In today’s edition of Daily Compliance News:
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Corporate culture is all the rage now, meaning it is an often used topic to signal commitment, sensitivity to issues of employee concern, and awareness of governance trends. In practice, as we all know, culture is not just about words but about action. As the often repeated phrase goes — talk is cheap. In this Corporate Culture Roundup Episode, Michael Volkov examines some culture-related issues involving: Culture + Action Steps, Civility in the Workplace, and What Happens when HR and Compliance are Disconnected.
In this podcast series, two complete MCU fans, Tom Fox, founder of the Compliance Podcast Network, and Megan Dougherty, co-founder of One Stone Creative, indulge in a passion for all things in the Marvel Cinematic Universe. We previously reviewed all the movies, and now we have a series on WandaVision. If you want to indulge in your love for the MCU with two fans passionate about all things MCU, this is the podcast series for you. For this offering, we continue with Episode 7, Breaking Down the 4th Wall.
Some of the highlights include:
Ø The story synopsis.
Ø What are the key plot points?
Ø What were some of our favorite cookies?
Next up in our series WandaVision, Episode 8 Previously On.
Categories
The Solar Winds Decision
Welcome to The Woody Report, where Washington & Lee School of Law Associate Professor Karen Woody and host Tom Fox discuss issues on white-collar crime, compliance issues, international corruption, securities, and accounting fraud, and internal corporate investigations. From current events to topical issues to academic research and thought leadership, Karen Woody helps lead the discussion of these issues on the new and exciting podcast. In this episode, Tom and Karen explore the recently announced decision in the Solar Winds shareholder claim based upon the Caremark Doctrine. Some of the issues we explore include:
- Background facts and court rationale.
- What is ‘positive law’?
- Can any cyberbreach claim be the basis of a Caremark Claim?
- Why is victim v. perpetrator status critical in a Caremark Claim?
- What is the bad faith standard in Caremark Claims?
- What does this decision portend for Caremark Claims going forward?
Resources
Karen Woody on LinkedIn
Karen Woody at Washington & Lee, School of Law
In today’s edition of Daily Compliance News:
- Why do courts award punitive damages? (Reuters)
- Does FASB need a shakeup? (FT)
- Fat Leonard was apprehended in Venezuela. (San Diego Tribune)
- The carbon tracking platform comes to Salesforce. (WSJ)
Today, we continue our exploration of the Monaco Memo by considering the sections relating to the evaluation of cooperation during the pendency of the investigation and the evaluation of a company’s compliance program at the conclusion of the resolution. These portions of the Monaco Memo should be studied intently by every compliance professional as they lay out what the Department of Justice (DOJ) will require to grant discounts under the FCPA Corporate Enforcement Policy. Today, I want to look at the provisions regarding monitors and monitorships. In many ways, they are some of the most interesting parts of the Monaco Memo.
The section on monitors and monitorships is broken down into three parts; (1) criteria for determining if a monitor is warranted; (2) criteria for selection of a monitor; and (3) monitor oversight. I am going to focus on the first prong, the criteria for determining if a monitor is warranted. You may recall the prior test to determine whether a monitor was warranted was last
articulated in the Benczkowski Memo. The test basically had an organization implement an effective compliance program and then test it. However, now there is a 10-factor test, which as Washington & Lee University, School of Law Professor Karen Woody says, greatly increases the temperature on corporations. The 10 factors are:
- Whether the corporation voluntarily self-disclosed the underlying misconduct in a manner that satisfies the particular DOJ component’s self-disclosure policy;
- Whether, at the time of the resolution and after a thorough risk assessment, the corporation has implemented an effective compliance program and sufficient internal controls to detect and prevent similar misconduct in the future;
- Whether, at the time of the resolution, the corporation has adequately tested its compliance program and internal controls to demonstrate that they would likely detect and prevent similar misconduct in the future;
- Whether the underlying criminal conduct was long-lasting or pervasive across the business organization or was approved, facilitated, or ignored by senior management, executives, or directors (including by means of a corporate culture that tolerated risky behavior or misconduct, or did not encourage open discussion and reporting of possible risks and concerns);
- Whether the underlying criminal conduct involved the exploitation of an inadequate compliance program or system of internal controls;
- Whether the underlying criminal conduct involved active participation of compliance personnel or the failure of compliance personnel to appropriately escalate or respond to red flags;
- Whether the corporation took adequate investigative or remedial measures to address the underlying criminal conduct, including, where appropriate, the termination of business relationships and practices that contributed to the criminal conduct, and discipline or termination of personnel involved, including with respect to those with supervisory, management, or oversight responsibilities for the misconduct;
- Whether, at the time of the resolution, the corporation’s risk profile has substantially changed, such that the risk of recurrence of the misconduct is minimal or nonexistent;
- Whether the corporation faces any unique risks or compliance challenges, including with respect to the particular region or business sector in which the corporation operates or the nature of the corporation’s customers; and
- Whether and to what extent the corporation is subject to oversight from industry regulators, or a monitor imposed by another domestic or foreign enforcement authority or regulator.
