The Ralph Lauren Corporation’s settlement of an investigation into whether it made illegal payments and gifts to foreign officials shows once again just how much a company’s cooperation can provide it with the benefit of a slap on the wrist by the government rather than the trumpeting of embarrassing details.
Settling the case with the Securities and Exchange Commission and Justice Department through nonprosecution agreements - the mildest form of rebuke - is a powerful example of the incentive for companies to turn themselves in rather than even hint at fighting the government.
As part of the settlements, Ralph Lauren paid more than $700,000 to the S.E.C. in forfeited profits and a criminal fine of $882,000 to the Justice Department.
Although nonprosecution agreements are most commonly used by federal prosecutors, the S.E.C. highlighted the one in the Ralph Lauren case as the first to resolve violations of the Foreign Corrupt Practices Act. This statute has become a particularly fertile field for pursuing companies over the last few years, with prominent investigations into companies like Walmart and Avon consuming hundreds of millions of dollars in corporate resources for internal investigations and bolstered compliance programs.
It remains to be seen whether companies caught up in foreign bribery investigations will go to the same lengths as Ralph Lauren in the hope of receiving a nonprosecution agreement to settle their cases.
The company paid $568,000 in bribes to customs officials in Argentina through a broker there to help expedite paperwork that allowed it to import products into the country, according to the government documents. The payments were hidden in the corporate records by creating false accounts for “loading and delivery expenses†and “stamp tax/label tax.†In addition, Ralph Lauren gave three Argentine government officials gifts that included perfume, dresses and handbags valued at $400 to $14,000 each.
While the bribes and unlawful gifts were modest, the real problem was the absence of effective compliance measures to prevent such misconduct. As the S.E.C. noted in a statement of facts accompanying the nonprosecution agreement, the company did not identify a single instance of an improper payment during the four years in which the violations occurred.
In February 2010, Ralph Lauren instituted a new policy to prevent violations of the foreign bribery law, and just a few months later the improper payments came to light. At that point, the company reacted swiftly, reporting itself to the Justice Department and S.E.C. only two weeks after learning of the problem.
It then took significant steps to show its willingness to cooperate with the government, which the S.E.C. said included “summarizing witness interviews that the company’s investigators conducted overseas†and “making overseas witnesses available for staff interviews and bringing witnesses to the U.S.†The S.E.C. noted the benefits of the cooperation, pointing out that Ralph Lauren “saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.â€
After reporting itself, the company took further steps that showed the measure of its cooperation. Not only were the employees and outside agents involved in the illicit payments fired, but Ralph Lauren even shut down its operations in Argentina.
In extolling the company’s approach, the S.E.C. did not make the decision to close the Argentina subsidiary appear to be a requirement for receiving a nonprosecution agreement. But by pointing out how the company responded, the S.E.C. sent a message to others about the aggressive steps the government will look at in deciding the terms on which to settle a case.
The S.E.C. has entered into few nonprosecution agreements since announcing a new policy in 2010 to allow for them. The only other parties to these agreements have been Fannie Mae and Freddie Mac, companies that are controlled by the government, and Carter’s Inc., a case in which accounting problems were considered isolated. The agency also entered into a deferred prosecution agreement in a foreign bribery case with Tenaris, a maker of steel pipes.
The benefit of a nonprosecution agreement, as opposed to a deferred prosecution agreement, is that no charges are ever filed. That allows a company to proclaim truthfully that it was never even accused of wrongdoing, providing at least some public relations benefit.
Moreover, the S.E.C.’s public announcement of the settlement highlighted the virtues of Ralph Lauren’s cooperation rather than the venality of its conduct. One could easily imagine a news release that included embarrassing details about the gifts given to foreign officials and measures taken to hide the bribes that would make the company the butt of headlines, something largely missing in this case.
The question is whether Ralph Lauren’s response becomes a template for other companies hoping their cooperation with the S.E.C. will result in a similar outcome. There are certain pitfalls that companies will have to consider in deciding whether they want to follow the same path.
Most important, the speed with which Ralph Lauren reported itself may give other companies pause if it is viewed as a prerequisite to obtaining a nonprosecution agreement. Coming to the Justice Department and S.E.C. just two weeks after learning about the violations could be dangerous because a company would probably want to know whether any misconduct was isolated or signaled more widespread problems before telling the government what it believed happened.
The first contact with government investigators can be crucial because of the need to establish credibility to show the company is being forthright about any potential violations. Coming forward too quickly runs the risk that corporate counsel could misstate the nature or extent of what took place, leading investigators to mistrust the company if additional issues come to light that could make it look as if there were an effort to cover up or soft-pedal any problems.
The option to close an overseas operation may not be possible for many companies, especially if they have a substantial investment there.
The S.E.C. also highlighted Ralph Lauren’s decision to fire everyone who was involved in the wrongdoing, which sends a clear message that a company needs to take stern measures with anyone tainted by illegal payments if it hopes to establish its cooperation. Of course, whether that is fair to the employees or undermines corporate morale appears to be secondary.
The S.E.C. may well be using the nonprosecution agreement with Ralph Lauren to reinforce its position that it wants â€" and perhaps even expects â€" a higher level of cooperation from companies that discover violations. It looks as if self-reporting alone will not result in the softest resolution the S.E.C. can deliver if there is delay or the response to wrongdoing appears to be tepid.
