DOJ’s Criminal Division Sweetens the Pot for Companies in a Revamped Corporate Enforcement and Voluntary Self-Disclosure Policy

DOJ’s Criminal Division Sweetens the Pot for Companies in a Revamped Corporate Enforcement and Voluntary Self-Disclosure Policy

January 24, 2023, Covington Alert

Summary

What You Need to Know:

• On January 17, DOJ Assistant Attorney General for the Criminal Division Kenneth Polite announced a revamped Corporate Enforcement and Voluntary Self-Disclosure Policy (the “Policy”) for the Criminal Division, providing expanded incentives to companies that voluntarily self-disclose misconduct, fully cooperate in DOJ investigations, and timely and appropriately remediate.
• The new Policy maintains prior guidance specifying that companies that voluntarily self-disclose misconduct, fully cooperate, and timely and appropriately remediate are presumptively entitled to a declination with disgorgement, absent aggravating factors (e.g., involvement by executive management, significant profit from the misconduct, egregious or pervasive misconduct, or criminal recidivism).
• Where aggravating factors are present, the Policy newly makes available a potential declination with disgorgement if companies made an “immediate” voluntarily self-disclosure, had an effective compliance program and system of internal accounting controls at the time of the misconduct and at the time of disclosure, and engaged in “extraordinary” cooperation and remediation efforts.
• For companies that face a criminal resolution due to aggravating factors, but that voluntarily self-disclose, fully cooperate, and timely and appropriately remediate, the Policy indicates that DOJ generally will resolve its investigations through a deferred prosecution agreement (“DPA”) or a non-prosecution agreement (“NPA”), rather than through a guilty plea, absent multiple or egregious aggravating factors. For these companies, the Department will recommend at least a 50%, and up to a 75%, reduction off the low end of the U.S. Sentencing Guidelines (“USSG”) penalty range, up from a discount of 50% under the prior policy.
• Companies that DOJ considers to be recidivists, or repeat corporate offenders, can still earn these benefits, including avoiding a guilty plea, although the discount generally would be taken from a higher point in the USSG range.
• The Department will not seek to impose an independent compliance monitor if companies meet these self-disclosure, cooperation, and remediation requirements, and are deemed to have an effective and tested compliance program at the time of the resolution.
• Companies that do not voluntarily self-disclose misconduct, but that fully cooperate and timely and appropriately remediate, can earn a discount of up to 50% off the low end of the USSG penalty range, with recidivists generally starting from a higher point in the range—double the 25% maximum discount available under the previous policy for this category of companies.
• The Policy makes good on Deputy Attorney General Lisa Monaco’s stated goal, announced last year, of increasing predictability and transparency for companies that may be subject to Criminal Division enforcement. At the same time, open questions remain regarding how the Policy will be applied in practice, and the Policy continues to vest considerable discretion in Department prosecutors. Time will tell whether the new, significant incentives offered to companies to voluntarily self-disclose misconduct usher in a wave of such disclosures. At the very least, however, companies should arm their legal and compliance departments with the tools needed to detect misconduct at the earliest opportunity, so that the benefits and consequences of voluntary self-disclosure can be considered.

The following chart summarizes the resolution outcomes and requirements for achieving each as set out in the Policy.

New Criminal Division Policy Offers Expanded Incentives to Companies that Voluntarily Self-Disclose, Fully Cooperate, and Timely and Appropriately Remediate

Last week, DOJ Assistant Attorney General for the Criminal Division Kenneth Polite announced significant revisions to what was the Fraud Section’s FCPA Corporate Enforcement Policy—now the Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy (the “Policy”). In his speech announcing the Policy, Assistant Attorney General Polite traced the origins of the Policy back to the FCPA Pilot Program, established in April 2016, which we covered in a prior alert. The FCPA Pilot Program was intended to provide “a roadmap for what companies could expect if they chose to self-disclose misconduct, fully cooperate with [DOJ’s] investigation, and timely remediate.” The program was formalized as the Fraud Section’s FCPA Corporate Enforcement Policy in 2017, which we discussed in a prior alert, and it was later used as informal guidance in all corporate cases in the Criminal Division.

