Ralph Lauren FCPA Case Offers Lessons on Customs Oversight, Benefits of Voluntary Disclosures
Ralph Lauren’s April disclosure of Foreign Corrupt Practices Act violations is both a lesson in the importance of customs compliance programs and self-disclosure and an example of harsh government penalties harming a cooperative company, trade and FCPA lawyers said. The FCPA case rests on a series of alleged bribes, over a four-year period, of Argentina customs officials by an Argentinean subsidiary of Ralph Lauren. The bribe payments and gifts were paid through the company’s customs broker in Argentina. Ralph Lauren settled the allegations through Non Prosecution Agreements (NPAs) with the Justice Department and the Securities and Exchange Commission (for more on the case, see 130423243).
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The benefits of self-disclosure are unclear for many companies facing FCPA violations, said Southern Illinois University School of Law professor Mike Koehler. Self-disclosure can prevent criminal or civil charges, and is often “easier and more cost-efficient than engaging your primary financial regulator -- the SEC -- in litigation,” said Koehler, a former FCPA lawyer and author of the FCPA Professor blog. Yet self-disclosing companies still face costs -- as in the case of Ralph Lauren’s fine and continued monitoring. “We just don’t see the tangible benefits of voluntary disclosure,” Koehler said. And though Ralph Lauren’s FCPA case spurred plenty of commentary from the legal community, Koehler said there is nothing particularly special about the action, other than it being the first time the SEC used a NPA in the FCPA context.
Ralph Lauren’s violations appear to have stemmed from routine customs activity, said Ted Murphy, a customs lawyer and partner at Baker & McKenzie. Many FCPA cases are customs-related, since customs is often the “first interaction” between foreign companies and government officials, he said. “These FCPA cases can be very, very expensive … A robust customs program will help identify and prevent some of these types of issues from arising.” Such a program should include an understanding of how a company’s products are regulated for foreign purposes: “If I’m importing into Argentina … I should know whether or not a permit is required, and if it is, what the process is to get it, how much it costs, etc.,” Murphy said.
An effective internal control system -- one that is tested regularly -- is also important, he said, and should vet customs agents and ensure customs payments are correct. Companies that outsource customs work to foreign agents without such an understanding can potentially face "problems down the line," Murphy said. In its NPA on the case, the SEC said Ralph Lauren’s Argentinean subsidiary lacked an internal control system between 2005 and 2009 -- the years of the alleged bribes -- and failed to conduct “effective due diligence” on its customs broker. The company adopted a new FCPA policy in February 2010; the violations were discovered by employees that summer, sparking an internal investigation. Within two weeks of uncovering the bribes, Ralph Lauren voluntarily disclosed its findings to the SEC and DOJ.
In statements on the case, the agencies commended Ralph Lauren’s disclosure and its “extensive, thorough, and timely cooperation.” A handful of law firm publications wrote that this is a lesson on the benefits of self-disclosure: “If a company gets ahead of the curve, it can significantly lessen its overall penalty and pain,” said Houston-based FCPA lawyer Thomas Fox (here). Ralph Lauren was subject to financial sanctions but “escaped larger penalties,” wrote David Smith of Brooks Pierce (here). “The penalties might have been much worse if the company had waited until it was forced to respond on the government’s terms.”
Others, however, argued Ralph Lauren wasn’t awarded enough for its laudatory cooperation. “Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decided to self-report potential unlawful conduct,” wrote a group of anti-corruption, white collar and global securities lawyers from Covington & Burling (here).
Ralph Lauren held itself to an extremely high standard of compliance: conducting an internal investigation, terminating employees convicted of wrongdoing and implementing remedial measures, the lawyers said. Yet under the NPA, Ralph Lauren was forced to pay about $1.6 million in penalties and disgorgement, implement further compliance changes, submit annual reports to the DOJ and “publicly admit and accept responsibility for the illegal conflict, which potentially exposes it to shareholder lawsuits and reputational damage,” the lawyers said. -- Jessica Arriens