DOJ Chooses Sticks Over Carrots: Three Reasons Why Changes to DOJ’s Corporate Enforcement Policy May Chill Cooperation by Companies

DOJ’s Updated Policies

On Thursday, September 15, 2022, the Department issued its second set of changes to its corporate criminal enforcement policy in less than a year, issuing a memorandum (the “Policy Memo”)¹ to DOJ components and U.S. Attorney’s Offices around the country. The Policy Memo includes specific updated guidance on the following topics: individual accountability, corporate accountability, independent compliance monitorships, and commitment to transparency on corporate criminal enforcement.

• Individual Accountability. DOJ announced the need for companies to make timely disclosures of information that could advance individual prosecutions if companies want to receive full cooperation credit, and the Department also updated guidance for prosecutors to advance prosecutions of foreign individuals when it appears that foreign authorities are unlikely to take action.
• Corporate Accountability. As we explain in more detail below, the Department emphasized its more punitive approach to companies deemed to be “recidivist.” DOJ also set forth new and specific expectations concerning how prosecutors will evaluate corporate compensation structures to see whether corporate policies deterred wrongdoing by adopting measures, such as compensation clawbacks, and on the flip side, whether policies incentivize compliance by including rewards for employees who meet compliance-related expectations. Among other things, the Department also ordered all corporate prosecuting components to issue guidance that encouraged voluntary self-reporting and cooperation by companies, following the model that had been set by the Criminal Division’s Fraud Section and the Antitrust Division, among others. The Department also renewed its focus on corporate policies’ coverage of the use by employees of personal devices, third-party applications and ephemeral messaging services.
• Independent Compliance Monitorships. Another area worthy of closer inspection, as we detail below, is the Department’s updated guidance on factors that prosecutors will now consider when determining whether to impose an independent corporate compliance monitor on a company as part of a resolution. Acknowledging the business community’s growing concerns over the intrusive and expanding nature of monitorships and the financial impact they have on a company’s bottom line, DOJ also empowered prosecutors to exercise more authority over mission creep and cost overruns by monitors in the future.
• Commitment to Transparency to Corporate Criminal Enforcement. Finally, the Department indicated its commitment to transparency by promising to publish corporate resolutions and clarifying why prosecutors reached a resolution and the relevant factors that were considered.

There is much to unpack from the relatively lengthy Policy Memo. Three specific changes, however, are particularly noteworthy and should merit further attention by companies and individuals who may face the daunting prospects of a DOJ investigation.

Compensation Clawbacks Could Backfire

Federal prosecutors must evaluate a company’s corporate compliance program before deciding whether and how to resolve a criminal case against the company. The Department has devoted considerable resources over the years to promulgate guidance to both prosecutors and the business community and to explain the DOJ’s expectations of corporate compliance programs.²

Perhaps the most notable policy change in the Policy Memo is the announcement that DOJ will now expect corporate compensation systems to “incorporate elements—such as compensation clawback provisions—that enable penalties to be levied against current or former employees, executives, or directors whose direct or supervisory actions or omissions contributed to criminal conduct.”³ Moving forward, the expectation is that a company may not be able to obtain full credit for its compliance program unless such clawback mechanisms are in place. Left unexplained in the Policy Memo is what “contributed” is supposed to mean, including what level of scienter DOJ expects a company’s policy to require of an employee before the company should take action to retrieve years of back pay and bonuses from current and former employees. Notably, the Policy Memo suggests that a company should seek to clawback salaries even before a current or former employee is convicted of a crime, which in addition to being a particularly draconian remedy, could violate employment laws in a number of foreign jurisdictions where workers’ rights are deemed sacrosanct. The Policy Memo’s ambiguity on the subject of clawbacks is of no small consequence: if a company’s compliance program and its inclusion of a clawback provision does not pass DOJ’s muster, then that could spell the difference between a guilty plea or one of several less onerous forms of resolution (e.g., a time-limited Deferred Prosecution Agreement, or “DPA,” or Non-Prosecution Agreement, “NPA”). Financially, under DOJ’s operative guidance for prosecuting companies,⁴ a company that is faulted for having a subpar compliance program could also end up paying tens or even hundreds of millions of dollars more in criminal fines. And perhaps most concerning, if DOJ finds a corporate compliance program to be lacking, it may try to impose a corporate compliance monitor on the company, which could significantly affect costs and cause unwanted distractions to business operations for years to come.

