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U.S. Justice Department encourages corporate self-disclosure on misconduct; raises heat on recidivist firms

NEW YORK(Thomson Reuters Regulatory Intelligence) - The U.S. Department of Justice is offering new incentives for companies to swiftly and voluntarily self-disclose misconduct, as the department steps up its efforts to combat corporate wrongdoing. But the country’s top law enforcement agency is also wielding a stick, in the form of enhanced penalties on corporate repeat offenders.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., August 29, 2022.

At a New York University event on Thursday(link: here), Deputy Attorney General Lisa Monaco expanded on policies introduced by the Justice Department last October and she underscored that the DOJ is "committed to providing incentives to companies that voluntarily self-disclose misconduct to the government." Those policies require companies to name all people involved in misconduct in order to receive credit for cooperation and required prosecutors to consider a company's full record when deciding how to resolve a probe. The policy shift reflects President Joe Biden's pledge to toughen the government’s stance toward corporate malfeasance.

“We need to do more and move faster,” Monaco said.

New guidance issued by the department last week to its prosecutors emphasizes the need for companies to avoid delays in providing the vital evidence. “Gamesmanship with disclosures and productions will not be tolerated,” she said.

The deputy AG pointed to the numerous benefits of prompt self-reporting such the avoidance of fines and reputational harm to a company. But the biggest reward was that the DOJ, in most cases, would not seek a guilty plea when a company has voluntarily self-disclosed, cooperated, and remediated misconduct.

“In many cases, voluntary self-disclosure is a sign that the company has developed a compliance program and has fostered a culture to detect misconduct and bring it forward,” Monaco said. “We also want to clarify the benefits of promptly coming forward to self-report, so that chief compliance officers, general counsels, and others can make the case in the boardroom that voluntary self-disclosure is a good business decision,” she said.

Legal experts said there was now greater incentive for compliance departments to monitor misconduct within their organization and reach out to DOJ quickly when wrongdoing is found.

“If you’re a company that finds misconduct, there is going to be a major incentive to fully cooperate and clean house,” said Todd Haugh, professor of business law and ethics at the Kelley School of Business, Indiana University.

“If a company voluntarily discloses wrongdoing, prosecutors shouldn’t seek a guilty plea and can avoid a monitor if also remedying the wrongdoing,” Haugh added. “That’s pretty big and a large incentive.”

PRACTICAL STEPS FOR COMPANIES

Some law firms viewed the DOJ’s announcement as a call to invest more heavily in compliance and culture. The firm Morgan Lewis, in a note to clients, said, “companies that devote appropriate resources to building up a comprehensive, risk-based compliance program prevent, detect, and remediate issues more effectively, and are less likely to be subject to harsh penalties or corporate monitors if problems arise.”

Companies also need to work with their general counsel to develop a protocol for evaluating allegations of misconduct for potential disclosure to the Justice Department.

“Notwithstanding DOJ’s enthusiasm for voluntary self-disclosures, decisions about what to disclose and when are complex. It will be critical—particularly given DOJ’s emphasis on ‘moving faster’—for companies to have an established protocol and team in place to facilitate making a timely decision on disclosure,” the law firm said.

“CARROTS AND STICKS”

While Monaco described the DOJ’s approach as one of using “carrots and sticks,” the latter was aimed at companies that have been in the agency’s crosshairs on numerous occasions. Specifically, Monaco said that between 10% and 20% of large corporate criminal resolutions have involved repeat offenders.

She noted that not all instances of prior misconduct are “created equal,” but that the most significant types of prior misconduct will be criminal resolutions in the United States, as well as prior wrongdoing involving the same personnel or management as the current misconduct.

Still, past actions may not always reflect a company’s current culture and commitment to compliance. So, dated conduct will generally be accorded less weight. Regarding a specific time frame for what the department would consider “dated,” Monaco said: “Criminal resolutions that occurred more than 10 years before the conduct currently under investigation, and civil or regulatory resolutions that took place more than five years before the current conduct.”

This part of the DOJ’s policy might be particularly concerning to Wall Street firms, several of whom have been repeat offenders, experts said. Critics of the government’s past policies to hold senior management accountable have often cited how many large financial firms see the fines imposed on them for wrongdoing as simply the “cost of doing business.” Monaco attempted to dissuade firms from assuming they can carry on as usual.

“Companies cannot assume that they are entitled to an (non-prosecution agreement) or a (deferred prosecution agreement), particularly when they are frequent flyers,” she said. “We will not shy away from bringing charges or requiring guilty pleas where facts and circumstances require. If any corporation still thinks criminal resolutions can be priced in as the cost of doing business, we have a message—times have changed.”

Experts said this part of the DOJ’s strategy will likely concentrate the minds of major financial firms who have numerous scandals under their belt.

“The difficult thing about this type of policy change is that risk has just increased partly based on conduct that can’t be changed,” said Haugh of Indiana University. “So now, the Credit Suisses of the world are facing much more risk.” Switzerland’s Credit Suisse has faced a number of scandals in recent years, including the loss of more than $5 billion from the collapse of family office Archegos, a barrage of legal action over $10 billion of client investments linked to Greensill, and a syping scandal that forced the departure of its former CEO.

Eric Young, former chief compliance officer for BNP Paribas USA, and now senior managing director of Guidepost Solutions, the global monitoring, compliance and investigative firm, said the DOJ “has the discretion to assess whether the corporate culture and propensity of recidivism has diminished or not. If not, cooperation credit will be minimal while the penalty will be severe.”

The options for companies with a track record are not easy, said Haugh.

“They can go overboard to make sure there are no compliance violations anywhere in their firms, and if there are go overboard in voluntary disclosure and cooperation or hope like hell the DOJ doesn’t uncover any wrongdoing,” he said.

The reality for large companies is that there are always employees committing wrongdoing that can result in criminal liability on the firm. “For firms with criminal liability in the last 10 years, they are just praying nothing comes up because this new policy may mean a criminal conviction and the clock starts again no matter how seriously you’re taking compliance,” Haugh said.

(Henry Engler, Regulatory Intelligence)

*To read more by the Thomson Reuters Regulatory Intelligence team click here: bit.ly/TR-RegIntel

This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - and initially posted on Sept 19. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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