At the American Bar Association’s 38th Annual National Institute on White Collar Crime, Department of Justice (“DOJ”) officials announced multiple significant policy updates regarding corporate compliance. These initiatives are consistent with DOJ’s recent actions in the realm of compliance-focused policy guidance but serve as a further effort to offer transparency, predictability, and to encourage self-disclosure of wrongdoing. The new provisions feature both the carrot and the stick.
In January, Assistant Attorney General Polite issued revisions to the Criminal Division’s Corporate Enforcement Policy (the “CEP”) and in February the DOJ published a Voluntary Self-Disclosure Policy for all United States Attorneys’ Offices (the “VSD Policy”). Our analysis of the revised CEP can be reviewed here and our analysis of the VSD Policy can be reviewed here.
The most recent policy updates, each from the Criminal Division, apply across three categories: 1) compensation, 2) compliance programs, and 3) monitors. Notable updates with respect to each policy, as well as key takeaways for companies, are outlined below.
- The Criminal Division’s Pilot Program Regarding Compensation and Clawbacks
The Criminal Division announced a Compensation Incentives and Clawbacks Pilot Program (the “Pilot Program”), which will require compensation-related compliance enhancements for companies entering into criminal resolutions with the Criminal Division as well as offering fine reductions for companies that seek to claw back compensation in appropriate cases. Deputy Attorney General Lisa Monaco explained: “Our goal is simple: to shift the burden of corporate crime away from shareholders who frequently play no role in the misconduct and onto those who are directly responsible.”
The Pilot Program, effective March 15, 2023, will apply to all corporate matters handled by the Criminal Division for the next three years. At the end of this pilot period, the Criminal Division will evaluate whether the Pilot Program should be modified or extended.
During the Pilot Program, all corporate resolutions with the Criminal Division will require the company to implement compliance-related criteria in its compensation and bonus systems. Examples of criteria companies may include are:
- A bonus prohibition for employees who fail to satisfy compliance performance requirements;
- Disciplinary measures aimed at employees who violate the law in addition to those with supervisory authority over the employees or business units engaging in misconduct and who knew of or were willfully blind to it; and
- Incentives for employees exhibiting a demonstrated commitment to compliance.
Companies implementing such compliance-related criteria will be required to annually report to the Criminal Division about their efforts throughout the term of the resolution.
Deferred Fine Reduction
Similar to the CEP, the Pilot Program provides tangible incentives for those who are willing to satisfy its mandates. If a criminal resolution is warranted, fine reductions may be available for companies that fully cooperate, timely and appropriately remediate, demonstrate they have implemented a program to recoup compensation from applicable bad actors and supervisors, and have in good faith started the process to recoup such compensation before a resolution is entered. When these criteria are satisfied, in addition to any other applicable fine reductions, Criminal Division prosecutors will reduce the fine in the amount of 100% of any such compensation that is recouped during the resolution period.
Thus, at the time a resolution is entered, the company will be required to pay the full fine amount less 100% of any compensation it is attempting to claw back. Then, at the end of the resolution term, the company will be required to pay the amount it attempted to claw back minus 100% of the compensation it actually recovered.
In his speech accompanying the announcement, Assistant Attorney General Polite acknowledged that clawing back compensation may prove difficult. To incentivize the effort, if a good faith attempt to recoup compensation fails, Criminal Division prosecutors may nevertheless exercise their discretion to apply a reduction of up to 25% of the amount of compensation the company attempted to claw back. Examples of instances where this reduction may be appropriate are where the company incurred significant litigation costs for shareholders or where it can establish a high likelihood of successfully recouping the compensation shortly after the end of the resolution term. Given that legal fees associated with the recoupment effort may exceed the amount of money at issue, companies will be faced with practical risk/reward analyses in this respect.
As a result of the Pilot Program, prosecutors will now consider how a company has structured its existing compensation programs, further incentivizing companies to consider whether they should alter their systems in the immediate term to bolster compliance. Whether companies will implement such changes proactively remains to be seen, but the Pilot Program represents another concrete benefit offered by DOJ for companies who are willing to prioritize individual accountability.
2. The Criminal Division’s Revised Guidance Regarding the Evaluation of Corporate Compliance Programs
When evaluating corporate compliance programs, Assistant Attorney General Polite emphasized that the Criminal Division will conduct a particularized analysis that considers the risk profile of each company and the solutions in place to reduce risk. To provide further insight into this analysis, the Criminal Division announced an updated guidance document for the Evaluation of Corporate Compliance Programs (the “ECCP”), which outlines common questions that companies can expect DOJ to consider. The full ECCP should be reviewed by companies, but some of its more significant changes are aimed at the use of evolving technologies in an increasingly remote workplace – in particular, the proliferation of encrypted or ephemeral messaging applications.
