In the Spring of 2012 I published a five-part series of on-line articles through Corporate Compliance Insights under the heading of “Incorporating the Fraud Triangle into Compliance Risk Assessments.” While those articles were publicly available, I understand they received a fair degree of attention and were quoted and/or cited by numerous persons doing white-papers or articles where this information was relevant. A friend in the compliance profession recently told me that this series of articles was no longer available publicly/online and asked if I might consider updating/revising that work into one complete article and putting it back out into the public domain – here it is.
Tag: compliance monitor
International Association of Independent Corporate Monitors
It is with great pleasure that I may announce the launching of the website for International Association of Independent Corporate Monitors (IAICM). A not-for-profit Membership Organization established in 2015 and headquartered in Virginia, in the greater Washington DC area, IAICM is an organization of professionals dedicated to educating the public on the topic of Independent Corporate Monitors (“Monitors”) and advancing the use and quality of service of those individuals serving or seeking to serve as Monitors.
The purposes of IAICM are to promote and improve the professional practice of Corporate Monitoring, to be a recognized thought-leader in the field of Corporate Monitoring, to make available information on Corporate Monitoring to the public, and to provide high quality, relevant information, resources and training to professionals and others practicing in the area of Corporate Monitoring.
IAICM’s Code of Professional Conduct is an invaluable resource for standards and best practices for those serving or seeking to serve as a Monitor. Indirectly, the Code also suggests best practices for Reporting Agencies and Host Organizations considering or using Monitors. All Members of IAICM must certify that they will abide by and uphold the IAICM Code, providing both a guide and a performance measuring stick for Host Organizations, Reporting Agencies, and the public-at-large.
The mysteriousness of Corporate Monitoring is enhanced by the difficulty in obtaining information on the topic. A person studying Corporate Monitoring not only must collect information from a wide variety of sources, but may also have great difficulty identifying reliable and relevant sources.
IAICM’s Public Resource Center helps address this by making available to the public the only repository of information on Corporate Monitoring. From key government policy documents to actual Agreements requiring Monitors, the Public Resource Center makes them easy to search and find. Interested in identifying all known Monitorships by a particular agency, underlying misconduct, or during a particular time frame? Our search engine helps visitors not only identify these in our repository, but presents, in one easy-to-read screen, the relevant information and supporting documents for each matter in our repository.
All IAICM Members have qualifications that suggest they possess the breadth and depth of relevant skills, knowledge, and experience, together with reputation of character, to effectively serve as an Independent Corporate Monitor consistent with IAICM’s Code of Professional Conduct. To facilitate the needs of those considering candidates for a Monitorship, finding a speaker on the topic, seeking guidance, or simply doing research, all IAICM Members are publicly listed on this site, along with each Member’s relevant contact and professional information.
American Bar Association Adopts Standards for Corporate Monitors
It is with great pleasure that I can announce that last month (August 2015), the ABA House of Delegates approved Standards for Corporate Monitors. These “black letter” standards will be published with commentary in ABA Standards for Monitors, 4th ed., ©2015 American Bar Association.
This work originally began with an Ad-Hoc Task Force on Corporate Monitor Standards, that was assembled by the Criminal Justice Section (CJS) of the American Bar Association (ABA) in 2010. In late 2013, after over two years of study on the topic, the Ad-Hoc Task Force was disbanded and a formal Standards Committee designated to develop the Standards. I had the privilege of serving on both the Ad-Hoc Task Force and the Standards Committee, which delivered our product to the CJS in August of 2014. After two readings before the CJS Council, these Standards were passed by the CJS Council in April 2015 and presented to and approved by the ABA House of Delegates in August 2015.
Though they presently lack commentary, they are the only official set of Standards currently applicable to lawyers who serve in the role of an Independent Corporate Monitor. The Standards define a Monitor broadly, as a person or entity:
- Engaged by a Host Organization pursuant to a Court Order or an Agreement and Engagement Letter;
- Who is independent of both the Host Organization and the Government;
- Whose selection is approved by the Government or ordered by a court; and
- Whose responsibilities and authority are established by Court Order or by the terms of the Agreement and the Engagement Letter.
Recognizing that Monitors are used and/or contemplated beyond the DOJ Monitors whom many have come to be familiar with, we drafted these Standards broadly (see the definition within the Standards of “Government”). For instance, the World Bank and Suspension & Debarment Offices have routinely used Monitors for years and we wanted to ensure that our Standards incorporated best practices sufficiently broad so as to include the many Monitorships that occur outside of DOJ. In addition to the issues that have brought public attention/criticism to this practice, such as the selection process for Monitors, we devised and deliberated on a host of other issues affecting the practice and, where it was appropriate, devised Standards to address them.
One of the first steps taken during the Ad-Hoc Task Force’s work, was to open communication channels with a variety of government law and regulatory enforcement agencies, as well as other oversight organizations, who were using or considering the use of Monitors. The purpose was to ensure that the concerns of such agencies and oversight organizations were considered as we developed these Standards. The Standards Committee also included representatives of the DOJ and State AG Offices to further ensure that relevant concerns and issues would be considered.