The FCPA Pilot Program was an early note in what has become a crescendo of pressure—in the form of carrots and sticks—designed to encourage corporate voluntary self-disclosure. In 2022, Deputy Attorney General Lisa Monaco issued a memorandum (the “Monaco Memo”) introducing notable revisions to the Department’s approach to criminal enforcement, which we covered in a prior alert. Among other things, the Deputy Attorney General announced additional “carrots and sticks” to encourage companies to voluntarily self-disclose misconduct to DOJ.

The Deputy Attorney General’s announcement offered a nod towards leniency for companies that voluntarily self-disclose misconduct, while leaning in more heavily on the harsh consequences that could befall companies that do not—particularly for recidivist companies. On the leniency side, the Monaco Memo directed all DOJ components that prosecute corporate crime to publish a written policy on voluntary self-disclosure. The Deputy Attorney General directed that the policies, at a minimum, must commit that the Department: (1) will not seek a guilty plea where a company has voluntarily self-disclosed misconduct, fully cooperated, and timely and appropriately remediated; and (2) will not seek to impose an independent compliance monitor on companies that voluntarily self-disclosed and that implemented an effective compliance program by the time of resolution.

When announcing the Monaco Memo, the Deputy Attorney General noted that the Criminal Division already had such a policy in place—the FCPA Corporate Enforcement Policy. As practitioners well know, that policy already provided benefits beyond those minimum policy commitments spelled out in the Monaco Memo, offering a presumptive declination for companies that voluntarily self-disclose misconduct, fully cooperate in the Department’s investigation, and timely and appropriately remediate, absent aggravating circumstances. When the Monaco Memo was released, we asked whether the baseline benefits dictated by the Monaco Memo would be enough to move the needle on voluntary self-disclosure, as even under the more generous regime of the FCPA Corporate Enforcement Policy, decisions around voluntary disclosure remain extraordinarily difficult for companies as they weigh the relatively unpredictable and uncertain potential benefits and much more certain costs associated with disclosure.

Apparently the Criminal Division judged that its prior efforts—let alone the baseline benefits provided by the Monaco Memo—did not go far enough to encourage voluntary self-disclosure, full cooperation, and timely and appropriate remediation, as it now has significantly boosted the benefits available to companies that meet the expectations set out in the Policy. Indeed, Assistant Attorney General Polite said in his announcement of the revised Policy that the Criminal Division “took the [Deputy Attorney General’s] call as an opportunity to reassess and strengthen” its voluntary self-disclosure program.

As explained in more detail below, the new Policy adds more carrots for companies to come forward voluntarily and self-report, without adding much in the way of sticks. Will the Policy be enough to create a wave of voluntary self-disclosures? This time, perhaps. The Policy offers new, previously unavailable opportunities to obtain a declination with disgorgement, even when some aggravating circumstances are present. It significantly deepens available discounts on penalty ranges for companies that are deemed ineligible for a declination if they self-disclose—and even if they do not. All of these expanded benefits and paths to favorable outcomes also are offered without pressing or expanding on the Monaco Memo’s threat to impose guilty pleas on repeat offenders. To the contrary, the policy sets out a path for recidivists to avoid guilty pleas or even a criminal resolution through voluntary self-disclosure, among other requirements.

The Policy represents a substantial step towards providing the predictability companies may need to “make the case in the boardroom that voluntary self-disclosure is a good business decision,” as Deputy Attorney General Monaco put it. As the first post-Monaco Memo promulgation of a voluntary self-disclosure policy, the Policy sets an aggressive standard for DOJ criminal enforcement components, and we will be watching to see whether other components adopt a similar approach. As the new incentives play out in practice, the Policy serves as an impetus for companies to bolster resources available to their legal and compliance teams to identify misconduct at the earliest opportunity, so that they can maintain their ability to take advantage of the potential benefits set out in the Policy.

We further discuss below the key changes and updates that were announced last week.

1. DOJ Offers a New Path to a Declination with Disgorgement for Companies with Aggravating Circumstances

Key Policy Changes

• Companies that voluntarily self-disclose can still obtain a declination with disgorgement, even if aggravating circumstances exist, if:
  • The voluntary self-disclosure was made “immediately” upon the company becoming aware of the alleged misconduct;
  • At the time of the misconduct and disclosure, the company had an effective compliance program and system of internal accounting controls that enabled identification of the misconduct and led to the self-disclosure; and
  • The company provided “extraordinary” cooperation with the Department’s investigation and undertook “extraordinary” remediation.

