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LEGAL DEVELOPMENTS ALERT: DOJ Provides Guidance on Corporate Compliance Programs and Monitorships

In a memorandum dated October 11, 2018 and, in a speech given the following day, Assistant Attorney General Brian Benczkowski provided new guidance regarding how DOJ’s Criminal Division will evaluate compliance programs and the selection of corporate monitors under deferred prosecution and non-prosecution agreements (“DPAs” and “NPAs”, respectively). Taken together, the changes announced last week should be welcome news to business organizations that are involved in federal criminal investigations. A corporation under DOJ investigation may now be able to avoid the expense and burden of a monitorship if it can credibly show that changes to its compliance program and/or management team would prevent prior misconduct from happening again.

As context, the Benczkowski Memo modifies two DOJ memoranda issued during the previous two administrations. Known as the Morford Memo and the Breuer Memo, each of these prior memoranda set forth policies and procedures related to the use of monitorships under DPAs and NPAs that have been in place for a decade.1 As described below, the Morford Memo set out overarching principles for monitorships and the selection of monitors. The Breuer Memo implemented the Morford Memo’s principles and laid out the procedural steps by which monitors would be evaluated and selected. Starting with this framework, the Benczkowski Memo supplements the Morford Memo, but has superseded the policies and procedures laid out in the Breuer Memo.

Several of the Benczkowski Memo’s policy and procedural changes are significant. As discussed further below: (i) DOJ now seems to be inclined against the use of monitorships in many situations; (ii) high-level DOJ supervisory approval for DPA or NPA monitorships is now required early in the process; (iii) DOJ now places additional checks on monitors and the scope of their review; (iv) corporate defendants will have a greater role in the selection of and interactions with monitors; and (v) DOJ will be training attorneys in its various Sections to be familiar with the nuances of compliance standards in particular industries.

(A) The Morford Memo – Principles for Selection and Use of Monitors

In the wake of then-U.S. Attorney Chris Christie’s controversial appointment of former Attorney General John Ashcroft to a lucrative monitorship in 2007, then-Acting Deputy Attorney General Craig Morford issued a memorandum on March 7, 2008 (the “Morford Memo”). The Morford Memo set out nine principles to guide DOJ attorneys in the selection and use of monitors in corporate DPAs and NPAs. Among other things, the principles laid out in the Morford Memo: require monitor candidates to be reviewed by the Office of the Deputy Attorney General (“ODAG”) for potential conflicts of interest; require the ODAG to approve any monitor appointments; instruct that a monitor’s responsibilities should be no broader than necessary to address and reduce risk of recurrence of misconduct; and instruct that the duration of monitorships should be tailored to the problems identified and the types of remedial measures needed to accomplish the monitor’s mandate.
1 As the Morford Memo clarifies, a DPA “is typically predicated upon the filing of a formal charging document by the government, and the agreement is filed with the appropriate court.” In contrast, with a typical NPA, “formal charges are not filed and the agreement is maintained by the parties rather than being filed with a court.”

 

B. The Breuer and Benczkowski Memos – Procedural Steps and Policy Positions

On June 24, 2009, just over one year after the Morford Memo was released, then-Assistant Attorney General for the Criminal Division Lanny Breuer issued a memorandum that laid out the procedural steps that DOJ attorneys would take when evaluating and selecting a monitor under a DPA or NPA (the “Breuer Memo”). The Breuer Memo recognized the principles set out by the Morford Memo and described its own procedural guidance as a supplement to that Memo. Although it incorporates most of the Breuer Memo’s procedural steps, the Benczkowski Memo certainly takes a distinct approach to DOJ’s policy regarding monitorships, modifies the process for review and selection of monitors and is now the operative document for DOJ attorneys because it expressly supersedes the Breuer Memo.

Both in the Benczkowski Memo and through AAG Benczkowski’s subsequent speech, the Criminal Division has outlined several significant changes to DOJ’s policies regarding corporate monitorships, which are described below.

(i) Policy Shift Away from NPA and DPA Monitorships

First, the Benczkowski Memo provides a lengthy policy statement as a sort of preamble to its recitation of procedural steps related to monitorships. (The Breuer Memo contained no such preamble.) The Benczkowski Memo’s policy statement likely is a positive sign for corporate defendants that can demonstrate to investigators that the corporation has ceased any alleged misconduct and that the corporation’s subsequent leadership changes and/or compliance enhancements make a monitorship unnecessary.

The Memo’s preamble makes clear that DOJ will take into account a corporate defendant’s efforts to enhance its compliance programs when deciding whether to require a monitorship.

Notably, when DOJ attorneys are considering whether to include a monitor in a negotiated NPA or DPA, those attorneys are now instructed to consider whether: (a) the underlying misconduct involved manipulation of corporate books and records or the “exploitation of an inadequate compliance program”; (b) the misconduct was pervasive in the organization or was approved by management; (c) the corporation made significant investments in or improvements to its compliance program or internal controls; and (d) those improvements have been tested to demonstrate that they would prevent or detect similar misconduct in the future. Further, the Benczkowski Memo instructs DOJ attorneys to consider whether the corporate defendant had an intervening change in leadership or change to its compliance environment and to determine whether the scope of a monitorship avoids “unnecessary burdens to the business’s operations”.

