In the prior post I talked about how, after nearly 40 years of FCPA history, the DOJ first used disgorgement as a remedy, including it this year in two declinations under the Pilot Program.
That post looked at the meaning of disgorgement.
In this post I’ll look at the measure of disgorgement — and more specifically, if the DOJ should calculate disgorgement the way the SEC does.
Although SEC disgorgement calculations are opaque, my understanding is that the SEC begins its analysis using a company’s reported pre-tax profits. The logic is that the SEC does not prohibit a company from seeking tax deductions for disgorged amounts and leaves open the possibility for an issuer or a subsidiary to seek refunds on taxes paid for historical profits that were ultimately disgorged.
In contrast, under the Pilot Program’s two declinations with disgorgement, the DOJ categorically prohibited the companies from seeking tax deductions for disgorged amounts.
The September 29 declination-with-disgorgement letter (pdf) from the DOJ to NCH Corporation that both parties signed said: “NCH cknowledges that no tax deduction may be sought in connection with any part of its payment of the Disgorgement Amount.”
The same language appeared in the declination-with-disgorgement letter with respect to HMT LLC.
In both cases, the amounts the companies disgorged was stated in the declination letters to be the same amount as the profit they made from the FCPA offenses.
But, for a disgorgement amount to truly encompass only the company’s gains from its wrongdoing (and nothing more), the DOJ disgorgement calculation should begin with post-tax profits — not pre-tax profits as may be the case with both NCH Corporation and HMT — if the DOJ insists on precluding companies from seeking tax deductions.
With HMT, the declination-with-disclosure letter referred to “$2,719,412 in net profits.” I assume net profits are profits before any taxes.
The reference in NCH’s declination-with-disgorgement letter is less clear. It refers merely to “profits to NCH of approximately $335,342.” That could mean profits before or after taxes.
With the two declinations with disgorgement to look at so far, there isn’t a lot of transparency. So it’s hard to take a strong position without knowing exactly how the DOJ is in fact calculating profits.
Nevertheless, here’s a suggestion that bring more clarity going forward.
I recommend that the DOJ provide further guidance under the Pilot Program.
The guidance should address:
(1) how the DOJ calculates the profits as a basis for agreeing on a disgorgement remedy
(2) the rationale for precluding a company from seeking tax deductions based on a nonpunitive remedy such as disgorgement, and
(3) whether the prohibition of tax deductions also precludes companies’ subsidiaries from seeking tax refunds for profits that are ultimately disgorged via Pilot Program declinations.
Insight into the DOJ’s thinking about these issues will help the Pilot Program meet expectations as a more transparent and predictable way to resolve FCPA offenses.
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Daniel Patrick Wendt is a Member in Miller & Chevalier’s International Department. He focuses on matters involving the FCPA and U.S. customs law.
1 Comment
Why wouldn't disgorgement be a top-line exercise? In Japan, when the FSA calculates disgorgement, they take simply the net gain (e.g. sale price less cost basis). It seems this is the amount that should be disgorged, no? By using the bottom line, take for example a company that makes say $1 million on an ill-gotten trade. If the company then paid the trader $1mn bonus on the trade, the net profit would of course be zero. DOJ gets zero, and the nefarious trader walks away with cold cash. Such a system would in fact incentivize wrongdoers to pay out ill-gotten gains to avoid capture by DOJ.
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