Analysis

While the FCPA Corporate Enforcement Policy offered a presumptive declination for companies that voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated, absent aggravating circumstances—which the Policy maintains—the new Policy makes available to companies another opportunity to receive a declination with disgorgement, even where aggravating circumstances exist, subject to prosecutors’ discretion. The Department’s enumerated, explicitly non-exhaustive list of examples of aggravating circumstances remain largely the same: “involvement by executive management of the company in the misconduct; a significant profit to the company from the misconduct; egregiousness or pervasiveness of the misconduct within the company; or criminal recidivism.”

The Criminal Division’s extension of a path to a declination with disgorgement to recidivist companies is particularly notable in light of the Monaco Memo’s warning that “[m]ultiple non-prosecution or deferred prosecution agreements are generally disfavored.” The availability of a declination—a decidedly more favorable outcome than a non-prosecution agreement (“NPA”) or deferred prosecution agreement (“DPA”)—thus seems to be a significant new carrot. Indeed, we asked in our prior alert whether uncertainty surrounding how DOJ will treat recidivists could chill self-reports for fear that the self-report could lead to formal charges if NPAs or DPAs would be disfavored, and the Criminal Division has answered by charting a path to a declination for recidivists.

To be sure, the requirements that companies with aggravating circumstances will need to meet to obtain a declination with disgorgement are demanding. First, the voluntary self-disclosure must be “immediate[].” The general definition of voluntary self-disclosure in the Policy, as in the prior FCPA Corporate Enforcement Policy, focuses, in part, on the disclosure being made “within a reasonably prompt time after becoming aware of the misconduct,” while signaling that there could be some time for a company to investigate the conduct before bringing it to the government, without losing voluntary self-disclosure credit. It remains to be seen what level of immediacy is required for a company with aggravating circumstances to meet the Criminal Division’s heightened timing expectations, but it stands to reason that even more haste will be expected to obtain a declination.

Second, companies must have an effective compliance program and system of internal accounting controls in place, at both the time of the misconduct and at the time of the disclosure, that enabled identification of the misconduct and led to the self-disclosure. This requirement could disqualify certain companies that cannot demonstrate compliance and controls effectiveness—now and then—from receiving a declination with disgorgement. It also remains unclear how DOJ will evaluate compliance program effectiveness in the face of misconduct having actually occurred.

Finally, to obtain a discretionary declination with disgorgement when aggravating circumstances exist, companies must demonstrate “extraordinary” cooperation and “extraordinary” remediation, above and beyond the Department’s criteria for full cooperation and timely and appropriate remediation. As discussed below, the “extraordinary” standard is not yet well defined.

Despite the demanding requirements to achieve a discretionary declination with disgorgement in the presence of aggravating circumstances, as well as the open questions about how the requirements will be applied in practice, companies that historically may not have otherwise seen much reason to proactively self-report may now seriously consider the issue in the future. For instance, a recidivist company or a company that derived “significant profit” (defined as “significant proportionally relative to the company’s overall profits”) from its misconduct may have seen little upside benefit to a voluntary self-disclosure in the past where aggravating circumstances would have taken off the table the primary benefit of self-disclosure. With this new path, however, such a company can still earn a declination if it can meet the Department’s expectations.

2. Companies that Voluntarily Self-Disclose but Still Face Criminal Resolutions Can Receive Increased Benefits

Key Policy Changes

If the Department determines that a criminal resolution is warranted because of aggravating circumstances, a company that voluntarily self-discloses, fully cooperates, and timely and appropriately remediates may receive the following benefits:

• The Department generally will not require a corporate guilty plea, including for recidivists, and will resolve investigations with an NPA or a DPA, except in cases with particularly egregious or multiple aggravating circumstances.
• The Department will, absent recidivism, apply a reduction of at least 50%, and up to 75%, off the low end of the U.S. Sentencing Guidelines (“USSG”) fine range.
  • For recidivists, the discount generally will be taken from a higher point in the USSG range—but what makes a company a recidivist has become unclear.
• The Department generally will not require appointment of an independent compliance monitor if, at the time of resolution, a company demonstrates that it has implemented and tested an effective compliance program and remediated the root cause of the misconduct.