These guiding considerations seem to indicate that, if a corporate defendant is negotiating an NPA or DPA and can make a credible showing that it has corrected compliance deficiencies of the past or that any identified problems occurred under a management team that has since been replaced, then the corporate defendant might be able to avoid the costs and burdens of a monitorship altogether. To that end, the Benczkowski Memo’s preamble concludes by noting that: “Where a corporation’s compliance program and controls are demonstrated to be effective and appropriately resourced at the time of resolution, a monitor will likely not be necessary.

(ii) Supervisor Review Required at Earliest Stages

Second, the procedural adjustments introduced by the Benczkowski Memo insert high-level supervisory review into almost every step of the monitor evaluation and selection process. As a prime example, “before agreeing to the imposition of a monitor in any case”, DOJ attorneys are now required to “first receive approval from their supervisors, including the Chief of the relevant Section, as well as the concurrence of the Assistant Attorney General (“AAG”) for the Criminal Division or his/her designee….” In contrast, the Breuer Memo did not expressly require DOJ investigating attorneys to seek supervisory approval before agreeing that an NPA or DPA’s terms should include the imposition of a monitor.

It remains to be seen whether this approval requirement will expand or constrict DOJ’s use of monitorships in its prosecutions of corporate entities. However, when coupled with the policy statements described above, the supervisory approvals now required under the Benczkowski Memo appear to be an effort to ensure that, before DPA or NPA negotiations get too far down the road, both career and political-level supervisors at DOJ have evaluated and are willing to stand behind any proposal that would involve the imposition of a corporate monitor.

(iii) Additional Limits on Monitor’s Scope

Third, the Benczkowski Memo requires DOJ attorneys to include additional checks on any monitor that is imposed under a DPA or NPA. As they were under the Breuer Memo, DOJ attorneys are still required to describe to their supervisors the qualifications of any proposed monitor, the selection process for the monitor and the proposed duration of the monitorship. However, DOJ attorneys are now required also to include in their monitorship proposals a “description of the process for replacing the monitor during the term of the monitorship, should it be necessary” and to provide an explanation not only of the monitor’s responsibilities, but also of the “monitorship’s scope”.

These changes appear to be designed to prevent the so-called “scope creep” that sometimes occurs with monitors and – presumably – to give corporate defendants a mechanism to replace monitors that are exceeding the scope of their mandate or imposing unnecessary costs or burdens on business operations.

(iv) Greater Role for Defendants in Monitor Selection

Fourth, corporate defendants are now given a greater voice in the selection of monitors. For example, as they were under the Breuer Memo, DOJ attorneys under the Benczkowski Memo are instructed to ask the corporate defendant to present at least three qualified, independent monitor candidates for DOJ to consider. A new procedural requirement, however, now asks the corporate defendant to identify its first choice of monitor candidates, so that DOJ may take that into account. This additional step should give corporate defendants – and their counsel – opportunities to advocate for monitors that they believe will be best suited for the job and the circumstances.

(v) Move Toward Industry-Specific Compliance Expertise at DOJ

Finally, in his speech on October 12, 2018, AAG Benczkowski introduced not only the policy and procedural shifts set forth in his Memo, but also the fact that DOJ will be making an organizational change related to its review of corporate compliance programs. In the speech, Benczkowski discussed the need for expertise at DOJ in evaluating corporate compliance standards and recognized that those standards often vary across different industries. Benczkowski noted that a compliance protocol for the banking industry, for example, would “look very different from one in health care, energy or casino industries.” According to Benczkowski, previous administrations had designated a single DOJ attorney – typically an attorney housed in the Fraud Section – to be “the repository of all of our compliance expertise.”

Benczkowski opined that this centralized approach created procedural bottlenecks, but also that the DOJ’s single compliance expert was frequently lured into private practice, periodically leaving DOJ without expertise or coverage in this critical area. In an effort to correct these issues, Benczkowski announced a plan to decentralize DOJ’s compliance expertise by training trial attorneys in each litigating Section to develop expertise on the contours of effective compliance programs in each of their respective areas. In this way, Benczkowski expects that DOJ attorneys will become more familiar with compliance issues that are unique to the industries on which they are focused and that DOJ will be less vulnerable to supervisory bottlenecks or coverage gaps.

Taken together, the changes announced last week are worth careful attention. These policy and procedural shifts likely will be beneficial to corporate defendants if they can show that any misconduct has ceased, that the company has improved their management team and/or compliance regimes and that, because of those improvements, the types of conduct that drew DOJ’s attention would be unlikely to occur today. A corporate defendant that can credibly demonstrate these changed circumstances while negotiating an NPA or DPA now seems to have a good chance of avoiding or limiting the costs and added burdens that a monitorship would bring.

 

Our firm will continue to monitor these trends and is available to assess issues related to compliance and government investigations. If you have any questions, please contact the author of this update or any member of our team:

Author: Cormac Connor

Joseph Covington

Iris Bennett

Sean Hartigan

 

 

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