I am humbled to have been included among such a distinguished group of professionals who comprised our Committee and very proud of the Standards that we created, which I believe to be robust, comprehensive, and thorough. Given how eager the various agencies and oversight organizations were to share their concerns with us, I am certain these Standards will have a significant impact on future Monitorships.
I must caution readers that the “black letter” Standards can, at points, be difficult to fully appreciate absent commentary, which may not be available for quite some time. If anyone has a question about what our Committee was thinking associated with any of the “black letter” Standards, please email me at JHanson@ArtificeForensic or call me at (202) 590-7702 and I would be happy to provide my personal opinions/thoughts (I speak only for myself and not the Committee, ABA, or CJS).
It should also be noted that these Standards only technically apply to attorneys. Many Monitors are not attorneys (myself included). It is hoped that they will nonetheless be broadly construed as “best practices” for anyone serving as a Monitor. Towards those ends, the International Association of Independent Corporate Monitors (IAICM) was formed in 2015. The IAICM is a 501(C)6 not-for-profit Membership organization serving those who practice in this field and is presently developing a Code of Professional Conduct that will establish Standards for its members. The IAICM’s Code, though consistent with the ABA Standards, may cover additional areas and/or delve more deeply into some areas than the Standards. The IAICM Code, together with the Standards, should be more than sufficient to establish best practices for Monitors, regardless of their professional designations/experiences/certifications/licenses.
The IAICM, though legally formed and anticipated by many government and oversight organizations that use Monitors, has not yet made its website publicly accessible – but be on the lookout for it soon!
DOJ Provides New Guidance to Prosecutors on “Individual Accountability for Corporate Wrongdoing”
On September 9, 2015, Deputy Attorney General Sally Quillan Yates issued a memo to all of DOJ regarding individual accountability for corporate wrongdoing. It’s been a heavy issue for years – that executives in companies where frauds or misconduct have occurred don’t seem to get prosecuted – and according to this memo, DOJ formed a “working group of senior attorneys from Department components and the United States Attorney community with significant experience in this area” to examine “how the Department approaches corporate investigations, and identified areas in which it can amend its policies and practices in order to most effectively pursue the individuals responsible for corporate wrongs.” This particular memo was stated as being a product of that working group.
I suppose that many may take this as a long-awaited admission that DOJ wasn’t focusing on individuals enough in corporate fraud matters (criminal and civil). I don’t know that I believe that to be the case, but I do find it refreshing to see greater emphasis placed on holding individuals accountable. Personally, when I was an FBI Agent, I was much more interested in putting people in jail than seeing my cases resolved with a settlement agreement of some sort. We always pursued the people behind the crimes. But like I said, the statistics and data do seem to indicate that some greater emphasis was needed in this area.
I haven’t analyzed the memo yet and may post some thoughts about it after I do so. Though I am guessing that many will be doing so very soon, probably better than I, and I look forward to reading their thoughts. Some of the repercussions that this memo will create are obvious, such as much more intense internal corporate investigations (which the external lawyers, compliance consultants and forensic accountants will welcome), while others are more subtle (e.g. how this will affect disclosures and negotiations).
Anyway, with no further commentary from me, here are the six (6) “key steps” that this memo says will provide guidance to “strengthen our pursuit of individual corporate wrongdoing“:
- In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct;
- Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;
- Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation;
- Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and
- Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
Here’s a copy of the Memo: DOJ Memo – Individual Accountability for Corporate Wrongdoing – Sept 2015 – I suppose it will become referred to eventually as the “Yates Memo”.
DOJ Hiring a Compliance Expert
In November of 2014, I published a paper entitled “Improving Corporate Settlement Agreements” on JDSupra. A few media people and industry experts picked it up and made comments on it – all the ones that I read were positive (thanks guys!).
In that paper, one of the issues that I raised was the lack of compliance and ethics program expertise among government agencies in the field of compliance and ethics programs. For example, while DOJ prosecutors are exceptionally knowledgeable, trained, and experienced in white collar crime matters, I know of very few who can say the same about corporate compliance and ethics programs. Yet it is exactly the robustness and effectiveness of an organization’s compliance and ethics program that dictates if or how the organization will emerge – prosecution, suspension/debarment, settlement, etc….
I would love to say that some DOJ people read that paper and took it to heart, but that’s probably doubtful. Nonetheless, I was thrilled when I saw the announcement that the DOJ FCPA Unit was bringing on a compliance and ethics expert to do exactly what I was saying needs to be done in that regard (I had other criticisms in my paper as well that I would love to see addressed).
It has been reported that in July 2015, the Chief of the Fraud Section at DOJ confirmed that this position/role was being filled. Here’s a link to an article on it. The article stated: “This new compliance counsel position constitutes a significant change for DOJ, which in the past has relied on its cadre of white collar criminal prosecutors to evaluate compliance programs. The compliance counsel will help DOJ answer the recurring issue of whether an FCPA violation occurred because the company lacked an effective anti-corruption compliance program or because a rogue employee circumvented an otherwise strong program. Should DOJ decide to prosecute the company, the compliance counsel’s evaluation of the company’s compliance program will inform the final resolution with the company, including whether the company will be required to retain an independent compliance monitor.”
Kudos to the DOJ FCPA Unit for recognizing this need and doing something about it. I and many others in the field will be anxiously awaiting to see it in action. I also hope we will see this in other DOJ units (e.g. Anti-Trust) – this isn’t just an FCPA issue!