The old Benczkowski Memo test is found in factors 2 and 3. However, factor 1 is whether or not the company self-disclosed the incident(s) at issue. Moreover, factors 4-6 all related to conduct and actions when the illegal activity occurred, not after discovery and self-disclosure. Factor 4 relates to the length or pervasiveness of the conduct and whether senior management was involved. Factor 5 reviews “the exploitation of an inadequate compliance program or system of internal controls.” Factor 6, asks if compliance personnel were involved or were basically negligent in failing to “appropriately escalate or respond to red flags.” Factors 7-10 refine company actions post-reporting and do relate to actions after a company became aware such as investigations and remedial actions (factor 7), a reduction in the company’s risk profile (factor 8), or unique regulatory or business challenges (factors 9 and 10).
The Monaco Memo states, “prosecutors will not apply any general presumption against requiring an independent compliance monitor (“monitor”) as part of a corporate criminal resolution, nor will they apply any presumption in favor of imposing one.” The Monaco Memo also states, “Prosecutors should analyze and carefully assess the need for a monitor on a case by-case basis, using the following non-exhaustive list off actors when evaluating the necessity and potential benefits of a monitor.” Finally, the DOJ believes “compliance monitors can be an effective means of reducing the risk of further corporate misconduct and rectifying compliance lapses identified during a corporate criminal investigation.” This statement leads me to believe the DOJ is very concerned about corporate recidivism. Whatever the ultimate reasons are it does appear that, as Professor Woody noted, the heat is definitely turned up.
One thing did strike me about this list is that provides a clear roadmap for compliance professionals to use in proactive manner. You now know the precise factors the DOJ will review so you can look at them on an ongoing basis to (1) determine if your organization has issues which need to be addressed; (2) allows you to remediate before the government comes knocking or you have to self-disclose; and (3) if you use an independent third-party as a part of this proactive process, you can document compliance if you need to do so going forward if the government comes knocking independently of your self-reporting.
I hope you will join me for my next post to wrap up with some final thoughts.
How do you create a system where you are continuously and effectively listening to your key stakeholders in an inclusive manner? Vera Belazelkoska is Director of Programs at Ulula, a social enterprise startup that provides organizations with digital tools and expertise to monitor the human rights impacts in their global supply chains. She joins host Gwen Hassan to discuss how Ulula is helping companies amplify the voices of people who don’t always get to talk to the social auditors.
Ulula designs technology solutions to help companies do better in many areas. They are dedicated to building, configuring, and successfully implementing different innovative tools to help organizations monitor human rights issues, labor rights impacts, and community rights in global supply chains. Supply chain transparency is part of it, but they also focus on the accountability aspects.
Corporations are being held to increasingly high standards across different jurisdictions to ensure that they do everything in their power to identify human rights violations they may be complicit in along their supply chain, and then remediate them.
Resources
Vera Belazelkoska on LinkedIn
Richard Lummis and Tom Fox continue exploring leadership through the study of US Presidents. This episode begins a short series on Gilded Age Presidents, now largely forgotten. In this episode, we take up Chester A. Arthur. Some of the highlights include:
- Educational and Professional Background of Chester A. Arthur.
- His time as a New York politician, including work in the Conkling Political Machine and as Head of Customs House and conflict with President Hays.
- His Stalwart Candidacy as Vice President.
- His election and short tenure as VP.
- Leadership issues from his Presidency, including the confusion on how to take office, his enactment of Civil Service reform, his work on the surplus budget and the tariff, immigration issues, and Civil Rights in the South.Leadership Issues, including (a) What are your expectations? (b) How much does a leader’s health matter? (c) Arthur adopted a code for his political behavior but was subjected to three restraints: he remained to everyone a man of his word; he kept scrupulously free from corrupt graft; he maintained a personal dignity, affable and genial though he might be.
In today’s edition of Daily Compliance News:
- Kraken CEO, who attacked his employees, steps down. (NYT)
- Citigroup offers a work-life balance at half pay. (FT)
- Canadian company faces corruption charges under CFPOA. (RCMP Press Release)
- Disgraced Suns owner to sell the team. (Bloomberg)
Today, we continue our exploration of the Monaco Memo by considering the sections relating to the evaluation of cooperation during the pendency of the investigation and the evaluation of a company’s compliance program at the conclusion of the resolution. These portions of the Monaco Memo should be studied intently by every compliance professional as they lay out what the Department of Justice (DOJ) will require to grant discounts under the FCPA Corporate Enforcement Policy.
