Often, enforcement officials at the SEC and the Justice Department express their wish that securities law violators own up to their (mis)conduct as soon it comes to light. That is, come to the government and explain what has happened. Almost as often, though, those officials have a difficult time describing the tangible benefits of doing so. Even for responsible corporations, it can be hard to know when to self-report, and, in truth, it is a minefield. On one hand, disclosing a potential issue when the government may never learn of it can seem too hasty. On the other hand, companies would rather present potential issues on their own terms, and without responding to subpoenas if the government does find out. What to do.
Companies received at least a bit of data on this score this morning, when the SEC and DOJ released non-prosecution agreements addressing potential FCPA violations by Ralph Lauren Corporation in Argentina.
From approximately 2005 through approximately 2009, Ralph Lauren Argentina’s general manager and others allegedly approved bribe payments to be made to Argentine customs officials through a third party customs broker to assist in improperly obtaining paperwork necessary for Ralph Lauren products to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited goods, and to avoid inspection of products by Argentine customs officials. These alleged payments were not exactly for the purpose of obtaining or retaining business, as is required for violations of the FCPA’s anti-bribery provisions, but at $568,000, the payments were too high to fit well into the FCPA’s exception for facilitating payments.
In addition to the customs-related payments, allegedly the Argentina general manager directly provided or authorized that several gifts be made to Argentine government officials to secure the importation of Ralph Lauren products. The gifts to three different officials included perfume, dresses and handbags valued at between $400 and $14,000 each.
The SEC’s non-prosecution agreement also found that Ralph Lauren Corp. failed to devise and maintain a system of internal controls sufficient to provide reasonable assurances that such payments could be caught and prevented.
Ralph Lauren Corp.’s Reaction
From the government’s perspective, the important part of all of this was how the payments were discovered and what Ralph Lauren did in reaction to them. As part of a general tightening of its corporate compliance programs, in 2010 the company adopted a new FCPA policy. Several months later, Argentina employees reviewed the policy and raised concerns about the company’s customs broker in Argentina. An internal investigation discovered the payments and gifts to Argentine. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the DOJ.
Upon discovering the bribes, Ralph Lauren Corp. fired its customs broker. It also thoroughly reviewed and enhanced its pre-existing compliance program with (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees.
As part of its “extensive, thorough, real-time cooperation” with the staff of the SEC and DOJ, the company also agreed to
- produce documents and disclose information to the government;
- provide accurate translations of documents;
- make witnesses available for interviews; and
- conduct a risk assessment of certain other world-wide operations.
Another thing Ralph Lauren Corp. chose to do was cease retail operations in Argentina. The company can obviously make its own decisions, and perhaps it did not view the reward from doing business there as worth the corruption risk. But I hope withdrawal from Argentina was not a condition of the non-prosecution agreements. The agreements themselves don’t say that it was, but it would be an unfortunate result if companies heard the message that staying out of global markets was a prerequisite for compliance with the FCPA.
Separately, this matter is a significant data point for those counseling for early disclosure to the government. The company was subject to financial sanctions – $700,000 to the SEC and an $882,000 criminal penalty to the Justice Department – but escaped other penalties. The penalties might have been much worse if the company had waited until it was forced to respond on the government’s terms.