DOJ policies aim to reduce enforcement burden on cooperating entities
May 2019 | SPOTLIGHT | FRAUD & CORRUPTION
Financier Worldwide Magazine
May 2019 Issue
The Department of Justice (DOJ) is continuing to refine and explain its approach to companies suspected of financial crimes, while at the same time emphasising the importance of the prosecution of individuals. In a number of recent speeches, senior department officials, including deputy attorney general Rod J. Rosenstein and assistant attorney general Brian A. Benczkowski, indicated that prosecuting culpable individuals can be a more effective deterrent than penalising corporations. In accordance with that view, department policies have aimed to reduce investigative burdens on companies, particularly those companies that seek to cooperate with law enforcement in its effort to identify and prosecute individual wrongdoing. However, setbacks to the DOJ in a number of notable 2018 trials may impact the DOJ’s bullishness in some types of individual prosecutions.
Recent policy changes
In 2018, the DOJ continued to expand the application of its 2017 Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy, applying it as nonbinding guidance in criminal cases beyond the FCPA context. John P. Cronan, then-acting assistant attorney general of the criminal division, and Benjamin Singer, then-chief of the fraud section’s securities and financial fraud unit, announced that policy expansion in a March 2018 speech at the American Bar Association’s white-collar crime conference.
The speech appeared to encourage corporations to self-disclose in other types of investigations by highlighting the significant reduction in penalties that can result, with Mr Cronan and Mr Singer pointing to a recent foreign exchange ‘front-running’ investigation in which a financial institution received a formal declination letter based on its self-reporting, full cooperation and enhanced compliance programme. The financial institution paid $12.9m in restitution and disgorgement, compared to a deferred prosecution agreement (DPA) and payment of $101.5m in penalties and disgorgement following a similar investigation of a different bank in which, according to the DOJ, the bank did not self-report or fully cooperate with the investigation at its outset.
Announced in May 2018, the DOJ policy against piling on — when multiple agencies investigate and punish companies for the same underlying misconduct — appears similarly designed to reduce the burden of enforcement activity on corporations, particularly when the entity cooperates. The policy encourages DOJ attorneys to coordinate, where possible, both within the department, where multiple components are investigating the same corporate entity, and with other federal, state, local and foreign investigating authorities, to alleviate the overlapping demands multiple investigations can place on corporations and eliminate “the unnecessary imposition of duplicative fines, penalties and/or forfeiture against the company”. That said, the DOJ continues to publically emphasise its cooperation with other authorities as a means of increasingly available evidence and facilitating far-reaching investigations of wrongdoing, an approach that naturally increases the burdens on corporations under investigation, particularly in the cross-border context. It therefore remains to be seen whether the so-called ‘anti-piling on policy’ will, in fact, benefit such corporations.
The DOJ’s recent revised guidance on the imposition of monitors is another indication of the current department’s sensitivity to corporate concerns. The new guidance calls for imposing a monitor “only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens”. In announcing the revised guidance in October 2018, Mr Benczkowski stated that monitors should be “the exception, not the rule”. The so-called ‘Benczkowski memorandum’ strongly suggests that the DOJ is narrowing the set of circumstances in which a monitor is required and limiting the role of a monitor, if appointed. Indeed, the policy seems to give companies the opportunity to establish that a monitor is not required on the basis of factors, including the company’s investment in its own compliance programme and internal controls, as well as its ability to demonstrate that those controls can detect and prevent misconduct.
Additionally, on 29 November 2018, Mr Rosenstein announced a revised policy concerning individual accountability and cooperation credit for corporations. A refinement of the 2015 memorandum by then-deputy attorney general Sally Yates on the same topic, the updated policy takes a more practical, less burdensome approach to the requirement that cooperating corporate entities provide information about culpable individuals. For example, it no longer requires companies to identify “all relevant facts about the individuals involved” in order to receive cooperation credit. Instead, companies need to provide relevant facts only about individuals who were “substantially involved in or responsible for” the potential criminal misconduct. Moreover, the revised policy allows a company to potentially receive cooperation credit even where it is “unable to identify all relevant individuals or provide complete factual information despite its good faith efforts to cooperate fully”.
Were there any doubt as to the direction of the DOJ’s policies in 2019 under the leadership of a new attorney general, William P. Barr, who was sworn in on 14 February 2019, a speech in March by Mr Benczkowski gave every indication that the DOJ will stay the course. Indeed, the latest speech by Mr Benczkowski reiterated the DOJ’s commitment to its recent policy pronouncements, such as the Corporate Enforcement Policy and the ‘anti-piling on policy’. Notably, in light of the new policy on corporate monitors, Mr Benczkowski announced that the DOJ will hold training sessions for prosecutors on how to “evaluate the effectiveness of corporate compliance programs”. Overall, hitting on similar themes of fairness, transparency and predictability, as in earlier speeches, Mr Benczkowski promised corporations “a fair shake from the Department” when they respond appropriately to misconduct. For example, even where senior executives are involved in misconduct, the DOJ may still decline to prosecute the company if its “actions are otherwise exemplary”.
Of course, these recent policy changes do not upend the fundamentals of the DOJ’s approach to enforcement and corporate cooperation. But they do reflect a change in tone and a growing recognition of the burdens companies face under investigation. They also encourage voluntary self-disclosure by increasing and clarifying the benefits of, and removing obstacles to, obtaining cooperation credit.
