The Department of Justice recently announced a new policy on voluntary self-disclosure for individuals (the Pilot Program) that is likely to create significant challenges for a board of director’s audit and compliance committees, as well as tension among employees — and especially managers.
The Pilot Program, formally announced by Principal Deputy Assistant Attorney General Nicole Argentieri on April 15, represents the latest initiative in DOJ’s effort to combat corporate fraud. The announcement followed on the heels of comments made by senior DOJ officials in early March about existing and new corporate fraud enforcement programs, including a proposed incentive program to strengthen corporate enforcement though monetary rewards for whistleblowers in exchange for their tips.
Overview
At its essence, the Pilot Program creates incentives for executives and employees to disclose what they know about corporate fraud and their own involvement in it in exchange for a promise not to be individually prosecuted, formalized through a non-prosecution agreement (NPA) with the government. This is significantly different from government whistleblower programs grounded in the promise of monetary reward.
For an individual to qualify for an NPA, the disclosure must meet strict criteria, including the following: (i) the disclosure must involve original information, not something already known to the DOJ; (ii) it must relate to one of six specific legal violations, ranging from money laundering and various types of financial and health care fraud to public corruption; (iii) the individual making the disclosure cannot be the CEO, the CFO, a high-level foreign official, any domestic official, or “the organizer/leader of the scheme;” (iv) the disclosure must be completely voluntary, as well as truthful and complete; (v) the individual must agree to cooperate fully with the government, forfeit any ill-gotten gains, and make financial restitution for the harm caused by the fraud; and (vi) the individual must fully disclose his/her role in the misconduct. All in all, a daunting set of requirements to satisfy.
Of particular importance is that CEOs, CFOs, and “individuals who organized or led the criminal scheme” (among others) are not eligible to participate in the Pilot Program and receive an NPA. This is likely to be one of the more controversial aspects of the program and a particular headache for the company’s board from cultural and “tone at the top” perspectives. Also, there are likely to be questions about how “leader/organizer” is defined for disqualification.
DOJ Rationale
In introducing the Pilot Program, Argentieri, the head of DOJ’s Criminal Division, referenced the emphasis DOJ places on individual accountability, i.e., “using all available tools to identify and prosecute the most culpable individuals for corporate misconduct.” From DOJ’s perspective, individuals who have participated in criminal conduct yet are willing to accept responsibility, cooperate with the government, and provide substantial assistance are often critical sources of information. These cooperators can, quite simply, make the government’s case and often do. They have long been a mainstay in criminal prosecutions for classic organized crime and drug cartel matters. The government clearly expects that this new Pilot Program will lead to similar successes.
Along these lines, Argentieri highlighted DOJ’s use of “longstanding law enforcement tools” to motivate corporate insiders not only to cooperate, but also to come forward and disclose corporate wrongdoing before DOJ itself discovers the wrongdoing on its own. This type of incentive for the first person to report misconduct to the government is sure to place increased pressure on everyone — including companies — to disclose misconduct as soon as they become aware of it.
Specific Governance Implications
Such a unique individual disclosure program is likely to create a variety of compliance and organizational culture challenges for boards.
For example, the promise of receiving an NPA might prove appealing for some employees who are extremely anxious about their own involvement in what they perceive as risky company initiatives. They may be more inclined to pursue DOJ’s Pilot Program rather than reporting their concerns through corporate open-door policies and internal hotlines, thus frustrating the company’s ability to learn about the issue and address the problem on its own. The opportunity to receive a “get out of jail free card” for the individual discloser who will become the government’s cooperator also creates tension between the employee’s natural desire for self-preservation and loyalty to the company.
In addition, the Pilot Program’s exclusion of the CEO and CFO sends a harsh message to senior officers (as DOJ may intend) and may trigger unexpected reactions, e.g., will it become a source of tension among these senior officers or the officers and the board? Will it undermine trust? Will it affect senior officers’ ability to set a “tone at the top” or their oversite of the compliance program?
The release of the Pilot Program, in addition to other DOJ corporate fraud enforcement policy initiatives over the last several years, may cause the board to recommend increased investment in the corporate compliance program. Indeed, this may be what DOJ seeks, but the additional investment could affect the company’s budget priorities in unexpected ways.
The board will also need to be alert to the potential that executives and managers will become more and needlessly risk averse out of concerns that one or more employees might misinterpret corporate activities as fraud and disclose them through the Pilot Program or one of the other initiatives the government has been using to encourage a “come see us before we come see you” atmosphere. To some extent, this is an existing tension t within certain C-Suites as to the circumstances of corporate cooperation.
The Pilot Program could merely be designed to see whether valuable information comes DOJ’s way. These programs are beta tests, subject to change. Nevertheless, it is in the best interest of the board to confront the issue in all its permutations and provide necessary compliance assurances to both the executive team and the broader workforce. Overall effectiveness will be enhanced, and individuals may be less likely to self-disclose, if they view their company’s compliance program as transparent, credible, and responsive.
The board is well advised to view the Pilot Program, together with other, previously announced DOJ corporate fraud policies, in the context of its Caremark responsibilities for oversight of the organization’s compliance program reputation. While the CEO and senior management have obvious interests in supporting a compliance plan’s effectiveness, the unique nature of the Pilot Program creates understandable tensions in how they may address this particular initiative. Close board oversight will help provide a useful check and balance to this tension.
This post comes of us from Michael W. Peregrine and Ashley C. Hoff at the law firm of McDermott, Will & Emery LLP.