March 09, 2023
On March 3, 2023, Assistant Attorney General (“AAG”) Kenneth Polite, Jr. announced new guidance issued by the Department of Justice (“DOJ”) Criminal Division intended to encourage companies to implement compensation policies to incentivize compliance-driven behavior and punish wrongdoers. First, AAG Polite introduced a new “Pilot Program” that sets forth the framework DOJ will use in assessing compliance policies governing clawbacks, and the credit that companies can receive for implementing and carrying out those policies. Second, AAG Polite announced an update to the DOJ Criminal Division’s Evaluation of Corporate Compliance Programs (“ECCP”) that provides additional guidance on how Criminal Division prosecutors will evaluate these compensation structures. Through these developments, the Criminal Division is reinforcing individual accountability as a top priority, even absent criminal charges. As Deputy Attorney General (“DAG”) Lisa Monaco stated in describing the new guidance, “Our goal is simple: to shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in misconduct, onto those directly responsible.”
In addition to the new policies governing compensation structures, DAG Monaco and AAG Polite also announced other changes, including to the Criminal Division’s monitorship policies and increased resources for enforcement in national security and financial services cases. These announcements are the latest of a series of expansive changes that the DOJ Criminal Division has made targeting white-collar crime.
Under the new three-year Pilot Program Regarding Compensation Incentives and Clawbacks (the “Pilot Program”), the DOJ has implemented two compliance requirements tied to a company’s compensation systems that will impact all corporate resolutions handled by the Criminal Division.1
First, going forward, every corporate resolution entered into by the Criminal Division will include a requirement that the company “implement criteria related to compliance in its compensation and bonus system.” Under the Pilot Program, companies will also be required to report to the Division annually about implementation of these criteria during the term of these resolutions.
Second, the Pilot Program encourages companies to claw back compensation from implicated individuals by providing that, if the company has fully cooperated and timely and appropriately remediated, amounts that have been clawed back from culpable individuals can be credited against the company’s overall fine. The Pilot Program encourages companies to recoup compensation from those who were directly engaged in, as well as those who had supervisory authority and were aware of, or willfully blind to, the misconduct.
The Pilot Program also recognizes that the process to claw back compensation can be lengthy and thus provides a process for awarding credit:
Requiring companies to leverage financial incentives is another way for the DOJ to ensure wrongdoers are held accountable without having to pursue charges against every culpable individual.
On March 3, 2023, the DOJ Criminal Division released an updated ECCP that provides additional guidance to its prosecutors on how to evaluate the design, implementation, and effective operation of corporate compliance programs with respect to (i) policies governing compensation systems and discipline and (ii) ephemeral messaging and use of personal devices (analyzed separately in another client alert).
Regarding compensation systems and consequence management, the ECCP recognizes that “[c]ompensation structures that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance. At the same time, providing positive incentives . . . can drive compliance.” Thus, under the new ECCP, prosecutors are now formally encouraged to consider the design and implementation of a company’s compensation and consequence management systems when evaluating compliance programs. Specifically, the ECCP instructs prosecutors to take into account additional considerations in several areas by making the following inquiries:2
The new ECCP guidance reflects DOJ’s continued focus on individual accountability by directing prosecutors to evaluate how companies hold individuals responsible for misconduct through clawbacks and other financial incentives or consequences.
The DOJ also released revised guidance on the selection of monitors in Criminal Division matters. These updates include: (1) prosecutors should not apply presumptions for or against monitors and should consider the ten non-exhaustive factors cited in DAG Monaco’s September 2022 memorandum when assessing the need for, and potential benefits of, a monitor; (2) many of the requirements for monitors also apply to monitor teams; (3) monitor selections will be made in keeping with the DOJ’s commitment to diversity, equity, and inclusion; and (4) the cooling off period for monitors and their teams is now at least three years, rather than two years, from the date of the termination of the monitorship.
DAG Monaco announced two important resource commitments to combat corporate crime. First, DOJ intends to increase resources to the National Security Division through the hiring of 25 new prosecutors and the creation of a new Chief Counsel of Corporate Enforcement. Second, DOJ will make a substantial investment in the Bank Integrity Unit in the Criminal Division’s Money Laundering and Asset Recovery Section.
As described in our recent alerts, DOJ continues to announce new policies and guidance at a rapid pace. The new changes governing compensation clawbacks and the use of messaging platforms and personal devices are the most recent steps in that effort. As AAG Polite stated in his remarks, however, “these are also only two facets of corporate compliance programs that [DOJ will] be assessing.” Thus, companies should remember that the new policies and guidance are just one element in the overall framework for building and implementing effective compliance programs.
Still, the new Pilot Program and ECCP guidance provide welcomed enhanced transparency in how DOJ assesses the effectiveness of compliance programs, including with respect to compensation structures and clawbacks. Companies should consider updating their compensation frameworks and compliance policies to incorporate incentives that deter misconduct and encourage compliance-driven behavior, and to incorporate compliance considerations in compensation assessments and promotion decisions. In doing this, companies should consider the following: