Disgorgement Of Profits As An Anti-corruption Tool

Close observers of the recent FCPA enforcement actions involving the bribery of Nigerian government officials (under the Bonny LNG Project)  would have observed that over $600, 000 of the over $1.72 billion paid by the violators to USA authorities  in settlements represented disgorgement of profits. 
Disgorgement has been described as the forced giving up of profits obtained by illegal or unethical acts, generally in order to prevent unjust enrichment. It has also been observed that disgorgement is a remedy and not a punishment.
As an anti-corruption tool, disgorgement has been employed principally by the Security and Exchange Commission, SEC in the USA and other jurisdictions to deprive violators of the anti-corruption/bribery laws of the proceeds of their crime. Though disgorgement has not been employed in Nigeria as a tool to fight corruption, the confiscation of proceeds of crime which has been utilised by the Economic and Financial Crimes Commission, EFCC in certain cases could provide a veritable avenue to employ disgorgement in the administration of criminal justice in Nigeria.
Disgorgement is an equitable remedy used in certain jurisdictions to deprive wrong-doers of their ill-gotten gains; it should be noted that as an equitable remedy, disgorgement is not intended as tool to punish, but as a vehicle for preventing unjust enrichment.  Consequently regulatory and enforcement authorities are only permitted to recover the approximate amount earned from the alleged illicit activities.  Disgorging anything more would be considered punitive.
 Consequently it is generally understood that disgorgement is technically a remedy rather than a penalty. 
Disgorgement is not applied in vacuo. Consequently the best practice has been to calculate disgorgement by making a distinction between legally and illegally obtained profits.  The first step in such calculations is to identify the causal link between the unlawful activity and the profit to be disgorged.  
In the United States of America, where the Securities and Exchange Commission, SEC, is explicitly empowered by law to seek disgorgement, the SEC may assert its right to disgorge illicit profits that stem from wrong-doing once a causal link is established between the said wrong doing and the profits earned.  The defendant organisation is under a burden to rebut this by showing that the causal chain linking the wrong doing/violation and the earned profits has been broken by intervening activities such that the earned profits cannot be attributed to the wrong doing or not solely attributable to the wrong doing/violation.
It is very vital that the causal chain be shown to have been broken otherwise enforcement and regulatory authorities possess a very wide latitude, for example, it has been observed that if a defendant who secured a series of lucrative contracts after an improper payment to a foreign official is unable to break the causal chain between the improper payment and the ongoing contracts it secured, it may be possible for the enforcement or regulatory authority to disgorge future, as yet unrealised, profits.  
It has been stated that the disgorgement of such gains, however, cannot be without limit.  Courts have recognised that at some point the continuum between a violation and profits becomes too attenuated to be feasible.  These profits would be seen as causally unrelated to the original fraud and attempts to disgorge them would be considered punitive and impermissible under the equitable theory of disgorgement.
As stated by, Messrs Sasha Kalb and Marc Allain Bohn in corporate compliance insights “in reviewing proposed disgorgements, courts have approved calculations using the “paper profit” realised by defendants rather than the “actual profit” they may eventually earn.  This “paper profit” reflects the value of a defendant’s illicit gains at the time of the disgorgement order and does not factor in any losses or devaluation that may affect the actual profit subsequently realised.  
There is a developing trend in various jurisdictions allowing a passive victim of corruption (the term passive victim here includes a third party who “bided” for a contract but lost out to the eventually bid winner who had paid a bribe in order to secure the contract) to bring an action against the violator for the profit that would have accrued to the said third party had it been awarded the “rigged contract.”
Generally, enforcement authorities seek disgorgement more frequently when there is a violation of the anti-bribery laws.
The Nigerian anti corruption process would be better served with the increased resort to disgorgement of ill gotten gains or tainted profits as this has served to significantly increase the financial loss that companies are exposed to in anti-corruption enforcement/regulation. Hopefully this would amount to another deterrent to corrupt activities by our companies and or organisations.

Sir Chukwu Jideani
08051789348 (SMS Only)

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