Of Counsel
“Go Forth and Sin No More” – Opportunities for Amnesty in the United States
07 Jun 2016

In this exclusive Of Counsel piece, Adam S. Kaufmann and A. Katherine Toomey of Lewis Baach pllc, discuss the advantages of self-reporting for those U.S. businesses who may fear that an upcoming disclosure, whether as a result of the Panama Papers scandal or elsewhere, may lead to a criminal or serious regulatory investigation in the U.S.

The fallout from the Panama Papers has been extensive and will continue far into the future.  It will continue to be an enormous problem for Mossack Fonseca, the law firm whose files were leaked to the press.  The firm’s clients will also face consequences.  The initial round of disclosures has focused scrutiny on high ranking political figures, heads of state, tycoons, and celebrities from virtually every country in the world, from the Middle East, to Europe, to South America.    According to the International Consortium of Investigative Journalists (ICIJ), the group in possession of the Mossack Fonseca files, more disclosures are coming.

Prosecutors in the United States and elsewhere have not been content to wait for the ICIJ to decide when and what to disclose.  Word of the leak had barely surfaced before Panamanian prosecutors raided Mossack Fonseca’s offices, seeking evidence of money laundering and other crimes.[1]   U.S. prosecutors have also signaled their interest in the treasure trove of information said to be contained in the Panama Papers.  In early May, U.S. Attorney Preet Bharara, from the Southern District of New York, reached out to the ICIJ seeking further information.[2]  Up to 35 jurisdictions may be looking to review the Papers for information concerning tax violations.

Given the disclosures to date, and the likely future disclosures, many persons and companies may be lying under a figurative sword of Damocles – just one more leak away from a devastating disclosure that may lead to criminal charges or a substantial penalty levied by a U.S. government agency.   Getting ahead of the bad news may be the best strategy.   So, now seems like a good time for a refresher on the advantages of self-reporting under a number of US programs.

FCPA Amnesty Program:

Virtually simultaneously with the Panama Papers publication, the U.S. Department of Justice (DOJ) announced a new one-year pilot program designed to motivate companies to voluntarily report and remediate criminal violations of the Foreign Corrupt Practices Act (FCPA). Under the new program, companies that self-report potential FCPA violations to the Justice Department before they are under investigation could cut their potential penalties in half.

In order to qualify for the cooperation credit, companies must (1) voluntarily self-report a criminal violation of the FCPA in a reasonable time period after becoming aware of the offense; (2) fully cooperate in the investigation; and (3) and conduct a timely and appropriate remediation, including disgorgement of all illicit gains.  However, qualifying for this credit is no simple task.  For instance, companies would not meet the voluntary self-reporting requirement if the disclosure is one that the company is required to make by law, agreement or contract.  Similarly, the self-report must occur before the violation is discovered by authorities.  A purportedly “voluntary” report made to head off an imminent government investigation or disclosure will not satisfy the requirements of the pilot program.

The benefits for a self-reporting company are substantial.  Companies that meet specific requirements set forth in the plan may be eligible for up to a 50% reduction in penalties.  In addition, if all of the program’s requirements are met, the FCPA Unit of DOJ’s Fraud Section has the discretion not to prosecute the case at all.  But that discretion is not unbounded.  For example, according to DOJ’s memo, if a corporate executive is involved in the wrongdoing, non-prosecution is not a possibility, even if all of the other elements of the program have been met.  DOJ’s memo also provides that a more limited reduction in the applicable fine may be available even where the company did not make a timely self-report, provided that it fully cooperates with DOJ’s investigation and remediates its violation.  That limited reduction would be a mitigation credit of, “at most,” a 25% reduction of applicable penalties based on the U.S. Sentencing Guidelines.

U.S. Sanctions Self-Reporting Program:

The U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) has a similar self-reporting program, which, like the DOJ’s pilot program, can reduce the potential penalties for a sanctions violation by one half.

