DOJ declines prosecution for PE firm after post-acquisition voluntary self-disclosure

On October 4, 2023, the DOJ announced a new policy to promote prompt reporting of misconduct discovered at acquired companies by providing a safe harbor to acquirer companies that voluntarily self-disclose misconduct at an acquired company “within six months from the date of closing.”

On March 7, 2024, the NSD followed up this announcement by publishing its new NSD M&A Policy. Under this policy, NSD generally avoids seeking a guilty plea and will consider entering into NPAs with companies that (1) voluntarily self-disclose potential criminal violations of export control or sanctions laws, (2) fully cooperate in investigations, and (3) timely and appropriately remediate the behavior. 

While the NSD’s policy and approach substantially mirrored the DOJ’s pronouncements from the previous year, the NSD M&A Policy notably shifted from a hard-and-fast “six months” requirement for reporting past violations to merely requiring reporting “within a reasonably prompt time after becoming aware of the potential violation, with the burden on the company to demonstrate timeliness.”

Background – Unicat’s Transactions and White Deer’s Investigation and Report

As alleged by the DOJ in its letter declining prosecution, between 2014 and 2021, former officers and employees of Unicat conspired to effect 23 unlawful sales of chemical catalysts used in oil refining and steel production to customers in Iran, Venezuela, Syria, and Cuba. As part of this scheme, Unicat’s former CEO directed others at Unicat, including subordinate employees in the sales, logistics, and accounting departments, to facilitate illegal transactions by arranging shipping logistics, creating false business records, ordering goods from manufacturers in China, and using a buying agent in China to directly ship catalysts from China to sanctioned jurisdictions and customers.

During White Deer’s pre-closing due diligence process, at least one historical sales agent agreement with an agent in Iran was provided to White Deer, but its significance was initially “overlooked by a junior attorney performing the due diligence review.” In June 2021, approximately nine months after the close of the transaction, White Deer learned of these past issues when the new Unicat CEO was told of a pending transaction with an Iranian customer by an employee with responsibilities for logistics. Acting promptly, the new Unicat CEO canceled the transaction and retained outside counsel to investigate the issue. Just one month later, White Deer and Unicat self-disclosed the criminal conduct to the NSD, OFAC, and OEE.

After submitting its VSDs, White Deer agreed to fully cooperate in the resulting investigation, disclosing all known relevant facts, proactively identifying relevant records both inside and outside of the United States, proactively and lawfully disclosing foreign-located records, and agreeing to cooperate with the ongoing investigation by providing relevant information and making its officers, employees, and agents available for interviews and testimony.

At the same time that White Deer was cooperating with the DOJ, it was internally remediating the issue by terminating culpable employees, disciplining other employees involved in the misconduct, and implementing a comprehensive and robust system of internal controls and compliance programs designed to identify and prevent similar misconduct.

Because of its timely disclosure to the government, complete cooperation, and appropriate remediation, White Deer avoided prosecution while the DOJ, OFAC, and OEE required Unicat to:

• forfeit $3.3 million, the approximate proceeds it derived from its violations of US sanctions laws
• pay a $3.88 million penalty to OFAC for its violation of US sanctions laws, crediting the forfeiture amount to the DOJ
• pay a $391,183 penalty for violations of US export control laws, crediting the penalty payment to OFAC

Although these fines and forfeitures are significant in the abstract, they represent a fraction of the amount that White Deer and Unicat might have faced, given the $1 million per violation that is applicable for criminal violations of sanctions laws. 

Key Takeaways and Recommendations

• Violations of US sanctions and export controls can function as a lingering source of potential criminal and civil liability risk for acquiring entities, especially given the 10-year statute of limitations that now applies to such violations. The DOJ’s resolution with White Deer, however, provides an important reminder that companies can mitigate their risks by promptly investigating and reporting past issues as they are discovered. 
• The DOJ has provided a concrete example showing its genuine commitment to preferencing and rewarding post-acquisition VSDs of US sanctions and export controls violations. The provision of the “safe harbor” for an acquirer that voluntarily self-disclosed pre-acquisition violations by the acquired entity in this case instantiates a form of the M&A Safe Harbor Policy that the DOJ previously announced in October 2023 and is consistent with the March 2024 NSD M&A Policy.
• Although the sanctions violations could have been uncovered during the pre-acquisition due diligence process, the DOJ nonetheless credited White Deer for reporting the issue once those violations were actually discovered during post-acquisition management of Unicat’s operations, nearly nine months after the close of the relevant transaction.
• Both the prosecution of the former Unicat CEO and the declination of prosecution for White Deer comport with the current administration’s “America First” policy, which balances taking a hard line against potential illicit activity with geopolitical adversaries like China and Iran with promoting and supporting US businesses at home and abroad.