As a practical matter, directors and management may find it hard to accept open-ended clawback provisions that risk years of salaries and bonuses for senior executives and lower-level employees alike, especially if the trigger for such clawback is anything less than a criminal conviction or other judicial finding of wrongdoing. It would be a hard pill to swallow for management and compliance officials to agree to put their livelihood on the line if it is discovered, years later, that a crime occurred under their watch. This could occur as new management may later seek to recuperate past compensation to satisfy DOJ’s policy requiring clawback for unspecified “actions or omissions [directly or indirectly that] resulted in, or contributed to, the criminal conduct at issue.”⁵ Faced with these new expectations by DOJ, companies that refuse to implement such clawback provisions may find it is not in their interest to engage voluntarily or cooperatively with DOJ when an potential criminal matter is uncovered.

With its focus on individual accountability, the Policy Memo also directed prosecutors to “strive to complete investigations into individuals—and seek any warranted individual criminal charges—prior to or simultaneously with the entry of a resolution.”⁶ However, DOJ’s clawback policy also creates real-world tensions that will make it far more difficult for prosecutors to enlist effective cooperation from employees, especially lower-level employees, whom the government typically requires to first plead guilty to their own crimes before they can cooperate against others. Ever since the Department issued its 2015 memorandum on “Individual Accountability in Corporate Wrongdoing” (often referred to as the “Yates Memo”),⁷ companies have sought to maximize their cooperation credit, and thereby reduce their financial exposure to the government, by encouraging current and former employees to cooperate with government investigations against individual targets. In practice, this has meant that a company would pay the legal fees for such employees to facilitate their cooperation, even when that cooperation included entering into a plea agreement with the government. Companies routinely opted not to recuperate legal fees even if an indemnity clause allowed for it, because they were concerned that the financial burden would chill the employee’s cooperation with the government. Thus, in the past, a lower-level employee had potentially good reasons to cooperate against others, since it could mean a significantly lessened sentence or probation and that the legal fees were taken care of. With the Policy Memo’s emphasis on compensation clawbacks, however, the strategic calculus by employees may significantly change. Faced with the risk of losing years of savings and jeopardizing their future livelihood for themselves and their families, far more employees may choose to roll the dice rather than admit to a crime and cooperate with DOJ. If true, the result could have devastating consequences on DOJ’s ability to build larger cases against companies and individuals.

The good news for companies and their employees is that there is time for DOJ to clear up the ambiguities in the Policy Memo regarding clawback provisions. Under the Policy Memo, the Deputy Attorney General asked the Criminal Division to “develop further guidance by the end of the year on how to reward corporations that develop and apply compensation clawback policies.”⁸ The Department would be well served to consider the issues raised above when developing this guidance, else companies and individuals who otherwise would be willing to engage with the government may decide that the risks of cooperation are far outweighed by any rewards.

