March 10, 2023 | Amanda Khatri
Estimated reading time: 6 minutes
The DOJ’s take on corporate criminal enforcement policies
It’s no secret that the Department of Justice (DOJ) is intensifying its efforts to combat corporate crime and deter misconduct by imposing more rigorous controls. The DOJ’s regulatory talk is frequently backed with enforcement actions against firms or individuals – no matter their status. Consistently emphazising the importance of establishing a financial industry that is accountable, innovative, and equitable for customers, investors and shareholders.
In the last several months, the DOJ has outlined regulatory policies aimed at rectifying issues within the realm of corporate criminality.
Voluntary self-disclosure policy
Effective immediately, on 22 February 2023, the DOJ announced a new voluntary self-disclosure (VSD) policy. Damian Williams, United States Attorney for the Southern District of New York and Chair of Attorney General’s Advisory Committee (AGAC) and Breon Peace, United States Attorney for the Eastern District of New York and the Chair of the White-Collar Fraud Subcommittee of the AGAC, revealed the details of the policy.
The DOJ is here to give corporations a chance to own up to misconduct, incentivize them to act accordingly and implement effective compliance programs so that “individual wrongdoers can be held accountable” and improve “corporate accountability.”
This “transparent and clearly delineated policy allows for more predictable outcomes” and motivates firms to do the right thing by reporting misconduct before regulatory bodies detect it.
The United States Attorney, Breon Peace, said that the VSD sets a “nationwide standard for how US Attorney’s Offices will determine whether a company has made a voluntary self-disclosure, and makes transparent the specific, tangible benefits to a company for making a voluntary self-disclosure, fully cooperating and remediating the criminal conduct.”
Actions for firms
- Review policies on voluntary self-disclosure.
- If no formal policies are in place, draft and share new policies that incentivize self-disclosure.
How does a VSD work?
- A firm is considered to have completed a VSD successfully if it is aware of employee misconduct before it is discovered by regulators or reported publicly.
- All relevant facts known about the misconduct are disclosed to the United States Attorney Offices (USAO) prior to an investigation.
Benefits of a self-disclosure
Full cooperation will be rewarded with the following benefits:
- The USAO will not seek a guilty plea.
- The USAO may not choose to enforce a criminal penalty and will not enact a penalty that is higher than 50% below the lower end of the US Sentencing Guidelines fine range (USSG).
- The USAO will also not seek an independent compliance monitor if the firm clearly shows that it has employed effective compliance processes.
On 2 March 2023, Ericsson – a multinational telecommunications firm, based in Stockholm, was charged over $206 million after breaching a 2019 deferred prosecution agreement (DPA) with US Authorities. Instead of complying with the DPA, Ericsson “repeatedly failed to fully cooperate and failed to disclose evidence and allegations of misconduct,” said Assistant Attorney General Kenneth Polite Jr. This proves that firms that do not abide by DPA rules will face serious consequences – both monetary and reputational damage.
What are the three aggravating factors that may lead the USAO to seek a guilty plea despite other VSD policy requirements being met?
- The misconduct could cause a threat to national security, public health, or the environment.
- If the wrongdoing is widespread throughout the firm.
- If the management were involved in the misconduct.
If the above instances apply, it does not mean a guilty plea will be sought. The USAO will evaluate the facts to come up with a solution. For full details on the self-disclosure policy, click here.
New clawback compensation policies to promote compliance
On 2 March 2023, Deputy Attorney General Lisa Monaco, announced that she and the Attorney General have “prioritized battling corporate crime in order to uphold the rule of law, to strengthen financial markers, and to reassure the public that no person and no company is above the law.”
Over the course of two years, Monaco has led immediate policy changes based on the below fundamentals:
- Preventing wrongdoing before it happens
- Holding individuals accountable for misconduct
- Deterring and punishing recidivism
In order to progress in “the fight against corporate crime,” that “jeopardizes jobs, savings, our economic security, and increasingly, our national security,” Monaco addresses three strategies:
1. A culture of compliance
In September 2022, Monaco began investigating the right incentives to promote a culture of compliance in the corporate world. She observed two areas: a cross-department approach to promote voluntary self-disclosure and how compensation structures can foster responsible corporate behaviour.
2. Voluntary self-disclosure programs
Monaco labels the recent voluntary self-disclosure policy “operative, predictable and transparent.”
She also advocates that the DOJ is practicing what it preaches. For instance, ABB Limited, a Swiss multinational engineering company recently completed a deferred prosecution DPA. This was a DPA for Foreign Corrupt Practices which it tried to disclose voluntarily. However, it was not the firm’s first DPA and the DOJ is not a fan of recidivism.
The DOJ took into account the company’s efforts in disclosing misconduct, its compliance processes, and other factors before agreeing that a DPA was acceptable. This case demonstrates that even a firm with a history of bad behaviour was able to make a self-disclosure.
“I want every general counsel, every executive and board member to take this message to the heart where your company discovers criminal misconduct, the pathway to the best resolution will involve prompt voluntary self-disclosure to the Department of Justice,” said Monaco.
3. Compensation and clawback programs to promote compliance
In September 2022, Monaco announced that the department would investigate compensation policies to protect shareholders from the “burden of wrongdoing” who “frequently play no role” and onto “those directly responsible.”
Firms should ensure that a culture of compliance is instilled in each and every executive or employee. This could be achieved through financial incentives. The DOJ is now ready to introduce the first-ever Pilot Program on Compensation Incentives and Clawbacks.
What will the program involve?
- The implementation of a compensation and bonus program that would directly measure compensation scores per employee.
- If an employee engages in wrongdoing, compensation can be demanded back (clawbacks).
The most important priority to drive enforcement and address corporate crime head-on is individual accountability. The DOJ has practiced what it preaches through recent charges and convictions against Sam Bankman-Fried, Carlos Watson, Elizabeth Holmes, and Sunny Balwani. Other examples include, the Securities and Exchange Commission (SEC) charging Christopher S. Kirchner, the co-founder and former CEO of Slync – a software company for fraud and selling over $67 million of securities to investors, of which more than $28 million was used for personal gain.
These instances demonstrate that the DOJ is serious about penalizing individual wrongdoers.
The US is ramping up its regulations to promote transparency and accountability and deter crime in financial services. The seriousness of the DOJ’s words is epitomized by the numerous enforcement actions against firms and individuals – no one is above the law, no matter how powerful they are.
The voluntary self-disclose policy allows firms to report misconduct and absolve the wrongdoings with the DOJ. Whereas the clawback rules will hold individuals more accountable for their actions if they want to keep their compensation.
Undoubtedly, the DOJ has advocated for a robust compliance program to identify misconduct adequately and to benefit not only the business but the nation. Monaco emphazises that an effective compliance system “is money well spent.”
Don’t let compliance be an afterthought, get in touch with CUBE to build a complete regulatory inventory so your firm can identify compliance gaps before the DOJ does.
Stay ahead of emerging regulations by reaching out to a renowned RegTech provider like CUBE.