The settlement agreement has been signed, hands have been shaken, and what seemed to be an endless string of meetings and update calls with the counsel and the government, has come to the end. But not all companies that reached Foreign Corrupt Practices Act settlements with the U.S. Department of Justice can actually breathe out. For some of them, the end of the investigation is just the beginning of another chapter that may be just as lengthy and expensive as the investigation they just went through.
According to Brian A. Benczkowski, the assistant attorney general in charge of the Justice Department’s Criminal Division, the goal of the recent change in the DOJ’s approach to the use of corporate monitors is to ensure that the hiring of a compliance monitor as one of the conditions of a corporate settlement will be required only if it appears to be truly beneficial to improve the company’s compliance environment, and will not impose unnecessary burden to its business’ operations. “[T]he imposition of a corporate monitor is never meant to be punitive,” he said during the speech he gave at New York University School of Law last October.
However, in the same speech he noted that a recent practice of imposing a corporate monitor in one in three resolutions does not seem to be excessive. Looking at the first quarter of 2019, there were three corporate FCPA enforcement actions. One company settled with the U.S. Securities and Exchange Commission and received a declination from the DOJ; and two others reached settlements with both the SEC and the DOJ and entered into a deferred prosecution agreement and a nonprosecution agreement with the DOJ.
Both companies that settled with the DOJ agreed to retain an independent compliance monitor for two- and three-year terms. Therefore, the recent practice shows that the corporate monitorship should remain high on the list of things to keep in mind when going through an FCPA investigation.
Thatch Your Roof Before the Rain Begins
The Benczkowski memorandum issued on Oct. 11, 2018, supplements the guidelines on the appointment of a corporate monitor included in the Morford memorandum issued in 2008. The Morford memorandum included two quite general considerations for determining whether or not a corporate monitor should be appointed: (1) the potential benefits that employing a monitor may have for the corporation and the public; and (2) the cost of a monitor and its impact on the operations of a corporation.
The Benczkowski memorandum adds more specific criteria, thus putting companies in a much better position to take proactive measures and be able to demonstrate their willingness to improve their corporate compliance programs and internal control systems by the time the department has to make a decision on the necessity of the monitorship.
In evaluating the potential benefit of a monitor, the department will now consider the following factors: (1) whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems; (2) whether the misconduct at issue was pervasive across the organization or approved or facilitated by senior management; (3) whether the corporation has made significant improvements in and to its compliance program and internal control systems; and (4) whether remedial improvements made by the corporation have been tested to demonstrate that they would prevent or detect similar misconduct in the future.
While the company under investigation cannot set the clock back and do anything about the past misconduct, there is no need to wait until the completion of the investigation to get a sense of gaps in the company’s compliance program that allowed the misconduct to happen. And the company can surely work on improving its compliance program and internal controls system in parallel with the investigation. This way, by the time the department begins considering the monitorship, the chances are that the company will be able to demonstrate that it has learned the lesson and is capable of taking effective measures to reduce the risk of reoccurrence of the misconduct without the third-party oversight.
Taking into consideration that monitorship usually lasts for two to three years, and requires significant time, personnel and financial resources from the company to cooperate with the monitor’s assessment, and simultaneously working on the implementation and testing of their recommendations, investing in the process beforehand seems absolutely necessary.
Tips for the Effective Monitorship
There is no silver bullet that could make the monitorship experience pleasant and effortless, but the following tips could help you make it less painful and get the best out of it, which is the ultimate goal of going through the whole process.
1. Carefully Select Potential Monitors
It is not completely up to the company to select a monitor, but it can usually choose candidates to be further approved by the department. The Morford memorandum requires a monitor to be “highly qualified and respected,” without actual or potential conflicts of interests.
One of the other things to consider is the jurisdiction of the monitor, which is particularly relevant to non-U.S. issuers. While a non-U.S. monitor may have a better understanding of the particularities of local business, and it may be generally easier to communicate with someone who is located in your time zone, the downside is that the monitor has to ultimately report to the U.S. government, and in order to do so with the assurance of meeting the department’s expectations, he or she will most likely need to retain a U.S. counsel to advise on the U.S. law matters that will increase the cost for the company and expand the number of “auditors”.
2. Plan Ahead
Start thinking through potential issues and ways to address them before the monitor has been selected. The department will want you to move fast when the monitor is approved, so you should be aware of and ready to start negotiating the engagement letter as early as at the first meeting with the monitor. Data privacy and privilege issues should be on the top of your list.
Your relationship with the monitor will most likely not create an attorney-client relationship. This puts the company under significant risk of waiving privilege on its internal documentation and makes it vulnerable in case of future litigation discovery requests. To address these risks, make sure that you will agree on the approach on how to address the monitor’s requests that may include privileged documents beforehand.
Possible solutions may include entering into an agreement explicitly stating that the parties do not intend to waive the protection of the privilege with respect to any documents and information disclosed to the monitor. Alternative solutions may include withholding any legal analysis and tailoring disclosures to include only factual information.
Data Privacy Issues
Data privacy is another issue to consider. Surely, after going through a lengthy investigation, data privacy concerns no longer surprise you, and the odds are that you have implemented relevant precautions for data transfer from the jurisdiction where the misconduct occurred. But it is important to keep in mind that the scope of the monitor’s assessment may be broader than the scope of the investigation, and you need to make sure that you will be ready to share data of the company’s other operations.
3. It’s All About Cooperation
One of the most important aspects of the successful monitorship is the ability to create an environment of trust and mutual respect between the company and the monitor. The tips below will help you focus on some of the key elements of how to achieve this.
- Prepare and launch an awareness campaign to ensure that all-level employees across the board know the monitor’s role and the company’s commitment to full cooperation with the monitor at every level.
- Create a single point of contact responsible for the coordination of the monitor’s requests, who will be supported by a core team that would include members of the key functions (e.g., compliance, legal, finance, internal audits).
- Obtain the monitor’s work plan with a detailed timeline and a list of locations he expects to visit as early as possible. On-site visits require significant preparation work to ensure that they will be conducted in a smooth and efficient manner.
- Develop and agree on with the monitor a system that will be used to track their requests and recommendations, and the company’s response and implementation. This will make your life much easier when you need to report on progress or look back at what was accomplished over the course of the monitorship.
- Last but not the least, communicate regularly to avoid any surprises about the monitor’s expectations and your perception of whether the company is on track with meeting them.