DOJ’s Tough Talk on Recidivism Could Make It Harder to Catch Repeat Offenders

The Policy Memo also builds on earlier guidance by the Department calling for closer scrutiny and harsher treatment of recidivist companies,⁹ or companies with a prior of history of government enforcement actions. Among other things, the Policy Memo provides that prosecutors should consider the “elapsed time between the instant misconduct, [any] prior resolution, and the conduct underlying the prior resolution,” giving less weight to criminal resolutions that occurred more than 10 years prior to the conduct being prosecuted and civil resolutions that occurred more than five years prior.¹⁰ Instances of recent misconduct involving the same individuals or management, on the other hand, should be given greater weight. The Policy Memo instructs prosecutors to consider how serious and pervasive prior misconduct was and whether it is similar in nature to the current conduct at issue or indicative of a weakness in the company’s overall compliance program. The Policy Memo also explains that prosecutors can discount the prior misconduct of an acquired company if the root cause of the prior misconduct was addressed post-acquisition and before the new misconduct occurred. Signaling frustration with the Department’s perceived leniency toward repeat offenders in the past, the Policy Memo expressly states that multiple DPAs and NPAs for recidivist companies are now “generally disfavored.”¹¹

After explaining its approach to recidivist companies, including the suggestion that recidivist companies will more likely have to plead guilty to resolve future enforcement actions, the Policy Memo goes on to state that “nothing in this memorandum should disincentivize corporations that have been the subject of prior resolutions from voluntarily disclosing misconduct to the Department.”¹² Doubling down on this message, the head of DOJ’s Criminal Division later explained that a company with a history of misconduct has a powerful incentive to self-report because it could be the difference between a DPA and a guilty plea.¹³ However, this statement is in tension with the Deputy Attorney General’s prepared remarks that accompanied the release of the Policy Memo, when she stated that “[c]ompanies cannot assume that they are entitled to an NPA or a DPA, particularly when they are frequent flyers.”¹⁴

The conflicting statements present a quandary for recidivist companies that may want to self-report a new violation to the government. The Department has repeatedly emphasized its focus on punishing companies it deems to be repeat offenders, yet the Policy Memo and Assistant Attorney General’s statements provide a small measure of comfort. The result for now is that, without further clarity, companies with a past history of wrongdoing may be less likely to self-report and engage with the government.

More Monitorships, but Promises for Increased Transparency and “Monitoring of the Monitors”

Finally, the Policy Memo provides updated guidance on DOJ’s use of corporate monitors in criminal resolutions. Corporate monitorships are not supposed to be imposed on a company as a punitive measure; rather, they are a unique tool used in corporate cases to ensure that companies have well-designed and implemented compliance programs to ensure compliance with the law. Criminal Division guidance from the previous administration¹⁵ advised prosecutors to impose monitors in criminal corporate resolutions in limited circumstances and “only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens.” Previous guidance also made clear that the most critical factor in determining whether a monitor should be imposed was the assessment of a company’s current compliance program. The Policy Memo again builds on previous guidance issued in October 2021, suggesting that monitorships will now be imposed more frequently on companies. While the new policy does not purport to create a presumption for or against monitors, it provides for a multi-factor analysis that goes well beyond the state of a company’s existing compliance program and now turns on a non-exhaustive list of factors to be evaluated by prosecutors, including whether the misconduct was widespread across the business, was ongoing for a long period of time, or involved acts or omissions by company leadership.

• Whether the company properly self-reported the conduct;
• Whether the company has implemented an effective compliance program by the time of the resolution;
• Whether the company has tested the compliance program to prove that it is capable of effectively detecting and preventing misconduct;
• Whether the misconduct was widespread across the business, was ongoing for a long period of time, or involved acts or omissions by company leadership;
• Whether the misconduct involved the exploitation of flaws in an existing compliance program;
• Whether the misconduct involved acts or omissions by company compliance personnel;
• Whether the company adequately investigated the misconduct and took remedial steps;
• Whether the company’s risk profile has decreased by the time of the resolution;
• Whether the company faces any particularized compliance risks; and
• Whether the company is subject to regulatory oversight or a monitor imposed by another enforcement authority.

Whereas the old guidance strongly suggested that investment in a compliance program could avert the need for a monitor, the new policy allows for more discretion in the hands of prosecutors who must evaluate more factors before deciding whether a monitor needs to be imposed on a company.

