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: corporate compliance
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.
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”
Messaging Risks – When IS the Right Time?
There was an awful lot of outrage about the Nationwide commercial drawing attention to home accidents affecting children during the Superbowl this year. It didn’t seem that the outrage was so much directed at the message as much as it was the timing – it was done during a time when people were trying to be entertained, not horrified.
I have four young daughters, so I get that anything that makes me think about their mortality (much less my delinquency or negligence contributing to something that harms them) causes a certain amount of discomfort. A lot of discomfort. But I was with my family watching the game when this commercial aired and I have to say, though it certainly put a temporary damper on our festive spirits, it also caused a moment of reflection. I had forgotten about securing a television set in our home that could fall if one of my kids climbed on it (such a scene was in the commercial).
So I am supposed to be angered that I suffered a brief interruption of my precious and fleeting television entertainment-induced happiness to be reminded that I needed to do something the consequences of which could cause a constant interruption of my happiness for the rest of my life?
When exactly is the time for delivering messages that draw our attention to risks? The argument that this commercial was poorly timed because it interfered with our entertainment is, in my mind, absurd. Television is predominately for entertainment. Therefore, there could be no appropriate time for a commercial like this. Perhaps there are some shows that cater to the melancholic, where “depressing” commercials might resonate better?
The idea behind heightening awareness of risks is to draw the largest amount of attention possible to those risks. In the case of this message, using a Superbowl commercial was sure to reach a heck of a lot more people than some educational/informational show that airs in the middle of the night watched by a couple hundred people.
The public uproar stimulated questions relevant to my professional compliance and consulting work – Are we living in a culture that has no appreciation for hearing about and taking actions to mitigate risks? A culture that actually takes offense when we do?
In business, we need to appreciate, understand and act on risks. Yet compliance and ethics professionals face similar challenges with Boards, Executives, Senior Management and even line employees and/or agents of an organization. Though there is an expectation that these roles know about and deal with risks, it’s not something they particularly care to hear about, particularly in the higher ranks, where it is of great importance and impact. They prefer to discuss financial results, stock performance, mergers & acquisitions, etc. – you know, the REAL and IMPORTANT stuff.
I face a similar challenge when trying to develop proactive compliance and ethics consulting work. Organizations simply don’t want to hear about faint, non-imminent, and “philosophical” dangers that could sink or significantly impair their organization. Much less do they want to spend a little money to properly deal with it.
Using the Nationwide commercial as an analogy, one might think the risk of an unsecured weapon in the home is minimal because one’s children have been well educated on the risks and, due to their obedience, would not play with the weapon. Perhaps true. But what about the kids who come over to play?
The rationalizations in business are really no different. I can’t tell you how often I heard victims of a fraud (both when I was an FBI Agent and now as a consultant) tell me something like “But Sally was such a nice and religious lady whose been with us for 15 years – she COULDN’T have stolen from us! You must have made a mistake.”
To all the compliance and ethics professionals out there working hard to do the right thing, whose risk messages too often fall on deaf ears, I raise my coffee cup to you. You ever need an ear, my number ain’t hard to find.
Mom’s Lessons
If you were wondering whether or not I had dropped off the face of the earth for the last six weeks, you guessed right. October of 2014 was a month that, along with September 2001, I would love to utterly erase from my memory.
My mother, who had been so courageously battling cancer for the last five years, lost the battle on October 17, 2014. Despite a contractor catching my house on fire and a kidney stone suddenly showing up, I was able to get to Bristol, VA and be with my mom before her passing. I remained in Bristol to support my dad and help with all of the funeral arrangements. After the funeral, I packed their house up and moved dad up to Fredericksburg, VA with my family.
As I reflected on my mom’s life and lessons, there were a few in particular that I find relevant to the work I do today, particularly in the area of compliance and ethics. My mom was raised in a second generation Italian family in extreme poverty in New Orleans. I recall hearing stories of how she slept together with her sister and brother in a small room where they had to take turns staying awake to keep the rats off of them.
Despite the obstacles, mom appreciated the value of hard & honest work, education, and selfless service. Working various jobs, she put herself through nursing school and began what became a forty-one year long career as a nurse. Mom’s nursing accomplishments were of no comparison with Nobel Prize winners and will never be remembered outside of the small circles of those whom they affected, but they are nonetheless as profound and meaningful, both to those affected and to those who might see in her life and work the impact and role of a positive high ethical tone and commitment to always doing what was right and in the best interests of her “customers” – her patients.
My mom always stressed the importance of honesty and showed me the benefits of it every time I owned up to something I did wrong as a child. As long as I was honest about my mistakes, the punishment was appropriately reduced. Thank God – or I would still be in “time-out” some forty years later! That is a lesson I have carried all my life and am trying hard to pass on to my children, as well as those with whom I work.
Positive ethical tone within an organization begins with honesty. And ends with dishonesty.