Also, I have seen some non-DOJ units picking up on this need. For example, key decision makers in the Department of Interior’s Office of Inspector General and Suspension & Debarment Offices have become Certified Compliance and Ethics Professionals through the Society of Corporate Compliance and Ethics. I have heard that the same is happening in at least one other Agency’s OIG and S&D offices.
There’s a long road ahead, but it seems people are at least seeing that a road exists.
Thomson Reuters Article on Deferred Prosecution Agreements and Monitors
I was interviewed earlier this year for this third part in a series of articles by Thomson Reuters on DPAs. If you would like to read it, click here or you can download a pdf copy that Thomson Reuters provided to me: Thomson Reuters Article on DPAs Part 3 – 13Apr2015
Recent Series of Articles on DPAs in Morning Consult
I was recently interviewed by Morning Consult for a series of articles regarding deferred and non-prosecution agreements and wanted to share those here for anyone interested. They are linked below (hopefully these links remain “live” for some time).
Part 1 – “More Banks Avoiding Trials in Era of Deferred Prosecution Agreements”
Part 2 – “Ripple Effects of Charging Banks Give Prosecutors Pause”
Part 3 – “Prosecutors in the Compliance Forest”
Improving Corporate Settlement Agreements
I recently put out a paper providing suggestions on how government agencies and defense counsel might improve corporate settlement agreements (e.g. deferred prosecution agreements, non-prosecution agreements, consent agreements, administrative agreements, etc.). I believe that the vast majority of current agreements are not effectively addressing corporate compliance and ethics programs and thereby failing to achieve the spirit of what the parties to the agreements, particularly the government, hope – the prevention and timely detection of future misconduct.
For those interested in reading the paper, please click here.
New York Times Article Response
As an expert in the field of Corporate Monitors and a passionate advocate of Monitor reform (in the form of Standards and “best practices”), I follow news about Monitors very closely. An article recently published in the NY Times by Steven M. Davidoff (“In Corporate Monitor, a Well-Paying Job but Unknown Results”) deserves comment by a knowledgeable and experienced person from this field. Unfortunately, there are many misperceptions about Monitors that mask and hinder from constructive deliberation the real issues that should be highlighted, discussed, and considered for reform in this field.
Among the most prominent of these issues is the Monitor selection and appointment process. The misperception that has evolved is that this is a “good old boy network” where current DOJ or other government agency officials give “lucrative” contracts to former co-workers or friends.
The reality is that, since 2008/2009, the DOJ has done an effective job of preventing this from happening with Monitors and that the selection process is, as I will explain more fully later, now driven by customary and effective professional service industry business development practices. The real issues and concern lies within the Monitor selection and approval process of those outside of the DOJ, who utilize Monitors more frequently than the DOJ and are presently significantly more susceptible to nepotism and/or potential abuse.
There are no hard numbers on this, but as one who tracks it as best as I am able, I would estimate that the DOJ accounts for maybe 20% (that is on the high side) of Monitors among all the agencies that use them. The rest is spread out among other federal law and regulatory enforcement agencies (particularly in the suspension & debarment area), state & local agencies, the Courts, and non-government oversight organizations (i.e. World Bank). As is often the case, the DOJ may get the most press on the topic, but that’s only because they have the most high profile matters, not the most matters.
After the Zimmer Holdings controversy led to congressional inquiry and threatened law-making in early 2008, DOJ responded with what is commonly referred to as the “Morford Memo,” which is DOJ’s most widely known policy regarding the selection and use of corporate monitors in pre-trial diversion agreements. That policy was furthered by another, lesser publicly known and/or referenced Criminal Division memo, issued by Lanny Breuer on June 24, 2009 entitled “Selection of Monitors in Criminal Division Matters.” In both Memos, the pool of candidates for a Monitorship comes from the Company, not the DOJ.
According to several GAO reports ordered by the congressional inquiry, the DOJ was following its policy on Monitors quickly after institution. For those with interest, I have linked them here: June 2009, November 2009, and December 2009.
Here’s the reality – there is presently no indication of any political favoritism playing any role whatsoever in the selection and appointment process for Monitors in DOJ matters by the DOJ. None. To the contrary, DOJ goes to extraordinary lengths, including applying the Morford and Breuer memos more conservatively than they require, to avoid any appearance of favoritism. To this point, though each memo could be read as to permit the DOJ to take a more active role in determining the Monitor and/or pool of Monitor candidates, the DOJ does not – it instead requires the Company to propose a pool of Monitor candidates and refuses to provide any candidate names, even if asked.
There is a simple and wholly commercial reason why many Monitors come from the ranks of former federal prosecutors. It is because the white-collar defense attorneys who represent the companies needing Monitors also come mostly from the ranks for former federal prosecutors! Business development in the white-collar defense world relies on referrals – a Monitorship is simply a business referral. This is no different than if they represent a company and refer the representation of company individuals to people in their legal network whom they ordinarily make back-and-forth referrals to and believe qualified to do a good job.
