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The Expected and Unexpected Compliance Risks from the Coronavirus

The Expected and Unexpected Compliance Risks from the Coronavirus Background Decorative Image

On June 17, 2020, three Vinson & Elkins LLP partners in the firm’s Government Investigations & White Collar Criminal Defense practice led a one-hour webinar co-hosted by the Practising Law Institute, “The Expected and Unexpected Compliance Risks from the Coronavirus.” The partners, Matthew J. Jacobs, a former federal prosecutor, Jessica S. Heim, an experienced litigator in the area of government investigations, and Michael W. Ward, a former prosecutor and in-house chief compliance officer in multiple companies and industries, explored the impact that the pandemic has had on the effectiveness of corporate compliance programs. Each of the three partners is based in the firm’s San Francisco office. The program’s attendees represented the country’s largest companies, across all industry sectors.

As Matt explained at the outset, once the pandemic subsides, the Department of Justice and Securities and Exchange Commission will be back at work scrutinizing the decisions that were made during the pandemic. “We know that times of crisis lead to more regulatory actions,” said Matt. “People have a sense of desperation; they may be in economic peril, and the decisions that are made may be looked at later and lead to regulatory actions. We are also in an era when the SEC has a powerful incentive to come forward.” As Matt explained, there are workers who are at risk of losing their jobs, who may decide that they feel incentivized to become whistleblowers, and others who cut corners.

Jessica pointed out that the DOJ has been training its federal prosecutors across the country, not just on issues related to the loan situation, but on anything they view as criminal conduct related to the pandemic. That could also mean price gouging or hoarding.

Even companies that do not partake in federal relief programs are incurring an economic impact, and downturns can lead to misconduct. “CCOs should pay closer attention to indicators and evidence of past misconduct,” said Jessica.

Jessica discussed how most salespeople are already incentivized with variable compensation plans and “work from home.” She points out that the risk is not merely with that group. The greater danger, she stated, may come from the gatekeepers themselves, who may feel the squeeze of both economics and the pandemic, and all of the distractions that those bring.

Just this month, additional guidance was issued on what prosecutors must evaluate in terms of corporate compliance programs when making charging decisions, framing sentencing recommendations, and determining enforcement resolutions. This is an incredibly important guidepost. The mere act of issuing amendments at this time signals that the DOJ is concentrating on compliance programs. The amendments themselves also demonstrate that prosecutors will be looking more closely to see if compliance programs are actually working. They will want to know whether companies have placed resources where they should be allocated, whether the programs are regularly evaluated, and what companies are doing in terms of data analytics and cross-border implications.

Mike said, “When you examine your business model, and look at your industry and go-to-market model, once you design your program, each one will be a little different.” COVID-19 has created some additional risk, but as Mike noted, if you don’t have the right protection for your company, that creates the most significant risk.

The process of understanding your risk is really about the blocking and tackling of the basic compliance program. “What the DOJ is looking for is a thought-based program and a rigorous risk assessment,” said Mike.

CCOs need to break the risk assessment apart: discuss what the individual specific risks are and then focus on the controls for each one. The company needs to establish consistent criteria to weigh one risk against the other. Matt provided examples of when circumstances, and therefore risk, may change. He discussed work-from-home employees who make casual phone calls to industry competitors. There are more opportunities for companies to coordinate with one another in traceable ways (rather than informally running into each other at industry events), and those casual conversations may create an enforcement risk or be a slippery slope.

Mike discussed the new risks that are collateral to COVID-19, from expanding charitable donations to employees wanting to go into their job site even when it’s against local orders.

Matt pointed out that these programs can also be an offensive measure, and often the compliance mechanism is an affirmative way to limit the exposure of future investigations.

One of the risks discussed was the inherent one that comes from seeking government economic aid. Matt discussed how false statements do not have to be material to create an issue. Even though the intention and expectation that these loans is that they will be forgiven and the money will be used to flow through to employees, it leaves a lingering materiality question. Matt points out that prosecutors may be able to use vagueness to pursue “unworthy” recipients. Although the law says that statutes that are unclear should be interpreted against the Government, just the fact that you have an investigation could be ruinous for a company. And in regards to intent, if your business model changes, what does that mean for the issue of intent at the point at which you applied for a loan.

Matt noted, “The evidence, which could include emails, text and statements that people make such as, ‘Gee, we didn’t need this money,’ all of that, will be the Government’s evidence.”

This content was provided by Deborah Farone, Farone Advisors LLC.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.