Evaluation of Cooperation
Cooperation with the DOJ during the pendency of an investigation has always been a critical factor of the overall costs of a Foreign Corrupt Practices Act (FCPA) resolution since this factor can be added as a discount under the US Sentencing Guidelines and the FCPA Corporate Enforcement Policy. Essentially a company can double dip in discounts with superior cooperation. Indeed, we have seen companies have the fines and penalties increase by tens of millions when they failed to cooperate.
The Monaco Memo acknowledges what a corporation can obtain by stating, “Cooperation can be a mitigating factor, by which a corporation – just like any other subject of a criminal investigation – can gain credit in a case that is appropriate for indictment and prosecution.” Further, “Credit for cooperation takes many forms and is calculated differently based on the degree to which a corporation cooperates with the government’s investigation and the commitment that the corporation demonstrates in doing so. The level of a corporation’s cooperation can affect the form of the resolution, the applicable fine range, and the undertakings involved in the resolution.”
Principal Associate Deputy Attorney General (DAG) Marshall Miller, recently said in a speech, “I trust one thing came through loud and clear: the Department is placing a new and enhanced premium on voluntary self-disclosure.” This is where the timeliness issue becomes so critical. Miller went on to state, “The DAG also provided important guidance on corporate cooperation. The key point I want to highlight relates to timeliness. In building cases against culpable individuals, we have heard one consistent message from our line attorneys: delay is the prosecutor’s enemy — it can lead to a lapse of statutes of limitation, dissipation of evidence, and fading of memories. The Department will expect cooperating companies to produce hot documents or evidence in real time. And your clients can expect that their cooperation will be evaluated with timeliness as a principal factor. Undue or intentional delay in production of documents relating to individual culpability will result in reduction or denial of cooperation credit. Where misconduct has occurred, everyone involved — from prosecutors to outside counsel to corporate leadership — should be “on the clock,” operating with a true sense of urgency.”
Miller fleshed out the Monaco Memo regarding this DOJ expectation when he intoned that the DOJ expects “cooperating companies to produce hot documents or evidence in real time.” Moreover, “The key point I want to highlight relates to timeliness.” This could mean literally when you find a smoking, still hot or even cold gun you had better pick up the phone and call the DOJ. Finally, when it comes to cooperation credit the DOJ will evaluate companies “timeliness as a principal factor.” It cannot be stated any plainer or more simply than that.
Evaluation of Corporate Compliance Programs
Equally important for compliance professionals was the section on evaluating compliance program. The DOJ has presented significant information to the compliance community with the release of the 2019 Evaluation of Corporate Compliance Programs and its 2020 Update. The Monaco Memo recognizes these documents as key components for the DOJ to review compliance programs of companies under investigation. Moreover, although there is no compliance defense to prosecution of illegal conduct, such compliance programs have “a direct and significant impact on the terms of a corporation’s potential resolution with the Department.”
To that end, the Monaco Memo directs prosecutors to “evaluate a corporation’s compliance program as a factor in determining the appropriate terms for a corporate resolution, including whether an independent compliance monitor is warranted. Prosecutors should assess the adequacy and effectiveness of the corporation’s compliance program at two points in time: (1) the time of the offense; and (2) the time of a charging decision. The same criteria should be used in each instance.”
However, the Monaco Memo focused attention on an area given little weight previously in determining the effectiveness of an effective compliance program, that being clawbacks. While compensation, particularly in the form of bonus or other compensation based on positive compliance actions, has long been a part of a best practices compliance program (the carrot) we have not previously seen its equivalent disincentive (the stick).
The Monaco Memo stated, “Corporations can best deter misconduct if they make clear that all individuals who engage in or contribute to criminal misconduct will be held personally accountable. In assessing a compliance program, prosecutors should consider whether the corporation’s compensation agreements, arrangements, and packages (the “compensation systems”) incorporate elements such as compensation clawback provisions – that enable penalties to be levied against current or former employees, executives, or directors whose direct or supervisory actions or omissions contributed to criminal conduct. Since misconduct is often discovered after it has occurred, prosecutors should examine whether compensation systems are crafted in a way that allows for retroactive discipline, including through the use of clawback measures, partial escrowing of compensation, or equivalent arrangements.” This is a change.
Miller expanded on this when he said the DOJ would start with two questions:
- Has the company clawed back incentives paid out to employees and supervisors who engaged in or did not stop wrongdoing?
- Is the company targeting bonuses to employees and supervisors who set the right tone, make compliance a priority, and build an ethical culture?
Miller went on to add, “What we expect now, in 2022, is that companies will have robust and regularly deployed clawback programs. All too often we see companies scramble to dust off and implement dormant policies once they are in the crosshairs of an investigation. Companies should take note: compensation clawback policies matter, and those policies should be deployed regularly. A paper policy not acted upon will not move the needle — it is really no better than having no policy at all.”
My suggestion is that you develop a clawback policy and write it into the contracts of your senior management going forward.
I hope you will join me tomorrow where I look at guidance around monitors and monitorships.