Last week, the parties in U.S. v. Fokker Services, B.V. filed their appeals of the United States District Court’s February 5, 2015 Order denying the parties’ joint consent motion to exclude time under the Speedy Trial Act pursuant to a deferred prosecution agreement. Readers of this blog will know that the judge presiding over the Fokker Services, B.V. (“FSBV”) matter, the Honorable Judge Richard Leon, was not pleased with the terms of the deferred prosecution agreement entered into by the parties, and as a result refused to approve the agreement as he believed that it was too lenient on FSBV.  Judge Leon even went on to suggest that it bordered on being an abuse of prosecutorial discretion.

The parties claim that the District Court erred in denying the motion to exclude time under the Speedy Trial Act because the Court does not have the authority to do so when the Court’s decision is motivated by a belief that the agreement was too lenient. The majority of the briefs delve into finer points of law concerning prosecutorial discretion, arguments about separation of powers in matters of criminal prosecutions, and what “approval” authority the courts have in matters involving deferred prosecution agreements. There is little in the briefs which speaks to the substance of the case, or of the Iran sanctions with the exception of this paragraph in the Government’s brief addressing why, in part, they offered the deferred prosecution agreement:

“In addition, the United States carefully considered the appropriate use of scarce agency resources, particularly given the difficulty of obtaining witnesses and evidence not located in the United States and the difficulty of proving every element of an International Emergency Economic Powers Act violation beyond a reasonable doubt. See JA 97 (observing that “the government lacked sufficient proof to demonstrate that a person with adequate responsibility over the company’s affairs had both the necessary knowledge of the corporation’s legal responsibility to abide by U.S. sanctions and knowledge of the manner in which Fokker Services was evading those sanctions”).”

This is an argument that the Government also made in its briefing before the District Court. Essentially, the Government contends that one of the reasons it offered the deferred prosecution agreement, and did not prosecute any individuals, was because of the difficulty of proving every element necessary to sustain a conviction beyond a reasonable doubt.

Specifically, while the Government on one hand has previously argued that the corporate knowledge doctrine makes FSBV’s criminal liability readily provable, it also acknowledges that there were several changes in FSBV’s upper management during the course of the conduct. Further, the Government in this case has openly recognized that although senior management was aware of the breadth of the U.S. sanctions targeting Iran, there is little evidence that they were aware of the “work arounds” to sanctions that had been developed by their employees working in the field. Further, there was a lack of evidence that those lower level employees that had created and implemented the “work arounds” had knowledge of the application of sanctions to their conduct. In the Government’s own words: “In the end, the government lacked sufficient proof to demonstrate that a person with adequate responsibility over the company’s affairs had both the necessary knowledge of the corporation’s legal responsibility to abide by U.S. sanctions and knowledge of the manner in which Fokker Services was evading those sanctions.”

This is a far cry from the allegations made in the Criminal Information filed in this case which state that:

1. Fokker employees created and updated a chart that tracked which U.S. companies were vigilant about export controls and directed business to those which were not (implying that even if this was done by lower level employees, that those employees had knowledge of U.S. export controls);
2. Fokker employees were directed to hide activities and documents related to Iranian transactions when the U.S. Federal Aviation Administration inspectors audited their Dutch warehouse (implying that management was involved in the actual conduct as these employees were “directed” to conceal their activities);
3. A manager in the Logistics Department published an internal “work instruction” detailing steps on how to evade U.S. sanctions (again, showing participation in the conduct by management); and
4. Fokker’s President in August 2009 informed a newly installed compliance manager and in-house counsel, who recommended that no U.S.-origin parts be shipped to Iran, that he would remove the compliance manager from the position if the compliance manager thought he could stop everything from going to Iran (demonstrating senior management with direct knowledge of the conduct).

These are the allegations the Government has made concerning Fokker’s willful conduct, conduct which they now say cannot implicate any individuals because Fokker is merely liable under the “corporate knowledge doctrine” (sometimes called the collective knowledge doctrine or the collective intent doctrine). The corporate knowledge doctrine states that a corporation can be held criminally liable even though no one employee had the requisite knowledge, so long as prosecutors show that the sum of the knowledge of several employees amounts to the requisite knowledge. This is a legal theory of which the D.C. Circuit has expressed a great deal of skepticism. See Saba v. Compagnie Nationale Air France, 78 F.3d 664 (D.C. Cir. 1996); United States v. Philip Morris USA Inc., 566 F.3d 1095 (D.C.Cir. 2009) (“[l]ike… other courts, we are dubious of the legal soundness of the `collective intent’ theory”).

Merits of this appeal aside, the Government seems to have chartered a perilous path for the future. On one hand, the Government has painted the picture that upper management was clearly aware of the conduct, and that the employees were clearly aware of the law. Now, they seem to be back tracking and saying the only reason why the prosecution can move forward is because of the corporate knowledge doctrine, and that they lack sufficient evidence to prove beyond a reasonable doubt that management knew the conduct, or that the employees knew the law; two points which were clearly implied, if not explicitly noted, by the allegations made in the Criminal Information. And of course, they did all of this in a circuit in which the law is very shaky as to the appropriateness of a corporate or collective knowledge doctrine.

Now the Government is left with the choice of admitting that their allegations where misleading–an approach they are clearly not taking by attempting to justify their allegations with the corporate knowledge doctrine–or facing the prospect that future defendants will argue that if Fokker’s conduct–the egregiousness of which has be noted by many commentators, including Judge Leon–isn’t sufficient to establish anything but “corporate knowledge” of prohibited conduct, that their own conduct may also be insufficient to establish anything outside of corporate knowledge; a doctrine that at least some Circuit Courts are quite skeptical about. The result, particularly in cases involving large corporations, could be more defendants taking their chances at trial, which would lead to increased costs for the government, and the creation of law that would negatively impact prosecutions of export control cases in the future.

Indeed, FSBV themselves may be scratching their heads as to why they are entering into a deferred prosecution agreement–although a sweetheart deal–in a case where the Government has admitted that they lack sufficient evidence to prove, but for “corporate responsibility”, FSBV’s criminal liability. That question aside, FSBV has likely made the right choice in entering into the deferred prosecution agreement given the extremely favorable terms of the deal, their current financial condition, and the fact that our criminal justice system is constructed in such a way as to make it incredibly difficult to beat the Government at trial. Indeed, the position the Government is taking seems to suggest that not even Judge Leon can beat the Government when it comes to whether or not a deferred prosecution agreement can be approved by his Court.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com.