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Monitoring Corporate Monitors: DOJ Publishes List of Compliance Monitors, Improving Transparency and Accountability in the Monitorship Program

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First published on the Global Investigations Review website, April 16, 2020

By Ephraim (Fry) Wernick, Palmina M. Fava, Ronald J. Tenpas, Conrad Bolston, and Peter Thomas

On April 14, 2020, for the first time, the Department of Justice (“DOJ”) published a list identifying all corporate monitors actively engaged by companies as a part of criminal resolutions with the Criminal Division’s Fraud Section. DOJ’s monitor list names the companies and their monitors, noting the year when each monitorship began and the specific Fraud Section Unit overseeing each case. The move continues DOJ’s trend toward increased transparency into corporate criminal enforcement while also signaling that corporate monitorships are now a mainstay of DOJ’s corporate enforcement policy. While the decision to publish the information is a welcome development and may help identify trends in the Criminal Fraud Section’s use of corporate monitors, DOJ should consider expanding the publication to other components within the Criminal Division and to other Divisions within the Department that prosecute corporate cases. Additional information, including historical data on the cost of monitorships and the success rates for companies to receive certifications, would also be helpful in enhancing transparency and evaluating the effectiveness of the corporate monitor program and identifying areas of improvement.

Independent compliance monitors have been a part of DOJ’s criminal enforcement arsenal for over two decades. The concept of a corporate monitor may have its roots in a deferred prosecution agreement (“DPA”) entered into between the U.S. Attorney’s Office for the Southern District of New York and Prudential Securities, Inc. in 1994.1 In Prudential, the government required the company to appoint an “independent ‘ombudsman’” to sit on the company’s board and compliance committee, accept anonymous complaints, and report quarterly compliance progress reports that included allegations of “criminal conduct and material improprieties” to the government and the company’s board and audit committees during the duration of the DPA.2 Since that time, the role of the independent monitor has morphed significantly into a much larger and more intrusive presence on company operations, and the DOJ has imposed monitors on companies with increased frequency as part of corporate plea deals, DPAs and non-prosecution agreements (“NPAs”). Due to a lack of guidance in the early years, companies seeking to resolve criminal investigations faced uncertainty as to when the government would require a compliance monitor as part of its corporate resolution and what the monitor process would entail. It was not until 2008 that DOJ set forth its first guiding principles for prosecutors considering the appointment of corporate monitors in what is known as the “Morford Memo.”3 DOJ supplemented this guidance multiple times since, with the publication of the “Breuer Memo” in 2009,4 the “Grindler Memo” in 2010,5 and the “Benczkowski Memo” in 2018.6

Monitorships can be an effective tool for remediating corporate misconduct and preventing recidivism. Agreeing to a monitorship can also be a helpful way for a company to close a corporate plea negotiation and avoid more onerous alternative terms. However, once in operation, they also present the potential to be exorbitantly expensive and unnecessarily intrusive on a company’s business operations. DOJ guidance recognizes the need to strike the right balance because neither the company nor the public benefit from monitorships whose scopes are overbroad; the guidance specifically reminds prosecutors to be “mindful of . . . the cost of a monitor and its impact on the operations of a corporation.”7

The most recent DOJ guidance suggested that monitors should be used sparingly and only in the most egregious circumstances. Specifically, the 2018 Benczkowski Memo states that DOJ should consider imposing a corporate monitor “only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens” the monitorship will impose on the company.8 It is noteworthy, however, that almost half of the Criminal Fraud Section’s corporate Foreign Corrupt Practices Act (“FCPA”) resolutions since the Benczkowski Memo involve compliance monitors.9

Recent DOJ guidance also indicates that the quality and efficacy of a company’s compliance program are the most critical factors for prosecutors to consider when determining whether a monitor is necessary.10 In 2019, one senior DOJ official even went so far as to describe compliance as a “super mitigator” that should affect prosecutorial discretion when evaluating how to treat a company under investigation.11 There is a general understanding that monitorships should not be imposed as a punitive measure, and they should only be used when there is a perceived need to improve a corporate compliance program. Moreover, DOJ wants to incentivize companies to remediate and invest in their compliance functions, even while under investigation, and companies are more likely to do so if they understand more concretely the steps necessary to avoid the imposition of a corporate monitor.12

Analysis of the List

Of the thirteen companies with active monitorships published by the DOJ on April 14, 2020, eight are based outside of the United States and five are U.S.-based companies. The companies are spread across multiple industries, with three companies from each of the healthcare and automotive sectors, two companies from each of the aviation and financial services sectors, and the remaining companies operating in telecommunications, retail, and construction. Twelve of the thirteen monitorships stem from prosecutions by the FCPA Unit (7 cases) and Market Integrity and Major Fraud Unit (5 cases), with the Health Care Fraud Unit handling the remaining case.

