DOJ Introduces Guidance Over Inability-to-Pay Claims

Shearman & Sterling LLP

Shearman & Sterling LLP

On October 8, 2019, the Department of Justice (“DOJ”) issued a memorandum (“Memorandum”) providing guidance on how the DOJ’s prosecutors will handle inability-to-pay claims from companies, intending to provide companies—and prosecutors—with a better understanding of how to evaluate and address these claims. Memorandum to All Criminal Division Personnel from Brian A. Benczkowski regarding Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty (Oct. 8, 2019). Assistant Attorney General Brian A. Benczkowski announced the Memorandum, stating that it does not provide any new methodology, but rather merely “puts a lot more meat on the bones” of how these claims are analyzed. Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the Global Investigations Review Live New York (Oct. 8, 2019).

Inability-to-pay claims arise when, while seeking to resolve a criminal case, a company may acknowledge that a proposed penalty is appropriate, but simultaneously claims that it cannot pay such a penalty. Prosecutors are only able to consider such a claim after there has been an agreement both on the form of the resolution—such as a deferred prosecution agreement or corporate guilty plea—as well as the amount of the penalty itself. Prior to this Memorandum, prosecutors have been required to apply sentencing provisions from 18 U.S.C. § 3572(a) as well as federal Sentencing Guidelines to consider a corporation’s ability to pay a criminal penalty. However, neither of these sources provides much direction in how to analyze the legitimacy of these claims in the corporate criminal enforcement context.

In accordance with the new guidance, in every case where a company makes an inability-to-pay claim, it will be required to complete an eleven-subject questionnaire, which asks for information regarding the company’s recent cash flow projections; operating budgets; capital budgets and projected annual capital expenditures; changes in capital structure; acquisition, divestiture, or restructuring plans; claims to insurers; encumbered assets and liens on company assets; and payments to the business’s top earning executives. The company is also required to provide, among other things, audited financial statements and tax returns for the previous five years, any current credit and loan agreements, and any recent studies or appraisals of the company’s assets. Mr. Benczkowski said the questionnaire is meant to help “flesh out the company’s full financial picture … with a view towards making a fully informed, rational, and fair decision about a company’s ability to pay.”

The Memorandum notes that in many cases, the responses to the questionnaire will be sufficient to decide on the inability-to-pay claim. However, in particularly complex circumstances, the Memorandum notes multiple relevant factors that prosecutors are to consider, including: the company’s ability to raise capital, underlying circumstances that led to the organization’s current financial condition, whether the fine or penalty will impact the company’s ability to pay restitution, along with some collateral consequences to the company of the fine or penalty. The collateral consequences that the DOJ has stated are relevant include the inability to fund pension obligations, layoffs, and significant disruptions to market competition. On the other hand, the DOJ noted that collateral consequences like adverse impacts on growth, future opportunities, planned product lines, future dividends, and future executive compensation or bonuses are not relevant.

According to the Memorandum, if, after considering these factors, prosecutors determine that an organization truly cannot pay the appropriate fine or penalty, prosecutors should recommend a reduction by the amount necessary to avoid the existential risk to the company and allow the company to make victims whole. Additionally, if the recommended reduction is greater than 25%, the prosecutor is required to obtain approval from the Assistant Attorney General.

This Memorandum is the latest effort by the DOJ to provide transparency to companies regarding its corporate enforcement policies. However, several issues remain uncertain. Notably, this guidance is directed to inability-to-pay claims from corporations, but it is unclear how they may be applied to individuals in similar situations. Additionally, this process may be significantly impacted by the fact that in most cases, according to the Memorandum, prosecutors “will need to consult an accounting expert to examine the financial condition of the business.” Lastly, the requirements of the questionnaire raise potentially substantial disclosure questions. Despite these remaining uncertainties, the Memorandum on the whole provides a much more nuanced picture for companies that find themselves facing difficult financial circumstances as a result of criminal enforcement resolution.

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