Analysis

The commitment not to seek a guilty plea—even for recidivists—absent “particularly egregious or multiple aggravating circumstances” is notable. This commitment represents, at a minimum, a substantial shift in tone from the Monaco Memo, which emphasized that successive NPAs and DPAs are disfavored and would require DOJ supervisory approval. Moreover, the Monaco Memo’s baseline direction to DOJ components not to seek a guilty plea where a corporation has voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated was expressly conditioned on the absence of aggravating factors—a standard that would have been out of reach for many companies with histories of criminal, civil, or regulatory enforcement actions. The Criminal Division’s revised Policy softens the approach to recidivists, perhaps to respond to criticism that recidivist companies may not be incentivized to voluntarily self-disclose, even if the Monaco Memo suggested worse outcomes in those cases. Indeed, although the Monaco Memo stated that “nothing in this memorandum should disincentivize corporations that have been the subject of prior resolutions from voluntarily disclosing misconduct to the Department,” its emphasis on punishing recidivist companies was more threatening than welcoming. With the Criminal Division’s enhanced benefits for voluntary self-disclosure, even for recidivists, the Division seems to be seeking a realigned balance that does not categorically take significant benefits off the table for repeat offenders.

The new Policy also provides notable, increased incentives to companies that voluntarily self-disclose, fully cooperate, and timely and appropriately remediate, but that do not earn a declination. In these circumstances, the Criminal Division has increased the available discount off the low end of the USSG to 50–75%, with 50% as a floor to the discount, as compared to the 50% maximum discount that was available under the FCPA Corporate Enforcement Policy. In the case of recidivism, any discount generally will be taken from a higher point in the USSG range—a trend that has been observed in FCPA resolutions involving recidivists in recent years.

Significantly, the Criminal Division’s definition of recidivism as relevant for the Policy is somewhat unclear. The Monaco Memo declared that the Department would evaluate a company’s full history of misconduct, including “prior criminal, civil, and regulatory resolutions.” But the Criminal Division’s updated Policy refers only to “criminal recidivism,” not “recidivism.” Does that mean civil or regulatory resolutions, even involving similar misconduct or individuals, will not brand a company as a recidivist for purposes of the Criminal Division’s Policy? Time will tell.

3. Even Without Voluntary Self-Disclosure, the Policy Offers the Potential for Increased Discounts on Criminal Penalties for Companies that Fully Cooperate and Timely and Appropriately Remediate, but DOJ Retains Considerable Discretion

Key Policy Changes

• The Policy offers the potential for a larger discount off the low end of the USSG range for companies that do not voluntarily self-disclose but fully cooperate and timely and appropriately remediate. Such companies can now receive up to a 50% discount off the low end of the USSG fine range, up from the prior cap of 25%.
  • For recidivists, the discount generally will be taken from a higher point in the USSG range.

Analysis

The increased available discount for companies that do not voluntarily self-disclose but fully cooperate and timely and appropriately remediate—up from a maximum of 25% under the FCPA Corporate Enforcement Policy to a maximum of 50% under the new Policy—is significant and may reflect the Criminal Division’s continued desire, and perhaps need, to encourage companies to act as partners in its investigations.

As the Criminal Division’s cooperation expectations may become more stringent, as described in the next section, it remains to be seen where on the spectrum of “up to 50%” companies will fall. Assistant Attorney General Polite emphasized, for instance, that a 50% reduction is a cap, not a standard. Likewise, for recidivists, any discount earned “will generally not be from the low end” of the USSG range, and “[p]rosecutors will have discretion to determine the specific percentage reduction and starting point in the range based on the particular facts and circumstances of the case.” It is unclear how prosecutors throughout the different sections of the Criminal Division will apply this discretion, and whether the application will be consistent across cases, industries, and offenses.

4. Exacting and Demanding Cooperation Expectations, with Questions About What Constitutes “Extraordinary” Cooperation and Remediation

Key Policy Changes

• The Policy clarifies that cooperation credit “starts at zero” and is earned, as opposed to companies starting with maximum available credit that is lost as a result of deficiencies.
• “Extraordinary cooperation,” judged by “immediacy, consistency, degree, and impact,” is required of companies seeking a discretionary declination in the presence of aggravating circumstances.