In the SAC Capital Advisors matter, there is no indication whatsoever that the DOJ gave a “gift” to the proposed Monitor, Bart Schwartz, a former federal prosecutor, as Davidoff suggests. It appears that Mr. Schwartz was proposed by the company in accordance with the DOJ policies described and hyperlinked earlier. Moreover, his approval appeared to be subject to judicial approval as well, adding an additional level of scrutiny and further removing it from DOJ’s ability to “manipulate.” As it regards Mr. Schwartz, it’s not as though he is fresh out of the government and has no relevant experience in the area. To the contrary, he is a highly qualified Monitor candidate who left government service decades ago. Much like with “expert witnesses,” who need not have necessarily been so qualified previously in order to be retained in a matter, many of those proposed as Monitors have never been a Monitor before. Though this is common, unavoidable, and necessary, it also provides greater opportunity for controversy, disagreement, and discord. Mr. Schwartz is a very experienced Monitor and likely to avoid such issues and be more effective and efficient than someone lacking Monitor experience. It is perfectly reasonable to expect that companies would find such persons independent of the government and propose them as Monitor candidates.
Transparency is another issue worth exploring. If you read the Breuer Memo that I referenced and hyperlinked earlier, you will see that significant documentation should exist within and around the Monitor selection process in the DOJ’s Criminal Division. I am aware that such documentation is prepared and does exist, but I do not believe that it is something likely to be shared publicly. I’ve never filed a FOIA request, but I wouldn’t bet on getting those documents if I did so. I fully appreciate the pros and cons on this issue and would like to see the DOJ explore ways to provide greater transparency in this regard.
Outside of the DOJ, where Monitors are used more commonly and frequently, transparency is largely non-existent. Many, if not most other agencies that utilize Monitors have little or no written policy around any parts of the process, from selection through reporting. Much less do they create any documentation during that process that would provide insight into how a particular Monitor was nominated, selected, and/or approved. The same goes for the Courts (i.e. Judges).
I have noticed a “practice-shift” over the last couple of years where Federal Agencies (outside of DOJ, but perhaps following in DOJ’s footsteps) have begun refusing to provide the names (i.e. more than one – a “pool” of names) of potential Monitor candidates to organizations, even when those organizations request it, for fear of running afoul of “endorsement” prohibitions under 5 C.F.R. §2635.702. I wrote the US Office of Government Ethics earlier this year asking specifically about the application of any ethical requirements and/or guidance specific to Corporate Monitors, but as one might expect, received no response at all. I am not an attorney and may well be wrong about this, but I personally do not believe that §2635.702 applies in this context, so long as there is no “private gain” for the relevant government officials. I would like to see the Government Ethics Office examine this and provide specific guidance as to whether or not a government agency can provide a pool of names of Monitor candidates to a company, particularly when so requested by the company.
Greater transparency and policy/practice documentation is a real issue, particularly as more and more agencies are beginning to appreciate the value of and use Monitors in resolving issues.
Let’s talk fees now. I seem to always see the word “lucrative” associated with Monitorship agreements in press articles – another broad and inaccurate stereotype born out of the Zimmer Holdings controversy. Certainly some of the biggest Monitorships cost organizations a sizeable amount, but that is the nature of professional hourly work in complex matters within large organizations. One could apply the term “lucrative” as well to the fees charged by external defense counsel, subject-matter experts, forensic accountants, information technology consultants, corporate compliance & ethics consultants, e-discovery professionals, document reviewers, marketing professionals, and a whole host of others whom organization’s engage long before a Monitor ever comes into the picture.
For the SAC matter, Davidoff’s suggestion that the Monitor’s fees “will probably run in the millions, if not tens of millions, of dollars” is illogical and wholly out of touch with reality. This estimate of fees seems to be more of a sensationalistic reference to the Zimmer Holdings matter (which the article brings up later) than to what any reasonable person would expect having read the scope of the “Compliance Consultant” within the SAC Plea Agreement. Under this Agreement, SAC’s Compliance Consultant will only perform two (2) assessments and file two (2) reports, all done within six (6) months. A third assessment and report may be required, if deemed necessary by the government.
Keep in mind that SAC Capital (now Point72) is not a mammoth organization with thousands of employees all over the world facing a multitude of risk areas. To the contrary, it appears to me that SAC is now practically nothing in terms of size and will only manage the money of its owner – meaning that the Monitor’s assessments should not be very big or difficult at all, nor will they extend over a lengthy period of years, as is common to many Monitorships. SAC is hardly a traditional Monitorship and certainly not a large one likely to generate millions of dollars in fees.
Another common question relates to whether or not a Monitor actually has any impact on the organization monitored. Though I can personally fall back on my own experience as a Monitor to satisfy myself that we do, I can also look to more objective studies that support the real and positive impact of Monitors. In addition to the GAO reports I linked above, some of which address that question directly with companies that were monitored, one of the best studies that I have seen on the question is a white paper entitled “Can Corporate Monitorships Improve Corporate Compliance?” by Cristie Ford and David Hess (I would love to see them update that paper!). Short answer – Monitors can and do have an impact, though much of that impact relies on the substance and terms of the underlying Agreements, which really drive the scope, authority, purpose, and role of a Monitor.