Specifically, the ECCP directs prosecutors to consider a company’s policies and procedures governing personal devices, communication platforms, and messaging applications (including ephemeral messaging applications). Applicable policies should take into account the company’s risk profile and should ensure “to the greatest extent possible” that “business-related electronic data and communications are accessible and amenable to preservation by the company.” In addition, prosecutors will consider how data preservation and review policies have been communicated to employees and whether these policies are enforced “on a regular and consistent basis in practice.”
The ECCP lists three primary factors that prosecutors will evaluate in this area:
- Communication Channels: this includes what electronic communication channels are used by the company and its employees to conduct business. Prosecutors will consider the mechanisms put in place to manage and preserve information contained within these channels, including the rationale for preservation and deletion settings that are available to each employee and why certain communication channels and settings are permitted.
- Policy Environment: this includes the policies and procedures in place that govern data preservation related to devices that are replaced, the organization’s ability to monitor and/or access business-related communications, the rationale behind “bring your own device” programs such as policies related to accessing corporate data stored on personal devices (including messaging platforms on the devices), and how data retention and business conduct policies have been enforced with respect to personal devices, among other considerations.
- Risk Management: this includes consequences for employees who refuse to allow the company access to company communications; whether the company has disciplined employees who fail to comply with its policies; whether the use of personal devices and messaging applications used by the company has ever impaired the organization’s ability to follow its compliance program, conduct investigations, or respond to government requests; and whether the company’s device and messaging-related decisions are reasonable in light of the company’s risk profile.
Assistant Attorney General Polite explained that a company’s failure to produce communications from third-party messaging applications will not be accepted “at face value.” Rather, prosecutors will ask about the company’s ability to access communications, how are they are stored, and whether applicable laws permit the company to review them. “A company’s answers – or lack of answers – may very well affect the offer it receives to resolve criminal liability.” Accordingly, companies with underdeveloped policies addressing devices and messaging applications should perform a more thoughtful analysis so that future investigations can be conducted efficiently.
Finally, consistent with the announcement of the Pilot Program, the updated ECCP also addresses compliance considerations related to compensation. The ECCP notes that prosecutors may consider a company’s provisions for recoupment of previously awarded compensation for those responsible for corporate wrongdoing or the reduction of compensation due to compliance violations or other forms of misconduct.
The ECCP further observes that compensation structures which clearly and effectively impose financial penalties for misconduct can help deter bad actors while positive financial incentives, such as promotions, bonuses, and rewards for ethical leaders and those who develop or improve upon compliance systems, will help drive compliance. Prosecutors evaluating compensation and consequence management schemes for factors indicative of a positive compliance culture will consider human resources processes, disciplinary measures available to management, whether disciplinary actions and incentives are applied consistently, the impact of any financial incentive system, and the effectiveness of the company’s decisions in application.
The ECCP’s revisions demonstrate that compliance decisions which are not supported by a sufficiently tailored analysis of the company’s risk profile may be accorded minimal weight in future negotiations with the government. DOJ has also demonstrated a consistent focus on individual accountability, including through tactics that target compensation, as a means of fostering compliance.
- The Criminal Division’s Revised Memorandum Regarding the Selection of Monitors
As a third policy change, the Criminal Division has issued a revised memorandum related to the selection of monitors. The guidance in this memorandum applies to all Criminal Division determinations regarding whether a monitor is appropriate in specific cases and to any deferred prosecution agreement, non-prosecution agreement, or plea agreement between the Criminal Division and a company which requires the retention of a monitor.
Assistant Attorney General Polite made a point at last week’s conference to highlight one aspect of the memorandum in particular: “any submission of a monitor candidate by the company and selection of a monitor candidate by the Criminal Division should be made in keeping with the department’s commitment to diversity, equity, and inclusion.” The memorandum further states that any submission or selection of a monitor candidate by either the Criminal Division or the company itself should be made in accordance with DOJ’s commitment to diversity, equity, and inclusion. Corporate defendants should expect that resolution agreements themselves will specify this requirement and commitment.
- Companies should evaluate their compensation structures and determine whether compliance-driven revisions are necessary.
- Existing compliance systems should be assessed in light of the updates to the ECCP, with a particular focus on strengthening the company’s rationale supporting device and messaging-related policies.
- Given how actively DOJ has been releasing policy guidance in recent months, companies should remain vigilant of future resolutions which may serve as helpful case studies in these rapidly developing areas.