Enforcement actions in 2018
The DOJ’s approach to corporate enforcement is also evident in actions brought and declined in 2018. For example, under the FCPA Corporate Enforcement Policy and the pilot programme that preceded it, the DOJ declined prosecution in 11 of 13 cases where a company had voluntarily self-disclosed. The remaining two investigations were resolved with non-prosecution agreements, and no monitors were imposed. The volume of FCPA actions brought and the penalties in those 11 actions remained relatively constant in 2017 and 2018, suggesting that in circumstances where companies fail to self-disclose, enforcement activity continues to be relatively robust.
Outside of the FCPA context, cases against banks and companies for financial crimes appear to have declined in 2018, with fewer industry-wide actions than in prior years. One year is likely too short to define a trend. It is, of course, possible that the DOJ has been involved in non-public investigative activity during this time, and such cases typically take months, or even years, to build. Where financial crime cases have been brought, the penalties are 72 percent lower than during the prior administration, according to the New York Times. If the data holds, overall, corporations dealing with potential criminal misconduct may be better-positioned to resolve investigations on more favourable terms than in the past, particularly if they are willing to self-disclose or, at a minimum, provide substantial cooperation. Companies with robust compliance programmes and the ability to track and substantiate their effectiveness may fare particularly well.
While the DOJ appears committed to individual prosecutions, particularly those arising out of broader investigations which began during the prior administration in such areas as criminal antitrust, fraud and market manipulation and the FCPA, the DOJ suffered setbacks in 2018 that may impact its approach to individual prosecutions in the future.
In the antitrust context, the DOJ failed to obtain convictions after a jury trial in United States v. Usher, a prosecution of three foreign exchange traders charged in 2017 with conspiring to violate the Sherman Act by allegedly ‘bid rigging’ in their trading of the euro/dollar currency pair. The defence argued, among other things, that trading data showed, in many instances, that the defendants were not coordinating trades.
A case arising out of global investigations into the setting of Libor rates, United States v. Connolly ended in guilty verdicts for both defendants, but a pending post-trial motion raises significant questions about the implications of extensive law enforcement involvement in the relevant bank’s internal investigations. Before trial, one of the defendants, Gavin Black, challenged the admission of statements he made to outside counsel conducting an internal investigation of the conduct of the bank’s traders involved in setting Libor rates. During the internal investigation, Mr Black was interviewed by outside counsel under threat of termination, and he claimed his statements were compelled in violation of the Fifth Amendment due to extensive law enforcement involvement in the bank’s investigation, which had ‘federalised’ outside counsel. While the government tried to moot the issue by opting not to offer his statements at trial, Mr Black has moved, post-trial, to vacate his conviction and dismiss the case under Kastigar v. United States, which bars the use of compelled testimony, and evidence derived directly and indirectly therefrom, on Fifth Amendment grounds. Judge Colleen McMahon of the US District Court for the Southern District of New York stated in a recent order that the “Kastigar/outsourced investigation motion” is “where the Government should be concentrating its efforts” in terms of post-trial briefing. Should Judge McMahon find a Kastigar violation and order a new trial or a dismissal of the charges, the ruling will have a significant impact on law enforcement’s interactions with outside counsel handling internal investigations in future cases.
The US Court of Appeals for the Second Circuit’s decision in United States v. Hoskins limits the DOJ’s reach in FCPA actions against individuals, particularly foreign nationals. Lawrence Hoskins, a non-US citizen charged with conspiring to violate the FCPA, was an employee of a UK subsidiary of a French company and never entered US territory during the period of the criminal scheme. The Second Circuit held that Mr Hoskins therefore fell outside the categories of persons generally covered by the FCPA, and because he could not be charged with a substantive FCPA violation, he could likewise not be charged with conspiring or aiding-and-abetting violations of the FCPA. While this decision does not entirely foreclose the possibility that a non-US citizen acting outside the US could be charged with an FCPA violation — indeed, the Second Circuit expressly left open the possibility that Hoskins could be charged as an agent of the company’s US subsidiary — the DOJ certainly will consider Hoskins when deciding whether to pursue an individual in similar circumstances.
The DOJ’s consideration of the burdens its investigations and resolutions impose on corporations and financial institutions, and its messaging that it may seek to alleviate those burdens while continuing to investigate and prosecute individual misconduct, seem likely to continue into 2019. Depending on the circumstances, some institutions may seek to benefit from the DOJ’s current approach by voluntarily disclosing misconduct or at least providing substantial assistance to the government, including with respect to culpable individuals. Indeed, because the DOJ remains committed to individual prosecutions, companies can expect the department to continue to seek their assistance in investigating the conduct of culpable employees. And while the DOJ’s 2018 prosecutions have not been entirely successful, its policies and public statements suggest it will continue to aggressively investigate wrongdoing by corporate employees into 2019. If anything, the DOJ’s 2018 setbacks may cause it to seek even more information, evidence and assistance from cooperating corporations, in order to support its efforts to successfully prosecute culpable employees.
Jocelyn E. Strauber is a partner and Micah F. Fergenson is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. Ms Strauber can be contacted on +1 (212) 735 2995 or by email: email@example.com. Mr Fergenson can be contacted on +1 (212) 735 2258 or by email: firstname.lastname@example.org.
© Financier Worldwide
Jocelyn E. Strauber and Micah F. Fergenson
Skadden, Arps, Slate, Meagher & Flom LLP