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Remedial Compliance Programs: A Key Ingredient in the Enforcement Recipe

By Ryan McConnell and Charlotte Simon

Over 90% of the deferred prosecution (DPA) and non-prosecution (NPA) agreements entered into in 2010 contained compliance features, an almost 40% increase since 2005, according to our latest research.

The rise of compliance reforms in DPAs and NPAs has been rapid. In 2005 and 2006, only 50% or fewer of all DPAs and NPAs contained compliance measures. In 2007, that number began to increase as thirty-one out of forty agreements contained compliance-related reforms. In 2008, 89.47% of DPAs and NPAs contained compliance requirements; in 2009, the number remained high, at 78.26%. The years 2008, 2009, and 2010 suggest that the emphasis on compliance-related business reforms in DPAs and NPAs is only growing stronger.

In our paper, “Plan Now or Pay Later,” available from SSRN here (forthcoming University of Houston International Law Journal, Spring 2011), we explain that an effective compliance program is critical for both charging and sentencing. A company’s compliance program is a consideration in three of the nine factors federal prosecutors evaluate when deciding whether to bring charges against a company under USAM 9-28.000. In addition, a compliance program potentially can reduce a company’s criminal fine by up to 30% under Chapter 8 of the USSG. Despite the clear benefits from an effective compliance program, statistics from the U.S. Sentencing Commission reveal that virtually every company convicted of violating federal law lacks an effective compliance program. From 1996 to 2009, only three companies received sentencing credit for having an effective compliance program. The rest either had no program or an ineffective one.

Convictions, however, tell only part of the story because they do not take into account compliance failures in DPAs and NPAs. We analyzed every DPA and NPA the U.S. Department of Justice (DOJ) entered into from 1993-2010 – searching for compliance deficiencies and reforms. Our review and analysis of FCPA DPAs and NPAs made clear that the FCPA poses unique compliance challenges because internal control deficiencies are often the leading cause of FCPA violations. In addition, recent FCPA DPAs and NPAs now map out anti-corruption policies specific to gifts, hospitality, entertainment, and facilitation payments. In November 2010, four of the five DPAs for FCPA violations provided guidance for compliance requirements involving third-party business partners, including mandatory due-diligence and mandatory contract clauses allowing termination for a third-party business partner’s non-compliance with anti-corruption policies.

Although the compliance framework in DPAs and NPAs varies depending upon the criminal law violation and compliance risks to the particular company, based on our review of DPAs and NPAs, the USSG, and OECD framework, we have come up with a model for the basic elements of an FCPA compliance program (including a flow chart) that is set forth in the article.

Ryan McConnell is a partner at Haynes and Boone LLP and former AUSA in Houston. He can be contacted here.

Charlotte Simon is a third year law student at the University of Houston Law Center and will be an associate at Haynes and Boone this Fall.

The third co-author of “Plan Now or Pay Later” is Jay Martin, the Chief Compliance Officer and Senior Deputy General Counsel at Baker Hughes, Inc.

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