The good news for companies facing the prospects of a monitorship is that the Policy Memo appears to respond to direct criticism of the monitorship program, including the lack of accountability of monitors, especially when it comes to mission creep and cost issues. The Policy Memo emphasizes that prosecutors are responsible for ongoing review of the monitorship, including by receiving regular updates from the monitor and assessing the reasonableness of the monitor’s scope of work and fees. While more guidance could be useful in empowering prosecutors with specific authority to restrain a runaway monitor, the emphasis on fee and scope controls is at least a welcome recognition that these issues all too often can become a problem.

What This Means for You

The Policy Memo includes a number of changes to DOJ’s corporate enforcement policies, but the new emphasis on compensation clawbacks, the focus on punishing recidivist companies, and the increased likelihood of monitorships amount to significant downsides for companies to consider when making the crucial decision of whether to self-report a crime and cooperate with federal prosecutors. At the same time, the Department is sending a powerful message for companies to invest in compliance to try and minimize the risk of engagement with DOJ. Given certain ambiguities in the guidance, it is now more important than ever, to engage experienced counsel who know the Department and can help advise you and your company on the best path forward.

¹Memorandum from Lisa O. Monaco, Deputy Attorney General, U.S. Dep’t of Justice, to Assistant Attorney General, Criminal Division, et al., Further Revisions to Corporate Criminal Enforcement Policies Following Discussions with Corporate Crime Advisory Group (Sept. 15, 2022), https://www.justice.gov/opa/speech/file/1535301/download.

²Ephraim (Fry) Wernick, Michael Ward & Lincoln Wesley, DOJ Updates Its Guidance on Corporate Compliance Programs, The V&E Report (June 2, 2020), https://www.velaw.com/insights/doj-updates-its-guidance-on-corporate-compliance-programs/.

³Policy Memo at 10 (emphasis added). 

⁴Memorandum from Mark Filip, Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Dep’t Components and U.S. Attorneys, Principles of Federal Prosecution of Business Organizations (Aug. 28, 2008), https://www.justice.gov/sites/default/files/dag/legacy/2008/11/03/dag-memo-08282008.pdf; U.S.S.G. § 8C2.1−.10.

⁵Policy Memo at 10.

⁶Id. at 3.

⁷Memorandum from Sally Quillian Yates, Deputy Attorney General, U.S. Dep’t of Justice, Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015), https://www.justice.gov/archives/dag/file/769036/download. In a return to the Yates Memo, the Policy Memo sets forth DOJ’s renewed expectation for companies to produce all nonprivileged facts about individual misconduct and communications with relevant parties during the period of misconduct. DOJ now requires companies do so swiftly to receive full cooperation credit and threatens to reduce or eliminate cooperation credit for any undue or intentional delays. Policy Memo at 3.

⁸Policy Memo at 10.

⁹Memorandum from Lisa O. Monaco, Deputy Attorney General, U.S. Dep’t of Justice, to Assistant Attorney General, Criminal Division, et al., Corporate Crime Advisory Group and Initial Revisions to Corporate Criminal Enforcement Policies (Oct. 28, 2021), https://www.justice.gov/dag/page/file/1445106/download.

¹⁰Policy Memo at 5. 

¹¹Id, at 6.

¹²Id. 

¹³Press Release, U.S. Dep’t of Justice, Assistant Attorney General Kenneth A. Polite Delivers Remarks at the University of Texas Law School (Sept. 16, 2022), available at https://www.justice.gov/opa/speech/assistant-attorney-general-kenneth-polite-delivers-remarks-university-texas-law-school.

¹⁴Press Release, U.S. Dep’t of Justice, Deputy Attorney General Lisa O. Monaco Delivers Remarks on Corporate Criminal Enforcement (Sept. 15, 2022), available at https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-delivers-remarks-corporate-criminal-enforcement.

¹⁵Memorandum 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, at 2 (Oct. 11, 2018), https://www.justice.gov/criminal-fraud/file/1100366/download.