Not surprisingly, the state of a company’s compliance program appears to have factored most heavily into DOJ’s decision whether to impose a monitor. In almost every case, DOJ identified significant weaknesses with a company’s compliance program or remediation. For example, in the DPA with Russian telecom company Mobile Telesystems PJSC, DOJ stressed that the company had “inadequate anti-corruption controls and an inadequate program,” and although the company had “committed to enhance its compliance program,” it had “not yet fully implemented or tested” those enhancements.13 Similarly, the plea agreement with Brazilian construction company Odebrecht S.A. cited the company’s lack of implementation and testing of internal controls.14 When it announced the Panasonic Avionics Corporation resolution, DOJ also noted that it required a monitorship “[b]ecause many of the company’s compliance enhancements were more recent, and therefore have not been tested.”15

The Fraud Section’s decision to publish this list is consistent with the current Criminal Division leadership’s commitment to transparency. Speaking in October 2019, Assistant Attorney General Benczkowski explained that transparency ensures “consistency and predictability” in the prosecutorial process and allows defense attorneys to “base their advocacy on the very criteria that [DOJ’s] prosecutors find relevant to their decisions.”16

The publication will enable some additional analysis and should help in-house and outside counsel to tailor their advocacy in light of past practices. However, more can be done to help shed light on corporate monitorships so that both the government and the business can learn from past practice and improve the monitor program.

One area in critical need of more transparency is cost. The government and the business community generally understand that monitorships are expensive endeavors, but there is a limited understanding as to just how expensive they are, and the lack of information makes it difficult for a company to know whether its monitor’s fees are reasonable. Certain information may be gleaned from the select few companies that choose to include line items for monitor fees in their public disclosures, but there is no requirement to do so. DOJ is best-positioned to collect such data as part of its ongoing commitment to improving the monitorship program. The release of current and historical cost information would be useful in establishing baselines and determining whether certain monitor fees are reasonable and in line with the government’s and company’s expectations in a given case. Moreover, if DOJ were to publish such data, it would help companies and their compliance professionals make the business case for investing more money into their compliance programs on the front-end to avoid costly monitorships later.

Costs tend to escalate as monitors expand the scope of the review and companies feel powerless to resist. Given that DOJ is imposing the monitors in the first instance, it could improve upon this system by offering greater input to refine a monitor’s role to specific testing areas and to empower companies to develop independently the internal framework necessary to fortify their compliance programs. At the end of the monitorship, the company must stand on its own, and shareholders are better served by the company learning how to do that through the monitorship process, rather than the monitorship becoming an extension of the initial investigation.

It would also be helpful for DOJ to publish data covering the certification success rates for companies under monitorships, including the number of times that companies were able to exit the monitorship on time or if extensions were needed. Such information also would be a valuable analytical tool to help companies and compliance officials understand where companies succeeded and where they failed under previous monitorships.

Enhancements to the dispute resolution process also would be helpful for companies dealing with cost and scope-creep issues. The 2010 Grindler Memo set forth new guidance so that monitor agreements would be designed to “explain what role the Department could play in resolving disputes that may arise between the monitor and the corporation,” and the Memo suggested language to require annual meetings to enable a company to raise issues, “including with respect to the scope or costs of the monitorship.”17 However, DOJ is not a party to the contract between a company and the monitor, and Department prosecutors may feel limited in what they can do to resolve such disputes. The promulgation of additional guidance, including requiring monitors to submit and be expected to stick to budgets for their work, would be very helpful in cementing public confidence in the program.18

Finally, while it is helpful for the Fraud Section to publish this data, DOJ should consider expanding the initiative and publish monitor data from other components within the Criminal Division, as well as other DOJ divisions that enforce corporate cases, such as the Antitrust, Civil and Environment and Natural Resources Divisions. Doing so would ensure consistency and greater transparency in how monitors are employed Department-wide.