Analysis

In a prior alert, we observed that DOJ was becoming increasingly demanding in its cooperation (and remediation) expectations, noting that several companies had received less than full cooperation (and remediation) credit in FCPA enforcement actions due to stated deficiencies in each area. The Policy previews the continuation of this trend. As noted, the Policy emphasizes that “a company starts at zero cooperation credit and then earns credit for specific cooperative actions (as opposed to starting with the maximum available credit and receiving reduced credit for deficiencies in cooperation).” The onus is squarely on companies to prove their usefulness to the Department. It remains to be seen how this position will affect the dynamics at play when prosecutors and defense counsel negotiate over priorities during the course of an investigation.

For companies hoping to obtain a discretionary declination, the Criminal Division has introduced a new—and elastic—concept of “extraordinary” cooperation and remediation. What exactly is extraordinary cooperation or remediation? Assistant Attorney General Polite’s announcement was ambiguous on this question, invoking Justice Potter Stewart’s famous “I know it when I see it” rubric. Polite did offer that cooperation can be judged by its “immediacy, consistency, degree, and impact” and that to obtain credit for “extraordinary” cooperation or remediation, “companies must go beyond the criteria . . . set in our policies.” Of course, how this superlative is applied in practice is not yet fully known, even if, in its FCPA DPA with ABB Ltd. late last year, the Department credited the company for its “extraordinary cooperation.” For defense counsel that truly seek out proactive opportunities for their clients to assist the Department’s investigation or to remediate the misconduct in order to obtain maximum credit, they may already be doing what the Department will consider to be extraordinary. For those that seek to do the bare minimum that would meet the Department’s enumerated criteria, this update may represent a wake-up call.

At bottom, these developments suggest that the Criminal Division has been exposed to a wide range of quality in cooperation (and remediation), and prosecutors thus will have an ability to draw even greater distinctions between levels of cooperation and remediation, and how they are rewarded.

Looking Ahead

The new Policy provides greater predictability and transparency regarding the Criminal Division’s priorities and decision-making, which companies should welcome. But the devil can be in the details, and companies should assess the impact of the Policy not only based on how it is written but also based on how it is applied.

In addition to the issues identified above, some practical questions remain. For example:

• The Policy states that the new benefits for voluntary self-disclosure apply only when the disclosure is made to the Criminal Division (or “a good faith disclosure to another office or component of the Department of Justice and the matter is partnered with or transferred to, and resolved with, the Criminal Division”—a confusing proviso that may serve as a trap for the unwary). Does this suggest that a company that uncovers criminal misconduct in the course of a regulatory inquiry, and that notifies the regulator just before it notifies the Criminal Division (or even at the same time), takes a declination off the table? And what is to be done if a company wishes to make parallel disclosures to DOJ and the SEC? Must the Criminal Division disclosure come first? Competing regulatory expectations may present unintended complexities for companies in regulated industries looking to do the right thing.
• The Monaco Memo specified that companies would receive credit for voluntary self-disclosure only if they had no “preexisting obligation to disclose,” for example based on “regulation, contract, or prior Department resolution.” The Policy integrates this requirement. Does this mean a company that is required to report historic environmental non-compliance to a regulatory agency or a company obligated to disclose misconduct under a civil settlement can never self-disclose “voluntarily”? How such disclosures would be treated remains unaddressed in the Policy.
• On the face of the Policy, there is at least a possibility that what DOJ might consider objectively “worse” actors that voluntarily self-disclose may be subject to more favorable outcomes than first-time offenders that do not. For example, under the Policy, a recidivist company that self-reports a pervasive fraud scheme but nonetheless cooperates and remediates could receive a discretionary declination or a DPA or NPA with a 75% discount from a point higher than the bottom of the USSG penalty range, and no corporate monitor. Meanwhile, a first-time offender with a relatively minor violation that is revealed by a media source may receive, in a best-case scenario, a discount of 50% off the bottom of its USSG penalty range, and no presumption against a guilty plea or the imposition of a monitor. Perhaps the discretion prosecutors retain under the Policy will prevent these divergent and plausibly unintended outcomes, but that remains to be seen.

Although we recognize that the new incentives may cause companies to seriously consider voluntary self-disclosure, evaluating the benefits and burdens associated with voluntary self-disclosure will remain complex and challenging. The consistency of the Department’s application of the Policy will no doubt influence corporate decisions going forward, and we will be watching to see how the Criminal Division administers the Policy.

If you have any questions concerning the material discussed in this client alert, please contact the members of our White Collar Defense and Investigations practice.