Understanding the New DOJ Guidance: Part 1 – Tone at the Top

by Orrick - Securities Litigation and Regulatory Enforcement Group
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In February, the Department of Justice’s Fraud Section offered a new perspective on what the government expects in a compliance program in the form of a series of questions that companies should be prepared to answer about their program. Although some reported these questions provided limited, if any, new information, we see it differently. The guidance offers companies an unusually detailed roadmap for building or assessing their compliance program when it is explored in conjunction with past guidance.

This is the first in a series of posts where we will explore key topics for companies of all sizes from the questions posed within the recent guidance.

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A commitment from high-level management is typically the first compliance component discussed in government guidance and Deferred Prosecution Agreements. Commonly referred to as “Tone at the Top,” this critical concept has previously been described in vague, generic ways.  See, for example, this excerpt from Attachment C of DOJ’s recent DPA with Embraer S.A., which is identical to language in many other agreements:

“The Company will ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”

The Fraud Section’s new guidance provides much greater insight into the DOJ’s precise expectations on this topic. Below are the relevant excerpts from the new guidance, which one high-level DOJ official recently suggested  may be used more broadly by DOJ’s Criminal Division in all types of enforcement actions.

  • Conduct at the Top – How have senior leaders, through their words and actions, encouraged or discouraged the type of misconduct in question? What concrete actions have they taken to demonstrate leadership in the company’s compliance and remediation efforts? How does the company monitor its senior leadership’s behavior? How has senior leadership modeled proper behavior to subordinates?
  • Shared Commitment – What specific actions have senior leaders and other stakeholders (e.g., business and operational managers, Finance, Procurement, Legal, Human Resources) taken to demonstrate their commitment to compliance, including their remediation efforts? How is information shared among different components of the company?
  • Oversight – What compliance expertise has been available on the board of directors? Have the board of directors and/or external auditors held executive or private sessions with the compliance and control functions? What types of information have the board of directors and senior management examined in their exercise of oversight in the area in which the misconduct occurred?

These questions make clear that the government expects more from management than a mere verbal commitment to compliance – the commitment of senior leaders and the board of directors will be evaluated based not only on specific, concrete actions and well-demonstrated expertise, but the impact of those actions throughout the organization. In other words, commitment across a variety of functions within a company is crucial.

Simply stated, Tone at the Top is the fuel that drives the other, more tangible, elements of a compliance program forward. It is critical for ensuring there is a living, breathing program as opposed to one that only exists on paper.  The DOJ and SEC FCPA Resource Guide notes that the government has “often encountered companies with compliance programs that are strong on paper but that nevertheless have significant FCPA violations because management has failed to effectively implement the program even in the face of obvious signs of corruption.”

The culture of any organization is highly influenced by the attitude and actions of leadership. So a “culture of compliance” will naturally start at the top.  But as the Resource Guide and DOJ Fraud Section’s new guidance shows, the government’s expectation is that senior managers will “inspire” middle managers, who will in turn encourage lower-level employees to comply with and maintain standards set in the more formal elements of a compliance program.  Thus, there must be an appropriate Tone at the Top of each sub-unit throughout the organization.

This trickle-down approach makes sense when one considers the way employees interact with and respond to various levels of management within an organization. An entry level accountant reviewing invoices will be much more attuned to the actions and words of their direct supervisor than the CEO.  A commitment from the top management and Board of Directors is critical; but the commitment from line managers is what will drive the program on a daily basis.

The bottom line is that an effective compliance program is only as strong as those carrying it out – that is, the company’s employees – and not just the compliance personnel.   Creating a “culture of compliance” that permeates to all levels of a company must start at the Top and trickle down to all managers.

Companies should avoid a generic, or, to borrow the words of Supreme Court Justice Potter Stewart, an “I know it when I see it” approach. Using the recent guidance and looking at whether there are concrete actions demonstrating commitment in a tangible way is an excellent place to start.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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