Speaking of that, another important and greatly misunderstood issue is the role, authority, purpose, and scope of a Monitor. Davidoff writes: “He is the ostensible key to ensuring that Point72 will remain on the straight and narrow. A compliance monitor or consultant is a creation of the last decade. When a corporation accused of wrongdoing agrees to settle the charges or is sentenced to probation, it is often required to pay for a monitor to ensure that it does not break the law again. The corporate monitor is to supervise the compliance procedures of the company as well as beef them up.”
Monitors are not a creation of the last decade. While there has been an increased visible use of Monitors by the DOJ within the last ten years, Corporate Monitors go back at least two decades. Also, as previously mentioned, many people mistakenly think that Monitors are only used by the DOJ, which is just the opposite of the reality.
When a company settles a matter, a Monitor is only required around 20% to 30% of the time (even outside of DOJ), certainly not “often,” as Davidoff suggests. In fact, this percentage has declined within the DOJ since 2008, though it shows signs of increasing, particularly as standards and best practices continue to develop around the field. Also, there is a developing trend of the DOJ and other government agencies requiring what I call a “hybrid-Monitor,” which is exactly the case with SAC Capital Advisors. As best as I can tell, though the title used in these Agreements may not even contain the word “Monitor,” the DOJ continues to apply Morford and Breuer principles and process and other agencies still treat the role as they would a “Monitor.”
The purpose and role of a Monitor is largely misunderstood, leading to false and unrealistic expectations. Davidoff promulgates several scope-related misperceptions that have no basis in reality – such that Monitors are in place to ensure that a company “will remain on the straight and narrow” or that we “ensure that it (the organization) does not break the law again” or that we “supervise the compliance procedures of the company as well as beef them up.”
The purpose and role of a Monitor is to verify an organization’s timely and effective compliance with the Terms of an Agreement. An Agreement, by the way, that the Monitor had no part in devising. These Agreement Terms are most frequently associated with an organization’s remediation and improvement efforts in the areas of corporate compliance & ethics programs and internal controls, largely because §8B2.1 of the United States Sentencing Guidelines (“Effective Compliance and Ethics Program”) has made those areas the measuring stick of corporate liability. As a result, the Monitor’s assessments and scope are often heavily weighted, in accordance with the Terms of the Agreement(s), on corporate compliance and ethics programs.
Because an Agreement is exactly that, an Agreement, the parties could choose and agree to include Terms that provide the Monitor with authorities far exceeding that which I have described as a Monitor’s general purpose and role. If the parties so choose and agree, they could give the Monitor significant authority beyond merely verification and reporting, such as operational decision-making, contracting approval/disapproval, etc…. This level of authority is extraordinarily rare among all monitorships and presently non-existent among DOJ Agreements requiring a Monitor.
Absent some remarkably unusual Term(s) in an Agreement requiring it of a Monitor, a Monitor’s purpose and role is NOT to ensure that the company “will remain on the straight and narrow” or “ensure that it (the organization) does not break the law again.” Nobody can do that. Nobody expects that.
The Terms of the Agreement (not the Monitor) are responsible for ensuring, in principle, that the organization will have a compliance and ethics program that, in accordance with §8B2.1(a)(2) of the US Sentencing Guidelines, “…shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct.”
To recognize and emphasize that all fraud cannot be prevented, §8B2.1(a)(2) continues: “The failure to prevent or detect the instant offense does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct.”
The notion that a Monitor can prevent and/or uncover all fraud within an organization, is utterly absurd. It is so unconscionable that suggesting it defies all common sense.
The real scope issue lies within the Terms of the Agreement(s) underlying the Monitorship, which as noted previously, the Monitor had no part in drafting. Having been a Monitor and having read every Agreement requiring a Monitor that I can get my eyes on, it is my opinion that most of these Agreements are not constructed sufficiently so as to ensure that the monitored organizations have compliance and ethics programs that adequately comport with §8B2.1 of the US Sentencing Guidelines. While DOJ’s Agreements have improved drastically in this regard over the last few years, they still too narrowly focus on the underlying issues (i.e. bribery, false claims, insider trading, etc…) and not on the whole compliance and ethics program, which is what §8B2.1 covers.
As a result of this, while a company may significantly improve, for example, its anti-corruption compliance program component under an Agreement with the DOJ, it may utterly fail in other risk areas subject to criminal misconduct and/or abuse. In other words, DOJ risks missing the forest for the trees by too narrowly focusing on the underlying issues and not on the overall compliance and ethics program, which if designed appropriately and implemented effectively, would address all fraud and compliance risks and better prevent recidivism. Isn’t that the real spirit of what everyone wants to accomplish?
Additionally, as a compliance and ethics program expert, I feel that in these Agreements (particularly those requiring a Monitor) the DOJ and most other agencies overly focus on compliance program components and not enough on ethics and ethical tone. The title of §8B2.1 is “Effective Compliance and Ethics Program” (emphasis added) and §8B2.1(a)(2) specifically relates to ethical tone, yet rare is the instance that one of these Agreements obliges a Monitor to assess and report on an organization’s ethical tone! Ethical tone and compliance programs are symbiotic – one cannot succeed without the other – and the government does not yet seem to have come to a full appreciation of it.
Another issue alluded to in Davidoff’s article related, generally, to the concept(s) of “self-monitoring” and/or government monitoring. In self-monitoring, the company assesses its own performance against the terms of an Agreement and reports to the government. Government monitoring is where the relevant government agencies conduct the monitoring.
