A perennial debate exists in the white-collar space: do the benefits of self-disclosure outweigh the risks associated with providing the government with a road map to the company’s purported violation? Consistently, the Department of Justice, among other government agencies, has answered that question with a resounding yes. Yet, hesitation still exists among the defense bar to embrace the government’s position because the data just did not support the government’s position. Recognizing this trend, on July 26, 2023, the Department of Commerce, Department of the Treasury, and Department of Justice issued the Tri-Seal Compliance Note entitled “Voluntary Self-Disclosure Of Potential Violations” (the “Compliance Note”). The Compliance Note details the qualifications for voluntary self-disclosure and its purported benefits.
What You Need to Know:
- The Government strongly encourages voluntary self-disclosure, but the benefits may still be lacking.
- A significant internal investigation and fulsome disclosure is needed, which still creates issues for minor violations.
- Larger cases could both benefit and receive leniency in the right situations.
A. What Is Voluntary Self-Disclosure Under the Compliance Note?
The Compliance Note orients its guidance by stating in the very beginning that "[s]elf-disclosing potential violations can provide significant mitigation of civil or criminal liability, the extent of which depends on the agency, but may extend so far as a non-prosecution agreement or a reduction of 50 percent in the base penalty amount for civil or criminal penalties." The Compliance Note defines "full cooperation" as "…timely preservation and collection of relevant documents and information, including concurrent authentication of records under Federal Rule of Evidence 902 and/or 803; deconfliction of witness interviews and other investigative steps that a company intends to take as part of its own internal investigation; and timely identification of opportunities for further investigation by [the Department of Justice's National Security Division ("NSD")]."
B. What Are the Government Agencies Looking For in Voluntary Self-Disclosure?
Importantly, the "NSD will consider whether a company has implemented an effective and sufficiently resourced compliance and ethics program. NSD also now examines whether a disclosing company has imposed appropriate disciplinary measures, including compensation clawbacks, for employees who directly participated in or had oversight and/or supervisory authority over the area where the criminal conduct occurred." Truthfulness and completeness are standard requirements in a voluntary disclosure, as 18 U.S.C. § 1001 actually increases enforcement risk if a disclosure is materially false or misleading. Timeliness and true voluntariness also continue to be relevant, as disclosures after or in the imminent face of a legal requirement to disclose, another regulator's inquiry, or a third party blocking a transaction under OFAC guidelines are not considered voluntary.
C. What Are the Benefits of Voluntary Self-Disclosure?
The Compliance Note advises companies that "[m]oving forward, where a company voluntarily self-discloses potentially criminal violations, fully cooperates, and timely and appropriately remediates the violations, NSD generally will not seek a guilty plea, and there will be a presumption that the company will receive a non-prosecution agreement and will not pay a fine." Notably, technical and minor violations are expressly expected to result in a no-action (or warning) letter from the Department of Commerce within 60 days of final submission (which, in turn, would greatly reduce the possibility of any DOJ enforcement).
Specifically, as to OFAC, the Compliance Note remarks that "…OFAC considers [voluntary self-disclosure ("VSD")] VSDs to be a mitigating factor when determining appropriate enforcement action to take in response to a particular case. Additionally, in cases where a civil monetary penalty is warranted, a qualifying VSD can result in a 50 percent reduction in the base amount of a proposed civil penalty." The Compliance Note further notes that "…OFAC considers the totality of the circumstances surrounding the apparent violation, including, among other factors, the existence, nature, and adequacy of the subject's compliance program at the time of the apparent violation and the corrective actions taken in response to an apparent violation." Notably, all agencies explain (or reference prior guidance explaining) that a disclosure of one's own conduct or the conduct of another entity (whether the discloser is implicated or not in that conduct) creates goodwill. For instance, the Department of Commerce considers it to be a mitigating factor in a later unrelated enforcement action against a disclosing entity if that disclosing entity had previously given information leading to enforcement against another entity. Indeed, FinCEN even has a monetary whistleblower program to incentivize such disclosures that do not implicate or only tangentially implicate the discloser.
D. So What Drawbacks Remain?
Experienced practitioners continue to speak with clients that fear the costs of internal investigations or forensic analyses needed to prepare a fulsome voluntary disclosure often exceed the costs an enforcement action would bring. This concern is heightened in a minor or technical violation scenario where the government may be inclined to walk away without further action regardless of a disclosure—if the government ever even found out. The Compliance Note attempts to address this concept by stating that "companies cannot sidestep…by self-blinding and choosing not to do an internal investigation" because a company's compliance program (including self-detection and correction of issues) is already a factor under settlement guidelines. Yet, specific monetary analysis comparing the amount of improper gain (or total transactional/technology value) to the internal costs of time and money will likely persist.
Similarly, companies continue to raise concerns regarding the business implications of gathering information from employees, customers, counterparties, or other entities beyond an already-intensive due diligence progress when a compliance concern or investigation is underway. Many compliance efforts indeed made in good faith turn out to demonstrate that no violation occurred, yet damage is done to employee and commercial relationships in the investigative process.
E. Key Takeaways:
The Compliance Note works hand and glove with the Justice Manual's "Principles Of Federal Prosecution of Business Organizations," and specifically, § 9-28.700, "the Value of Cooperation." The Justice Manual notes that "[t]he Department encourages and rewards cooperation. Credit for cooperation takes many forms and is calculated differently based on the degree to which a corporation cooperates with the government's investigation and the commitment that the corporation demonstrates in doing so." The Justice Manual also notes that "[c]ompanies that identify significant facts but delay their disclosure will place in jeopardy their eligibility for cooperation credit. Corporations seeking cooperation credit ultimately bear the burden of ensuring that documents and information are provided in a timely manner to prosecutors."
The Compliance Note and Justice Manual are clear: the government values cooperation and will reward companies for their cooperation.
Another important consideration for companies is the language used in the press release that the government agency puts out following the conclusion of a matter. Increasingly, the government lauds companies that cooperate with the government with a favorable drafting of the press release. This consideration is important because a press release provides the government with an opportunity to soften the often-harsh allegations contained in a Complaint needed to address each legal element of an offense. Complaints are argumentative documents written by one party, and a press release provides the government with the ability to add some additional context to the Complaint's allegations. At times, even the ultimate language of a Complaint (and certainly the language of non-prosecution or deferred-prosecution agreements) are negotiable to minimize the inflammatory details while still providing a basis for the action.