Takeaways

DOJ’s list is an important step in improving transparency in the Department’s use of corporate monitors, and there should be no doubt that monitorships are here to stay. Given the high costs and intrusive nature of a corporate compliance monitor, companies should strive to avoid the imposition of a monitor when resolving government investigations. The easiest and most effective way to do so is to invest on the front end by implementing an effective risk-based compliance program that detects and prevents wrongdoing. Companies under investigation would be well-served to continue investing in compliance, as such a company may be able to impress the government that they sufficiently remediated, implemented, and enhanced an effective program, thereby negating the need for a monitor. In the event that a company has no choice but to accept the imposition of a monitor, it should endeavor to negotiate terms from the outset that set a clear scope tailored to the discreet issues that necessitated the monitor in the first place, providing a check against later scope-creep and expense increases during the monitorship’s execution. To this end, companies facing investigation should consider the following proactive measures to reduce the risk and cost of a monitorship:

  1. Enhance the Company’s Compliance Program

Consider engaging outside counsel to serve as compliance counsel and monitor the remediation of compliance programs. Having a robust compliance program is important to avoid instances of misconduct, but is equally important for companies who find themselves already under investigation. DOJ will consider a company’s compliance remediation efforts, including its degree of implementation and testing at the time of resolution, when deciding whether to impose a monitor and when scoping the monitor’s responsibilities. Outside counsel with experience in government investigations, including experience in evaluating corporate compliance programs, are well positioned to help companies design compliance programs that DOJ will view more favorably. The act of engaging an outside expert can also give further credibility to the company’s claims to seek genuine improvement, not mere “on paper” improvements. Companies who take the initiative to reform their compliance programs to prevent recidivism are in a much better position to show DOJ that a monitorship is unnecessary when negotiating a resolution.

  1. Make the Most of the Company’s Role in a Monitor’s Selection

If the government insists on imposing a monitor, companies should be deliberate in the selection process to ensure that the counsel is experienced in evaluating and developing compliance programs, while also identifying monitor candidates with requisite experience in the substantive area of law and the company’s industry. Any monitor candidate proposed by a company must be able to pass muster with the government, but the company should not diminish its role in advocating for particular counsel familiar with the company’s business. Companies should strive to identify potential monitors who will respect the limited nature of a monitorship engagement, scoping the engagement to the problem(s) to be monitored, and committing to an efficient and cost-effective budget and work plan. Finally, companies should properly document the process by which they choose certain monitor candidates, especially any negotiations centered on cost and scope, as such discussions could prove useful in any later disputes that may arise.

  1. Be Proactive Prior to a Monitorship Getting Underway 

There will be at least some period of time where a company knows that it will be required to retain a monitor and when the monitor is engaged and begins its review. That time should be spent fixing proverbial “low hanging fruit” in terms of compliance, creating an internal plan to address obvious deficiencies in a company’s compliance program, and determining how best to structure a team that will interact with the monitor. Doing so has the potential to (1) impress upon the monitor that the company is taking compliance seriously in a proactive way, (2) limit the number of recommendations that the monitor is required to make, and (3) avoid unnecessary administrative burdens on the company. Such developments can be critical to the success of a monitorship and helpful in lowering cost. 

  1. Keep Counsel Engaged During the Monitorship

Finally, companies should engage outside counsel even after a monitor is selected and begins its engagement. Having independent, post-resolution attorneys engaged can assist in ensuring that the monitorship stays within the proper scope and costs are kept in check. Such counsel can often suggest practical solutions to problems confronted during the monitorship, provide an informal feedback to the monitor to avoid issues and resolve problems before they escalate to DOJ, and can anticipate the likely DOJ perspective and concerns on any issues that will be elevated or that are arising during the monitorship. This enables companies to avoid further increased costs and the risk of a breach or extension of a monitorship.

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Companies facing investigation should prioritize compliance and remediation to potentially avoid the imposition of a monitor when resolving government investigations. Companies who find themselves subject to a monitor, however, should take the above steps to best position themselves to satisfy the obligations of their monitorships as quickly and in the least intrusive manner as possible.

Fry Wernick was recently Assistant Chief of DOJ’s Criminal Fraud Section, where he supervised numerous corporate prosecutions, participated in the selection of corporate monitors, and evaluated corporate compliance programs, including of companies under a monitorship. The analysis in this article is based only on publicly available information.

1 Deferred Prosecution Agreement, Prudential Securities, Inc. (Oct. 27, 1994), available at http://lib.law.virginia.edu/Garrett/corporate-prosecution-registry/agreements/prudential.pdf.

