AIS recently informed its clients about a new U.S. Department of Justice (DOJ) policy that was more favorable to the imposition of independent monitors to oversee corporate compliance. The previous Administration disfavored such appointments. In September, Deputy Attorney General (DAG) Lisa Monaca strengthened the new DOJ policy on monitoring and holding individual company employees and executives accountable for corporate non-compliance. The policy pertains directly to criminal prosecution decisions in corporate cases, but civil enforcement components can be expected to apply the principles to a wide range of regulatory and other non-criminal actions as well, perhaps including bankruptcy violations.New DOJ Policies
In a speech at New York University Law School that was followed by a detailed 15-page directive to DOJ officials, the Deputy Attorney General set forth detailed revisions to "Corporate Criminal Enforcement Policies” that will bind prosecutors in making charging decisions and entering into non-prosecution settlements (the "Monaco Memorandum). Much of the policy quite conceivably could apply to civil actions taken by DOJ components as well, including in bankruptcy matters.
Among the many significant features of the new DOJ policy are the following:
- Monitorships are no longer disfavored. DOJ has historically deferred prosecutions of some corporations that agree to alternative relief, including the appointment of corporate monitors who will ensure that the company meets its obligations under the DOJ agreement. This often involves reviewing the company’s development and compliance with extensive internal procedures to avoid the recurrence of misconduct. Many bankruptcy creditors may recall the use of monitors in the $25 billion National Mortgage Settlement (NMS) entered by several banks and government agencies. In addition to being a party the NMS, DOJ’s United States Trustee Program (USTP) also imposed corporate monitors in settling other bankruptcy enforcement actions. Those agreements generally involved both payment of hefty sums to debtors who were harmed by creditor conduct and also major changes to internal bankruptcy compliance procedures. The corporate monitors were selected to oversee and evaluate adherence to the court-ordered settlements and the banks’ new compliance regime.
- Corporate officials responsible for legal violations will be investigated and held accountable. According to DAG Monaco, "[t]he Department’s first priority in corporate criminal matters is to hold accountable individuals who commit and profit from corporate crime.” To that end, DOJ will extend "cooperation credit” if a company turns over non-privileged documents revealing individual wrongdoing. Importantly, company compensation policies also will be scrutinized to ensure that employee compensation plans provide "affirmative incentives for compliance-promoting behavior” and penalizes non-compliance, including through claw-backs of bonuses awarded to executives who are responsible for the company’s violations of law. Compensation packages that are geared toward revenues without balancing the necessity of compliance would clearly put the company at risk under the new policy.
- Corporations that expeditiously self-report and self-correct violations will receive more favorable treatment by DOJ. Companies that have robust compliance programs may identify violations before government agencies. Those companies should act with alacrity and remediate as soon as possible. In encouraging these responsible corporate behaviors, DOJ is not changing its policy but is instead laying out a clear marker of what is expected in what may be a stricter enforcement environment going forward. In several provisions of the Monaco Memorandum, the importance of compliance programs is highlighted, including the presence of strong internal controls to "detect and prevent” violations, escalation procedures when "red flags” are identified, and looking "at what happened in practice at a corporation – not just what is written down.”
- Past misconduct – "including previous criminal, civil, and regulatory resolutions” -- will be considered by DOJ. DAG Monaco warned that "repeated misconduct may be indicative of a corporation that operates without an appropriate compliance culture of institutional safeguards.” Although this aspect of the new DOJ policy is in accord with traditional law enforcement criteria, it seems that DOJ is also making clear that past offenders must be especially energetic in crafting and following appropriate compliance policies.
Implications for Bankruptcy and Other Non-compliance
The new DOJ corporate misconduct policies covering criminal prosecutions, considerations of deferred prosecution instead of guilty pleas, and cooperation credits in seeking punishment may be instructive in other contexts throughout the Department. After all, many factors that are cited in determining criminal enforcement actions likewise are present and weighed in civil actions as well.
It would not be hard to imagine, for example, that the USTP would be aggressive again in seeking corporate monitors as it did in the past. And although there would be many hurdles to overcome before a bankruptcy court could penalize a corporate employee directly, it would not be surprising for future bankruptcy compliance settlements to encourage claw-backs of compensation and new personnel policies that give more weight to compliance.
Large corporations and financial institutions will likely pay careful attention to the Monaco Memorandum with respect to all of its operations. Bankruptcy operations should not be spared from this heightened review. The memo reflects a tougher line on federal enforcement against corporate violators. If bankruptcy filings rise and violations of bankruptcy rules multiply, then federal enforcers may now have a few more arrows in their quiver when seeking appropriate remedies.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.