An effective compliance & ethics program will include on-going education and training. While my mom worked hard to put herself through school to become a nurse, she never stopped her education there. Over the course of her career as a nurse, she took on many new challenges/specialties, some of which she did pioneering work in. The lesson is that education never stops. We never stop learning and we always have room to learn more, regardless of where we are now in our lives and careers. Compliance training IS on-going education. It is not checking a box.
Being a nurse is among the most altruistic jobs one might have. Caring for those who, in many instances, can’t care for themselves. Helping them with the most humbling and/or simple tasks – many tasks that even family might shy away from. Not losing sight of their human dignity and treating them with respect, even as they lost respect for themselves. My mom was always a champion of the patients, even when being so was not always in the financial best interests of the hospital or kindly looked upon by her superiors. As best as I know, mom never had to deal with any “corporate” fraud issues as a nurse/employee, but she certainly had her share of ethical issues. Sometimes described as a “firecracker” when it came to advocating for her patients, I am sure mom upset her share of hospital superiors of lesser ethical constitution over the years.
It’s a great lesson for us. By placing greater value on what we do and doing things right (rather than on where our stock price is), we find a more fulfilling and long-lasting success. When someone acts unethically or engages in some sort of misconduct, we have to speak up – until somebody listens.
I recall with both joy and sadness a little boy named Stephen, who was a cancer patient under my mom’s care in a pediatric intensive care unit. I was living far away at the time, working as an FBI Agent. In caring for Stephen, my mom had learned that he had dreamed of one day becoming an FBI Agent and so she asked that I might visit him when I next came to town – in fact, she made certain to remind me of it MANY times as I planned my next visit!
When I got to town, my mom made sure that the hospital was my very first stop. She also insisted that I wear a suit – my official FBI Agent “uniform.” After Stephen’s chemo treatment(s) that day, she rolled him in a wheelchair to a private little waiting area where she had asked me to wait. Stephen was probably about ten years old and his cancer was terminal – in its latest stage. It was obvious that this child had suffered much and long, and was still in pain. He didn’t have a single hair on his head and maybe weighed forty pounds in all his clothes. Yet when my mom introduced me as her FBI Agent son, he lit up like a Christmas tree. My mom and Stephen’s mom left briefly, so that we could have our “top secret debriefing.” I let him hold by badge and credentials, let him see my handcuffs and the gun holstered on my hip, and answered every question he could muster the strength to ask – and many that I knew he would ask if he could.
When our time was over, I gave Stephen an official FBI t-shirt, a junior FBI Agent badge, some FBI pens, and other little things that I can’t even remember – though they meant the world to him. I learned a couple months later that Stephen had passed and that he had specifically requested that he be buried in that FBI t-shirt that I gave him. To this day I can’t think about that without tearing up.
This is just one example of how my mom took the time to listen to her “customers” and to appropriately do more for them than what just her job required. She got no honors, medals, promotions, mentions or bonuses for this – and that was fine by her. The joy brought to Stephen was priceless.
I’ll miss you mom. Thanks for all you did for me and for everyone you touched. I hope I can pass on the lessons I learned from you to my children as well as you passed them on to me. I also hope that I might follow your example(s) with the same humble obscurity as you sought and that I might touch just one tenth of the number of lives that you did.
Tell Stephen hello for me.
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.
Expert Testimony – Corporate Compliance & Ethics
A new “practice” area may be emerging for testifying experts.
When an employee(s) of an organization violates a law, regulatory requirement, etc., the organization can be, and often is, held liable for it. That liability may be, among to other things, criminal in nature (corporate criminal liability) or one associated with government contracting (present responsibility and/or responsible government contractor). It may also be civil, in such instances where there are collateral civil actions (class actions and/or shareholder derivative suits) arising out of the employee(s) misconduct.
One of the primary considerations of corporate liability, at least from the enforcement perspective, is the organization’s corporate compliance & ethics program (“Program”). That Program, in many respects, serves as the “body armor” against vicarious liability because of its consideration under 8B2.1 of the United States Sentencing Guidelines. Government prosecutors and Agency regulators, including suspension and debarment officials, consider an organization’s Program heavily, as demonstrated by the attention focused on such Programs in various government settlement agreements (i.e. Deferred and Non-Prosecution Agreements, Administrative Agreements, Consent Agreements, etc…).
While the benefits of an outside compliance expert are obvious as it relates to demonstrating the effectiveness of a Program to the Government, this may be a consideration in collateral civil litigation, where the Program can become a defense for the organization (or an offense for the plaintiff). Plaintiffs and defendants routinely hire outside experts for all sorts of things associated with such litigation (i.e. damage calculations, forensic accountants, etc.) – Why not a Compliance and Ethics Program Expert? After all, if the organization had an effective Program, what more could they have reasonably done to prevent the misconduct? If the government uses this as the measuring stick, why shouldn’t it be considered in civil litigation?
Just a thought. But if your organization or an organization you represent becomes embroiled in such matters, you should consider how this might fit into your litigation strategy.
If you want more thoughts about how a Corporate Compliance and Ethics Program Expert might fit within the litigation strategy of any matters you are involved in, call me. If nothing else, it would be a very interesting conversation.
The Fraud Guy 