In my opinion, “self-monitoring” is an oxymoron and cannot be generally relied upon to ensure either effective compliance with the Terms of an Agreement or that the organization establishes a compliance and ethics program that achieves the desired end-results (“spiritual compliance”) of an Agreement. Though many might think that trust and objectivity are the primary concerns in this regard, I have found that the real problem with self-monitoring is technical competence. When an organization is left to its own to make these assessments, the in-house people assigned to make and/or review such assessments often simply lack the requisite corporate compliance and ethics industry experience and knowledge necessary, leading to a “check the box” process or attitude that can hinder effective and/or “spiritual compliance” with the Agreement. This is not to suggest that a Monitor should always be required, only that greater consideration of an organization’s technical competence needs to be incorporated into the decision matrix as to whether or not a Monitor should be utilized.
For example, when an Agreement requires that an organization conduct some type of specific compliance training of employees, the company may genuinely believe it has effectively done so simply because they offered a training session (hence, “check the box”) and therefore report successful compliance with that Term of the Agreement to the government. What I frequently find, as a Monitor and compliance consultant, is that such training was not effective – meaning that those employees at risk to a compliance issue could not reasonably recognize the relevant compliance and ethics risk(s) or apply the relevant policies within the context of their role(s) (hence my term, “spiritual compliance”).
The same lack of compliance & ethics industry technical competence exists within the ranks of relevant government agencies as well, where it is exacerbated by agency budget/resource issues, making fruitful and effective compliance monitoring by the government unrealistic, if not impossible. The agencies that have the combination of technical competence and resources are very few (i.e. HHS) and even those utilize Monitors from time to time.
Self-monitoring and/or government monitoring assumes an expertise that is presently uncommon among organizations and government agencies – the whole compliance and ethics industry itself is barely out of its infancy, though it is growing and progressing rapidly. Monitors fill this void perfectly, often playing the role of teacher and guide to both the organization and government.
I much appreciate Davidoff’s dislike that Monitor reports cannot usually be obtained. There are many who argue that Monitor reports, as a general rule, should be publicly available, albeit with appropriate redactions, primarily to protect proprietary, sensitive, and/or personal information that such reports might contain. Also, how willing organizations might be to enter into Agreements where they know a Monitor’s reports will be available to the world could have a very chilling impact on both the willingness to enter into such an Agreement and the degree to which the organization might more openly and fully work with a Monitor towards “spiritual compliance.”
Balancing the obligation for the Monitor to inform (report to) the government against the risks of such information being used or misused by outside interested parties is a very difficult task, whose consequences could easily outweigh the public interest as it concerns access to a Monitor’s reports. For a more recent general exploration of these issues, I suggest “Minding the Monitor: Disclosure of Corporate Monitor Reports to Third Parties” by Karen Green and Timothy Saunders of Wilmer Hale.
There are a myriad of important issues that still exist around Corporate Monitors that yet need to be pointed out, deliberated, and resolved. I never even touched on “independence,” which is certainly one of the big ones! As someone who is passionate about and intimately involved in the development of Standards and “best practices” for Monitors, I hope that writings such as this may bring attention to the important and real Corporate Monitor issues, allay misperceptions, and lead to a greater appreciation for Monitors – an extraordinarily effective and largely under-utilized means by which government and/or other oversight bodies can better achieve long-lasting success in resolving corporate misconduct, fraud, waste, and/or abuse.
FCPA Settlement Agreements, Monitors and Self-Monitoring
There has been a slightly less frequent requirement by the DOJ for Independent Corporate Monitors (“Monitors”) in FCPA-based settlement agreements during 2011. Counts may vary a little due to timing, but there have been about seven (7) such settlement agreements during the first half of 2011, of which two (2) required Monitors and three (3) required some form of “self-reporting.” Previously, Monitors had been required, on average, in a little more than forty percent (40%) of FCPA-based settlement agreements, a fair amount more than the twenty-eight percent (28%) average for the first half of 2011.
What is behind this apparent trend and does it have anything to do with concerns that have been raised over the last few years about the costs and scope of Monitors? Does it signal a broader “policy” shift within DOJ and/or outside of just FCPA matters?
What should be considered by government agencies when contemplating whether or not to allow an organization to self-monitor their compliance with the terms of a settlement agreement?
If one looks at DOJ’s written policies on the topic and public statements by DOJ officials, such a change is clearly not “official policy” in general, nor is it just for FCPA matters. Also, while costs of a Monitor are certainly among the many factors considered by all parties, there is nothing to indicate costs are a key consideration by DOJ in determining whether or not to require a Monitor at all, much less a factor in this trend.
As a Monitor and one who tracks the use of Monitors intensely and very broadly, I am absolutely confident in saying that the use of Monitors is universally (FCPA being an exception thus far in 2011) increasing, not decreasing. Not only among more regulatory and enforcement agencies at all levels of government within the United States, but abroad. Without articulating and referencing all the support behind this assertion (just look at previous issues of “The Monitor” to see the broad use and requirement of Monitors), I think we can dispel any notion that this apparent trend in FCPA-based matters has any broader implications, both in and outside of DOJ. Accordingly, I would like to explore why this trend may be happening within DOJ FCPA-based settlement agreements.
