On October 5, 2023, Deputy Attorney General, Lisa Monaco, announced a new safe harbor policy for voluntary self-disclosures made in the mergers and acquisitions context. The safe harbor policy will apply Department-wide and so will apply to antitrust, corruption, fraud, money laundering, sanctions evasion, or any other type of potentially criminal conduct
What is the safe harbor?
The new safe harbor provides a presumption of declination for acquiring companies that promptly and voluntarily disclose criminal misconduct within the deadlines, and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement.
To qualify for the safe harbor, the acquiring company must:
- disclose misconduct at the acquired company within six months from the date of closing, whether the conduct was discovered before or after closing; and
- fully remediate the misconduct within one year of closing.
For more complex transactions, the Department could extend both of these deadlines.
In addition, the existence of aggravating factors at the target company, will not prevent the acquiror from receiving a declination. Aggravating factors include the extent to which senior management was involved in the conduct, the pervasiveness and duration of the misconduct, significant profit or benefit to the company, and whether the company is a criminal recidivist.
Lastly, the acquiror will not be viewed as a recidivist (and subject to a more stringent outcome) in any future criminal matter. The Department of Justice (DOJ) has focused lately on recidivists and disallowing companies with historic criminal conduct, even if unrelated, from some of the benefits of cooperation and remediation.
The acquired entity may also qualify for the benefits of voluntary disclosure, including a potential declination, unless there are aggravating factors. Assessing whether the conduct is aggravated or not is often a subjective determination, so companies would have to consider carefully the known conduct and potential ramifications of disclosure.
What does the safe harbor mean for deal teams and compliance departments?
Companies engage in due diligence of potential targets for broad types of risks, including financial and legal, to assess the value of the target. But legal risk is also diligenced because the buyer is subject to successor liability and buyers therefore attempt to identify whether they’re taking on any unnecessary or avoidable risk. The Department is sending a strong message that due diligence and timely post-acquisition integration is essential and will be rewarded. Many FCPA cases, for example, involve liability incurred by the buyer for conduct that occurred prior to closing date and often that conduct continued in a less transparent manner.
The DOJ is clearly stating that a “check the box” approach to due diligence is inadequate and attempting to provide transparent benefits for voluntary self-disclosure. As DAG Monaco states: “Invest in compliance now or your company may pay the price – a significant price – later.”
In light of the new safe harbor, buyers conducting diligence on a target should consider:
- whether the depth and breadth of the diligence is adequate to uncover any potential criminal conduct over which the DOJ would have jurisdiction;
- whether reliance on representations from the seller fully enables the buyer to identify and have the opportunity to disclose misconduct; and
- whether the target has been operating under a robust compliance program in alignment with the DOJ’s Evaluation of Corporate Compliance Programs.
Why now?
This is part of a broader push to encourage companies to voluntarily self-disclose potential misconduct. By enhancing the incentives to disclose, the Department hopes to learn more about conduct that occurs, which, among other things, enables the Department to bring cases against individuals. It is also part of a broader DOJ effort to “empower” compliance programs to obtain necessary resources and independence. Whether these initiatives actually empower CCOs is open for debate, but that is the stated intention.
The Biden administration announced in June 2021, that fighting corruption is a “core national security interest” and we are now seeing more of the output of that broad statement. In her recent speech, DAG Monaco referred to “the rapid expansion of national security-related corporate crime” as “the biggest shift in corporate criminal enforcement that I’ve seen during my time in government.” Encouraging companies to come forward with any type of potential misconduct will, the DOJ hopes, enable them to have better awareness of criminal conduct around the world and therefore, as DAG Monaco connected the dots, protect national security.
