FCPA action where a company performed insufficient due diligence in the acquisition phase. The timing of the Linde purchase of Spectra Gases and Spectra Gases’ purchase of the income producing assets is too close in time to be a coincidence. It would certainly appear that Linde purchased Spectra Gases to facilitate its acquisition of the boron column and other assets. If your company is going to make such a multi-step acquisition, you must perform due diligence on all the actors and the assets involved.

The Byzantine corporate structure created for the ownership of the boron column, its operation and management contract are clear red flags that any CCO should sniff out immediately. While I am sure the internal corporate excuse for this clear ruse was the ubiquitous ‘tax considerations’; every such transaction should be reviewed by compliance as well. Anytime there is more than one entity to accomplish one task, there is the possibility of fraud present. Further, it is not clear how Linde could not have been aware of the ownership interests of a company which it ultimately controlled. It would seem that the company did not even make any inquiry.

Even in 2006, the Republic of Georgia’s reputation for bribery and corruption was quite high. The 2006 Transparency International-Corrupt Perceptions Index (TI-CPI) listed Georgia at 99 out of 176 countries listed so that alone warranted red flag scrutiny. If you are purchasing an entity in a country with such well known affinity for corruption, extra care is warranted. Perhaps back in 2006, Linde did not view the FCPA as something which it would deal with in such a situation. 

Yet even with all the apparent miss-steps and non-steps of compliance, the company was able to secure a declination from the DOJ. While there may be some additional penalties or sanctions by the Securities and Exchange Commission (SEC) for the failures of internal controls, the result obtained by Linde was certainly a superior result. The company would seem to have met the four pillars under the FCPA Pilot Program through (a) self-disclosure, (b) extraordinary cooperation, (3) full remediation, and (d) profit disgorgement. Interestingly, the profit disgorgement in this case would appear to have been beyond the five year of limitations for profit disgorgement under the recent Supreme Court decision in Kokesh. If there is a FCPA enforcement action brought by the SEC perhaps additional facts will be recited in any resolution documents. 

II. CDM Smith 

Later in June, the DOJ issued its second Declination under the Sessions regime. Short with brevity, the matter nonetheless has some significant points for the compliance practitioner to help move their corporate compliance program forward. The matter involved CDM Smith Inc. (CDM) a privately held engineering and construction concern, headquartered in Massachusetts. As with Linde Gas, CDM obtained a superior result for obtaining a declination in the face of unrefuted violations of the FCPA.

From 2011 until 2015, CDM’s India operations acted corruptly in paying bribes to employees at the National Highways Authority of India (NHAI), the country’s state-owned highway management agency. The bribe payments were reported to be “2-4% of the contract price and paid through fraudulent subcontractors, who provided no actual services and understood that payments were meant to solely benefit the officials.” In addition to these ongoing payments, the company’s division responsible for India and the Indian subsidiary “paid $25,000 to local officials in the Indian state of Goa in relation to a water project contract.”

This was not a situation of the non-existence ‘rogue employees’ but there was substantive involvement at the management level. The declination stated, “All senior management at CDM India (who also acted as employees and agents of CDM Smith and signed contracts on behalf of CDM Smith, including CDM India’s country manager) were aware of the bribes for CDM Smith and CDM India contracts, and approved or participated in the misconduct.”

As a part of the declination, CDM agreed to disgorge $4,037,138, which represented the “profit to CDM Smith from the illegally obtain contracts in India.” The payment was spread out over several months with $1,037,318 due within 10 days of the date of the declination and the remaining $3MM due in $1mm installments on August 1, September 1 and October 1. As with all DOJ declinations granted with disgorgement, CDM agreed that it would not seek any tax deduction with “any part of its payment or the Disgorgement Amount.”

The declination related that the DOJ made its decision to grant the close the investigation based upon six factors. 

1. CDM timely and voluntarily self-disclosed the matter;

2. CEM engaged in a “thorough and comprehensive investigation”;

3. CDM cooperated fully with the DOJ in the investigation of this matter;

4. CDM agreed to disgorge all profits it made from its illegal conduct; 

5. The remediation engaged in by CDM, including enhancements to its compliance program and internal controls regime; and

6. CDM’s termination of the executives and employees who were involved in or directed the illegal conduct. 

In addition to agreeing to not seek favorable tax treatment for its disgorgement, CDM also agreed it “will not seek or accept directly or indirectly reimbursement or indemnification from any source with regard to the Disgorgement Amount.” As with the Linde Gas declination the company ceded its right to seek clawbacks from culpable senior executives or others who might have benefited financially from the illegal conduct. Also, the company appears to have given up the right to seek any type of insurance reimbursement for FCPA violations, if it had any such insurance which might cover the Disgorgement Amount.

While the conduct at CDM did not reach the invidious level as was demonstrated at Linde Gas, it was clear a large swath of company employees were aware or engaged in illegal conduct. It was not limited to the Indian subsidiary alone as both employees and agents of the CDM signed the contracts which were obtained through bribery and corruption. Also, the conduct occurred over a five-year period which certainly raises questions about oversight by the US parent. There was no information presented about when or how the illegal conduct came to the US parent’s attention, only that the company did timely disclose this matter in a voluntary manner. 

For the compliance practitioner, the CDM case once again drives home and re-emphasizes the lessons to be drawn from the Linde Gas declination. The DOJ has now, for a second time, sent a clear message that it will reward companies which meet the four pillars under the FCPA Pilot Program through (a) self-disclosure, (b) extraordinary cooperation, (3) full remediation, and (d) profit disgorgement. Interestingly, the profit disgorgement in this case would appear to have been beyond the five year of limitations for profit disgorgement under the recent Supreme Court decision in Kokesh.

The CDM declination also reiterates what Jim McGrath used to say, a serious case requires a seriously good lawyer. Linde Gas had as its lead counsel, a lawyer who Howard Sklar characterized as “one of the Deans of the FCPA bar”, Lucinda Low from Steptoe & Johnson LLP, which led it to obtain a declination from the DOJ. CDM had Nat Edmonds currently the Chair of the Litigation Section at Paul Hastings LLP and formerly the head of the FCPA Unit at the Fraud Section of the DOJ, as its counsel and FCPA investigation counsel which led it to obtain a declination from the DOJ. These are both superior FCPA counsel who know what they are talking about when it comes to FCPA investigations, decisions to self-disclose and following the prescripts of the FCPA Pilot Program.

Yet the in-house compliance practitioner also has a role in obtaining such a superior result. As Hui Chen noted in her interview with Matt Kelly on the Radical Compliance podcast, it is more than simply having a paper compliance program in place. When she was Compliance Counsel for the DOJ, Chen was much more interested in how a compliance program was used in “actual operations” of the company. In other words, as made clear in the DOJ’s Evaluation of Corporate Compliance Programs, how is your compliance program operationalized in your company? This is something which a Chief Compliance Officer (CCO) can work to achieve so that if there is a FCPA violation, as occurred in Linde Gas and CDM, then your company has a fair chance of receiving such a superior result. 

As we now have two FCPA matters resolved under the Trump Administration and Sessions’ DOJ, compliance practitioners and the compliance profession can only applaud the results. The DOJ has given clear incentives for companies to meet the four prongs of the FCPA Pilot Program. Companies now have a clear road map to resolve substantive FCPA violations with no criminal penalty.