From my reviews of the underlying settlement agreements in the older and more recent FCPA matters, both where a Monitor was and was not required, there seem to be three key things that have happened and are continuing to happen that I believe explain this trend. The cost of a Monitor is definitely not one of them and never should be.
Expertise of Counsel
First, outside counsel for the firms involved in FCPA matters have gotten really good. Not only have they gained an abundance of experience in such matters because of the sheer volume of DOJ FCPA investigations that have taken and are taking place, but they now have a plethora of settlement agreements available that tells them explicitly what the DOJ expects with regards to compliance programs and what other companies have done in those instances where a Monitor was not required, or vice-versa.
Accordingly, even as these seasoned defense attorneys begin to plan an internal investigation, they are looking for compliance and control failures and providing immediate advice about remedial measures aimed specifically at addressing the issues they know DOJ will have and in a fashion similar to that which they have seen other companies do to avoid a Monitor. The cost savings of this as compared to the cost of a Monitor could be argued to not be as large as perceived, given that the “additional” services by such law firms does not come free, or inexpensively, nor does it always necessarily entail the use of very experienced compliance professionals, though that is changing too. Nonetheless, many of these attorneys are exceptionally experienced in these matters and this strategy and process has been very effective to date in helping companies avoid the imposition of a Monitor in resolving FCPA matters.
Along those same lines, the DOJ (and the SEC) have not sat quietly regarding their expectations of compliance programs and internal controls within companies subject to the FCPA. To the contrary, they have been very vocal in sharing their views about the topic, as well as about Monitors and some of the factors involved in considering whether or not to require them. With such an abundance of information (i.e. settlement agreements, public statements by DOJ/SEC officials, articles, white papers, etc), its longer “rocket science” to “reverse engineer” what needs to be done in order to minimize the likelihood of a Monitor being required in DOJ FCPA matters.
The Corporate Compliance Industry
Second, among the key considerations in resolving FCPA matters (and corporate misconduct in general), is the state and effectiveness of an organization’s “pre-existing” corporate compliance and ethics program and internal controls. Corporate compliance, as an industry, is still relatively new and has grown tremendously over the last few years. Their impact on organizations’ pre-existing compliance programs has been positive, deep and broad.
There are several large and highly reputable organizations that now cater specifically to the compliance industry, some of whom even offer certifications for compliance professionals. These organizations host large national and international conferences, as well as a myriad of local and regional seminars that cover all aspects of compliance within just about every industry. They have created and aggressively communicated standards and best practices as well, which comport with, among other things, the United States Sentencing Guidelines as it relates to corporate compliance & ethics programs. As the compliance profession has grown and made more training and information accessible about best practices in compliance and ethics programs, corporate compliance professionals within organizations with pre-existing compliance programs have become better trained and equipped to improve their organization’s compliance programs, which results in less remediation and oversight if/when a problem occurs.
In addition to those organizations focused on the industry of corporate compliance and ethics, FCPA compliance has been a major topic of coverage by industry organizations (i.e. American Bar Association, Association of Certified Fraud Examiners, American Institute of Certified Public Accountants) and the professional training companies that serve the constituents of those organizations (i.e. American Conference Institute, Practising Law Institute, etc.). It is also the topic of a huge amount of “viral” coverage, with law firm websites, newsletters, tweets, Linked-In groups and blogs that track everything going on related to FCPA matters and, in some cases, providing instant access to libraries of relevant documents and resource materials.
Want to keep up with FCPA issues/happenings? Set a “Google Alert” on “FCPA” with instant updates and watch your email inbox explode.
Proactive FCPA Services
Finally, the universe of companies with exposure to the FCPA is tremendous and the risk(s) high. For many years now, attorneys, consultants and compliance professionals have been using the DOJ’s aggressive prosecution of violators, which entails individual criminal prosecutions and monstrous organizational fines and restitution, to make companies (and their Board Members, where applicable) abundantly aware of their FCPA risks, personally and organizationally. While organizations have traditionally avoided the costs of such proactive services in general, the seemingly huge personal and organizational risk(s) in FCPA has caused many organizations to shift their cost/benefit considerations in favor of action. As a result, many companies have obtained professional compliance related services to proactively assess and improve the FCPA compliance components of their corporate compliance programs. Proactive FCPA compliance has been among the hottest professional service areas of all proactive risk-based services for several years now.
As a result, there are many more companies, particularly within the industries “targeted” by the DOJ for FCPA, with viable “pre-existing” compliance programs today, who previously had little or no compliance program at all, much less one that addressed FCPA specific risks.
Self-Monitoring is Not Monitoring
The need for a Monitor must be evaluated in light of each matter’s particular circumstances. A Monitor is not always necessary or appropriate to assuring the timely and effective compliance of an organization with their settlement agreement obligations. However, the DOJ (and any other government agency) should cautiously contemplate their reliance on self-reporting by an organization on that organization’s compliance with the terms of a settlement agreement. While the DOJ might hope that most companies, their counsel and the company’s employees would do so with the effectiveness, transparency and integrity expected of an Independent Corporate Monitor, there is no “independent” in self-reporting.