U.S. sanctions programs are generally considered to impose strict liability.  That is, a person’s knowledge, intent and willfulness are not relevant to the question of whether a violation has occurred.   But such issues may be very important to OFAC’s determination of the appropriate penalty for the violation, which could be anything from “no action” through hefty fines for violations.   OFAC’s generally applicable schedule of appropriate fines ranges from $1000 to $250,000 per transaction – which can mount up quickly when a perpetrator is alleged to have been involved in dozens or hundreds of problematic transactions.  But penalties can go even higher.  Certain statutes have even higher maximum fines, and the amount of the penalty will also depend on whether OFAC determines the violation is “egregious,” i.e., reckless or willful.

OFAC has a longstanding self-reporting program which provides substantial benefits to companies that self-report sanctions violations.  The chart included by OFAC in its own guidance (reproduced below), reflects that self-reporting can both reduce the maximum amount of the penalty and cut even that amount in half.

OFAC penalty matrix 2

Self-reporting under the OFAC guidelines requires that a party provide a detailed notification to OFAC of its apparent violation or participation in a violation “prior to or at the same time that OFAC, or any other federal, state or local government agency or official, discover the apparent violation or another substantially similar apparent violation.”   A party may under certain circumstances also receive self-reporting credit if it reports the violation to another agency, which also provides self-reporting credit.  A party does not receive self-reporting credit if OFAC is informed of the violation by a third party notifies OFAC of a blocking or rejection of the transaction.

U.S. Tax Programs:

For the past seven years, the U.S. Internal Revenue Service has offered a self-reporting program designed to encourage U.S. taxpayers to disclose and pay taxes on offshore bank accounts.  The present program began in 2012, but is similar to previous programs.  Through the 2012 program, the IRS is offering taxpayers with undisclosed income from offshore accounts another opportunity to get current with their tax returns. The program generally requires that offshore accounts be disclosed, that past tax returns and related filings be updated and that the taxpayer pay a substantial penalty equal to 27.5% of the highest aggregate value of the offshore assets for the previous 8 years.

These penalties are steep, but the cost of non-compliance can be higher and may include criminal penalties.   These can be reduced or avoided through self-reporting.  In particular, the IRS has stated publicly that when a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure program, the IRS will not recommend criminal prosecution to the Department of Justice for any issue relating to tax noncompliance or failure to file Report of Foreign Bank and Financial Accounts.

Other Opportunities for Amnesty:

Even outside of these organized programs, other U.S. regulators and prosecutors may have discretion to extend some dispensation to self-reporters.  For example, the SEC has long included self-reporting as part of its evaluation of cooperation by a company seeking a non-prosecution or deferred prosecution agreement.   Prosecutors at both the state and federal levels have substantial discretion on issues like whether to bring criminal charges, what charges to bring, and what sentence to recommend.   Accordingly, where an individual or company has a significant fear that an upcoming disclosure, whether from the Panama Papers or elsewhere, may lead to a criminal or serious regulatory investigation in the U.S., it makes sense to consult with a lawyer to consider whether a voluntary report to an appropriate authority could resolve the issue with a lower penalty.

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Time may be of the essence in making these decisions.  It is impossible to predict when the next publication from the Panama Papers will occur, or whose secrets will be aired.   And the DOJ’s FCPA program is presently slated to end in the Spring of 2017, after which DOJ’s Fraud Section “will determine whether the Guidance will be extended in duration and whether it should be modified in light of the pilot experience.”  The IRS’s tax amnesty program may end or be modified at any time.   So penalties may be increased, even if the program is not terminated.

In considering whether to self-report, a company should weigh its exposure to investigation, reputational damage, costs of cooperation (which can be extensive), likely penalty, and the benefits of certainty against the likelihood of prosecution and conviction and the substantial risks of not self-reporting.   This analysis is likely to be complex and requires a thorough review with experienced criminal or regulatory counsel.  But what is clear is that doing nothing and hoping potential problems will remain hidden or disappear, while rarely a good strategy in the past, has become riskier for some with the release of the Panama Papers.   Companies and individuals playing a waiting game should consider their options today.

[1] http://www.wsj.com/articles/panama-papers-firm-office-raided-by-prosecutors-1460520089

[2] https://panamapapers.icij.org/20160421-us-investigation-hongkong-editor.html  ICIJ said that it welcomed the U.S. Attorney’s interest, but that it would not provide additional disclosures to him.

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