2 Id. at 3.

3 See Memorandum from Craig S. Morford, Acting Deputy Attorney General, U.S. Dep’t of Justice, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (Mar. 7, 2008) (“Morford Memo”), available at https://www.justice.gov/sites/default/files/dag/legacy/2008/03/20/morford-useofmonitorsmemo-03072008.pdf.

4 See Memorandum from Lanny A. Breuer, Assistant Attorney General, U.S. Dep’t of Justice, to All Criminal Division Personnel, Selection of Monitors in Criminal Division Matters (June 24, 2009) (“Breuer Memo”), available at https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2012/11/14/response3-supp-appx-3.pdf.

5 See Memorandum from Gary G. Grindler, Acting Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components and United States Attorneys, Additional Guidance on the Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (May 25, 2010) (“Grindler Memo”), available at https://www.justice.gov/sites/default/files/dag/legacy/2010/06/01/dag-memo-guidance-monitors.pdf.

6 See Memorandum from Brian A. Benczkowski, Assistant Attorney General, U.S. Dep’t of Justice, to All Criminal Division Personnel, Selection of Monitors in Criminal Division Matters (Oct. 11, 2018) (“Benczkowski Memo”), available at https://www.justice.gov/criminal-fraud/file/1100366/download.

7 Morford Memo at 2, 5–6; see also Grindler Memo at 1–2.

8 Benczkowski Memo at 2.

9 See Ephriam (Fry) Wernick, Brian Howard and Lincoln Wesley, Walmart’s DOJ Deal Evinces New Corporate Monitoring Policy, Law360 (June 24, 2019) (analyzing the imposition of a monitor on Walmart in light of existing DOJ policy), available at https://www.law360.com/articles/1172086/walmart-s-doj-deal-evinces-new-corporate-monitoring-policy. See also FCPA Monitorships: Data Analysis, Global Investigations Review (Dec. 11, 2019) available at https://globalinvestigationsreview.com/benchmarking/fcpa-counsel-tracker/1068506/fcpa-monitorships-data-analysis.

10 Benckowski Memo at 2.

11 See Dylan Tokar, How the Justice Department Incentivizes Companies to Invest in Compliance, The Wall Street Journal (Dec. 24, 2019), available at https://www.wsj.com/articles/how-the-justice-department-incentivizes-companies-to-invest-in-compliance-11577183403; see also Ephraim (Fry) Wernick, Chris James and Eric Hernandez, Five Predictions for FCPA Enforcement in 2020, Law360 (Jan. 17, 2020), available at https://www.law360.com/articles/1235398/5-predictions-for-fcpa-enforcement-in-2020 (describing recent statements by DOJ officials concerning the outsized role of compliance on prosecutorial discretion).

12 See Tokar, How the Justice Department Incentivizes Companies to Invest in Compliance.

13 Deferred Prosecution Agreement, at 4–5, United States v. Mobile Telesystems PJSC, No. 1:19-cr-00167 (S.D.N.Y. Feb. 22, 2019), available at https://www.justice.gov/opa/press-release/file/1141631/download.

14 Plea Agreement, United States v. Odebrecht S.A., No. 1:16-cr-00643 (E.D.N.Y. Dec. 21, 2016), available at https://www.justice.gov/opa/press-release/file/919916/download.

15 Press Release, U.S. Dep’t of Justice, Panasonic Avionics Corporation Agrees to Pay $137 Million to Resolve Foreign Corrupt Practices Act Charges (Apr. 30, 2018), available at https://www.justice.gov/opa/pr/panasonic-avionics-corporation-agrees-pay-137-million-resolve-foreign-corrupt-practices-act.

16 Brian A. Benczkowski, Assistant Attorney General, U.S. Dep’t of Justice, Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the Global Investigations Review Live New York (Oct. 8, 2019), available at https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-remarks-global-investigations.

17 Grindler Memo at 1–2.

18 At least, in some limited circumstances, there may be a role for the courts in resolving disputes between companies and their monitors. In one instance involving a fee dispute with a court-appointed monitor, the company was able to enlist the court’s assistance to facilitate a resolution where the monitor’s proposed budget turned out to be ten times higher than its preliminary estimate. See Status Conference, USA v. Princess Cruise Lines, LTD, No. 1:16-cr-20897 (Oct. 18, 2017), ECF No. 48.

 

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.