As just one example from my own experiences as a Monitor, I have had within the scope of my Monitorships the responsibility of verifying that organizations have met their settlement agreement obligations regarding reports/complaints of employee misconduct. These have included complaints raised through a Hotline, directly or indirectly with the Chief Compliance Officer, through a direct supervisor, and/or any other means. For those raised through a Hotline, for example, I routinely review the Hotline log (often done through a third-party and may include both telephonic and electronic communications) and assess how all such complaints were responded to, resolved and reported. I then report to the relevant government agency on my findings.
In my Monitorships, regardless of whether a complaint was made through a Hotline or otherwise, the organizations knew that a I was watching, reducing the risk that any complaints could be ignored, mishandled or not appropriately reported in accordance with the settlement agreement obligations and/or applicable laws and regulations. While not all complaints and/or resulting investigations required that they be reported, either to me as the Monitor or the government, the ability of the company to subjectively and solely make such a decision was impacted by my presence. This helps assure that complaints are not only appropriately and effectively addressed, but that what needed to be reported to the government was so reported. In fact, the companies that I have served as the Monitor of have tended to “over-report,” meaning they reported to the government about complaints that did not require reporting, either by law or the settlement agreement. For example, in one of my Monitorships a Hotline call was received regarding an employee’s request for their own personal tax information and had no implications or relationship to misconduct; however, it was reported by the organization to me and the government merely because it came through the organization’s Hotline.
Though I am not involved in it and have no personal knowledge about the particulars, a company presently under a Monitor has very recently and publicly come under scrutiny as a result of a complaint (they note it as a “tip” in their public filings). While it is unclear at this point whether the tip that led to that internal investigation came into the Hotline or not, it and the results of their internal investigation was reported to their Monitor and the government and has called into question whether or not they “knowingly and willfully breached material provisions” of their settlement agreement. The company further acknowledged that this was a “significant liability” for them and could lead to government and civil liabilities and possible exclusion from certain government contracting which would have a “material adverse effect” on their financial condition.
Would this have come to light at all without a Monitor present, if they were left to self-reporting? We may never know.
In addition to the utter lack of independence, an organization’s capability/ability should also be carefully and closely weighed by government agencies that contemplate permitting an organization to self-report on their compliance with a settlement agreement. Among the chief responsibilities of a Monitor is to verify not only that the company complies with their settlement agreement obligations, but that they do so timely and effectively. As it relates to effective compliance, many companies may not have the requisite resources and compliance experience to adequately make such a determination, while Monitors do, frequently having more experience in making such assessments than a company’s management, in-house counsel and/or compliance personnel.
One example of evaluating effective compliance from my own Monitorship experience involved an organization’s obligations in their settlement agreement regarding specific accounting and internal control requirements. The complexity of these requirements exceeded the ability of the accounting and compliance professionals within the organization. They intended to comply with their settlement agreement requirements in these areas and genuinely thought they had done so, but in reality they had not. As the Monitor, I brought their failure to their immediate attention and provided guidance about how they might remedy their errors, which they were able to do, improving their own systems and procedures while effectively fulfilling their settlement agreement requirements at the same time. Had this been left to self-reporting, neither the company nor the government would have known that the actions taken by the company were not effective.
Similarly, but much more frequently, I have experienced this same issue in evaluating the effectiveness of compliance training(s) required by settlement agreements. Because such trainings are a key means of communicating a company’s compliance policies and the primary means of assuring that their employees understand and can apply them in their roles, they have been and continue to be a recurring requirement in settlement agreements. There have been instances in my own Monitorships where, with the best intentions in mind, such compliance training has been conducted, in accordance with the requirements of a settlement agreement, that were wholly ineffective. My testing found that those who received the training did not adequately understand the compliance policies or how they were applicable in their roles. This lack of effectiveness was immediately raised with the organizations, allowing them to refine and improve their compliance training, as well as learn techniques to assess the effectiveness of that training within their own on-going compliance program monitoring, while effectively meeting their compliance training obligations as per their settlement agreements. Once again, without the presence of a Monitor to recognize such a deficiency, neither the organizations involved nor the government agencies to whom they would have self-reported would have ever known.
Perhaps most concerning of all as it relates to self-reporting are those instances where companies view their compliance with a settlement agreement as a “check the box” exercise, with no regard to the spirit and goals of the settlement agreement. In such instances, the government (and possibly the company itself) would not know whether or not a company is effectively complying with their settlement agreement obligations. To the contrary, they would think everything was proceeding along smoothly. At least until the next crisis arises.
Yes, Monitors come with a price. While there are many misperceptions about how high that price may be (perhaps another good topic to explore), such a price is outweighed by the many benefits for the organization, the government agency, the industry and the public-at-large, among others. Not only do I think that costs are not a factor in the recent decline in the use of Monitors in FCPA-based settlement agreements, I think they should never be a significant consideration at all in any matters where a Monitor is considered. If the costs of a Monitor are a concern to a company, perhaps the attorneys who help companies negotiate the settlement agreements with the government should push harder to have the government offset any associated fines with the costs of the Monitorship, as was recently done in the Sirchie Acquisition Company (FCPA) and XE Services (Export Controls) settlement agreements.
The price of non-compliance, intentional or not, is too high to pay.