The Justice Department Steps Up Its Compliance Message

The U.S. Justice Department unveiled new policies about how it will prosecute cases of corporate misconduct, offering new incentives for companies whose misconduct includes “aggravating circumstances” to step forward and cooperate with regulators anyway.

The policies, announced in January, are the latest step in the department’s quest to encourage companies to develop strong cultures of compliance. Corporate ethics and compliance leaders, as well as senior executives and the board, have much to consider here.

Let’s first review what these new policies are. Until now, a corporation with an FCPA violation (or some other criminal misconduct) could secure a “declination to prosecute” from the Justice Department if that company met the following criteria:

  • Voluntary self-disclosure of the misconduct to law enforcement
  • Full cooperation in any ensuing investigation
  • Remediation of the corporate compliance program, to fix whatever weaknesses allowed the misconduct to happen in the first place

The catch: companies would not be eligible for a declination if their violation included “aggravating circumstances.” Those circumstances include (but are not limited to) senior executives’ involvement in the misconduct, particularly egregious or pervasive misconduct, or recidivist behavior.

The new policies now give companies in that aggravated predicament the chance to secure a declination anyway. How? By meeting a modified version of the three points mentioned above:

  • Voluntary self-disclosure, made as soon as the company becomes aware of the misconduct allegation
  • At the time of both the misconduct and the disclosure, the company has an effective compliance program and system of internal accounting controls that allow the identification of the misconduct and lead to the self-disclosure
  • “Extraordinary” cooperation with the ensuing investigation and “extraordinary” remediation as well

The Justice Department’s goal here is clear. A company whose misconduct includes aggravating circumstances has a serious, expensive problem on its hands. Some voices in that company might argue – sometimes quite persuasively –the wiser course of action would be to keep quiet, fix the issue, and hope the Justice Department never hears about it. These new policies are meant to tilt that calculus back in favor of voluntary self-disclosure.

The Justice Department is offering an olive branch to those companies with aggravating circumstances. Now compliance teams, CEOs, and corporate boards need to understand what’s involved when they try to take it.

It’s about commitment, culture and controls

Consider what must already exist at your company to meet the criteria of the new policies. You must already have executive-level commitment to a strong compliance program, and to follow through on that commitment regardless of how the case might be resolved.

This is stated explicitly in the new policies, in the second criteria mentioned above: “At the time of both the misconduct and the disclosure, the company has an effective compliance program.” You can’t have an effective compliance program if executive management isn’t interested in supporting it.

But executive-level commitment is also implicit in the other two criteria – immediate self-disclosure and extraordinary cooperation. A company cannot achieve either of those things if senior management doesn’t back up its words with real deeds.

At a more practical level, the company must also have strong internal controls and a set of policies that clearly explain how employees should behave when misconduct is discovered. For example, a company should have written policies in favor of voluntary self-disclosure, as well as policies and procedures for litigation holds and e-discovery to cooperate with investigations. As to effective internal controls – again, that’s explicitly stated in the second criteria.

The business case is compelling

Compliance officers will need to explain these new policies and their implications to senior management and the board. Thankfully, the business case for a strong commitment to compliance will be compelling.

First, boards should consider the adverse consequences of not disclosing misconduct to the Justice Department. That is likely to result in significantly more cost: longer investigations, higher monetary penalties, and the possibility of an expensive independent compliance monitor peering over the company’s shoulder for years.

Second, if a company can meet all those compliance expectations for violations with aggravating circumstances, by definition the company will also meet all the expectations for lesser violations that don’t include aggravating circumstances. That one higher standard of commitment to compliance will set a simple baseline to guide decision-making when violations are found.

Third, a strong compliance program brings other benefits, too. Higher rates of internal reporting correspond to better performance across numerous business metrics, such as fewer lawsuits and higher return on assets. Strong internal controls can identify other risks that aren’t legal violations, but still need prompt attention. Additionally, a workforce that perceives a strong ethical tone from senior management has lower employee turnover.

Clearly the Justice Department wants to make self-disclosure, cooperation and strong compliance programs the default standard for corporations. These new policies demonstrate the enticements that the department is willing to offer if corporations accept those terms. Considering the costs of non-compliance, and all the other benefits that a strong compliance program can bring – management teams would be foolish to think a second-class compliance program is still good business – it’s clearly not.

For more information about how NAVEX can help your organization stay compliant with the complexities of the regulatory environment:

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