U.S. Department of Justice Issues New Guidance on the Use and Selection of Corporate Monitors in Criminal Cases

by King & Spalding

Just three months into the job, Brian Benczkowski, the head of the U.S. Department of Justice’s criminal division, has issued a memorandum entitled “Selection of Monitors in Criminal Division Matters,” providing new guidance on the usage and selection of independent corporate monitors.1

At first blush, the Benczkowski Memo seems similar to guidance previously issued by DOJ in 2009 – guidance that the Benczkowski Memo supersedes. But a careful reading of the new memorandum and an accompanying press release2 suggests an encouraging change in tone and substance that reflects a more business-minded approach. 

Corporate monitorships have long been a favored settlement tool for federal prosecutors and the Securities and Exchange Commission, especially in cases involving widespread misconduct that reaches the C-suite.  Monitors can serve an important purpose, reducing the risk of recurring misconduct and improving a company’s compliance program (and ultimately its business). But forcing an independent monitor on a company can sometimes be unnecessarily punitive, especially when new management has proactively implemented compliance improvements and undertaken concrete efforts to remediate the historical misconduct.  Given the burden on compliance-minded businesses seeking to recover from lengthy criminal investigations, Benczkowski’s memorandum is welcome guidance reflecting a thoughtful approach to assessing when monitorships are necessary to serve their intended purpose.

Prior DOJ Guidance on Corporate Monitors

Following well-publicized controversy in the mid-2000s regarding the selection and use of corporate monitors, DOJ issued important guidance in 2008, in an effort to standardize and centralize control over the monitor process.  Issued by then-Deputy Attorney General Craig Morford, the Morford Memo explained that “[a] monitor should only be used where appropriate given the facts and circumstances of a particular matter,” and set forth two considerations for prosecutors – “(1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the costs of a monitor and its impact on the operations of a corporation.”3 Where a monitorship is appropriate, the Morford Memo provides nine principles for drafting monitor-related provisions in settlement agreements, particularly as to the selection process and the duties and terms of monitors, including that compliance monitors be “independent” and selected “based on the merits.” 

One year after the Morford Memo was issued, the DOJ criminal division issued supplemental guidance in June 2009, which detailed new procedures for the selection of independent monitors, but did not add much in the way of substance.  This 2009 supplemental guidance has now been superseded entirely by the new Benczkowski Memo.

Finally, in 2010, Deputy Attorney General Gary Grindler issued a memorandum – which has not been superseded – that added a tenth principle to the Morford Memo’s nine: “an agreement should explain what role the Department could play in resolving any disputes between the monitor and the corporation, given the facts and circumstances of the case.”4 The Grindler Memo thus suggested a mechanism by which a company could push back on a monitor’s recommendations as “unduly burdensome, impractical, unduly expensive, or otherwise inadvisable.”

The Benczkowski Memo

While the now-defunct 2009 guidance focused primarily on the procedures for selecting a monitor, the Benczkowski Memo begins with a discussion of the principles for determining whether a monitor will be necessary in the first place.  The Memo emphasizes that “the imposition of a monitor will not be necessary in many corporate criminal resolutions,” and should occur “only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens.”

DOJ attorneys must now consider a number of factors in determining whether a monitor is appropriate.  These factors include whether: (i) “the misconduct at issue was pervasive across the business organization,” (ii) “the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems,” (iii) “remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future,” and (iv) “changes in corporate culture and/or leadership are adequate to safeguard against a recurrence of misconduct.”  The Benczkowski Memo also instructs criminal division attorneys to consider “the particular region(s) and industry in which the company operates and the nature of the company’s clientele.”

In addition to considering factors that may weigh in favor of a monitor, criminal division attorneys are cautioned to “consider not only the projected monetary costs to the business organization, but also whether the proposed scope of the monitor’s role is appropriately tailored to avoid unnecessary burdens on the business’s operations.”  Benczkowski echoed these principles in a speech coinciding with the Memo’s release, instructing criminal division attorneys to consider a number of factors in determining whether to impose a monitor, including the type of misconduct, improvements to compliance programs and other remedial measures, and whether the misconduct took place under different corporate leadership. 

If DOJ determines that a monitor is necessary in a given case, the question remains how to choose one.  In that regard, the Benczkowski Memo largely reiterates – with a few elaborations – the 2009 procedural mechanics of choosing the monitor from amongst three candidates proposed by the company.  The selection process then generally proceeds as follows: (i) the company to be monitored can propose a pool of three qualified potential monitors, (ii) the criminal division attorneys and their supervisors interview the candidates and submit a recommendation to a standing committee, (iii) the standing committee reviews the recommendation and votes on whether to accept it, and (iv) the recommendation is submitted to the Office of the Deputy Attorney General for final approval.  The detailed mechanics are beyond the scope of this Alert, but suffice to say that DOJ continues to take careful precautions to ensure that the monitor will be a “highly qualified person or entity, free of any actual or potential conflict of interest, or appearance of a potential conflict of interest, and suitable for the assignment at hand.”

Key Takeaways

The Benczkowski Memo is not a watershed change in policy or procedure, but it reflects an important emphasis on a thoughtful, principled, and somewhat more business-minded approach to corporate monitors. 

A number of points are worth noting:

  • The Benczkowski Memo applies to the negotiation of all corporate criminal resolutions, including Deferred Prosecution Agreements, Non-Prosecution Agreements, and plea agreements. Prior policies did not explicitly apply to plea agreements.
  • DOJ attorneys have occasionally asked companies to suggest which of the three proposed monitor candidates was the preferred candidate, although that was not part of the written guidance. The practice is now formalized.  Under the Benczkowski Memo, the company is directed to “identif[y] the monitor candidate that is the Company’s first choice to serve as the monitor.”  Empowering companies to express their preference is a subtle, but important step.
  • The Morford Memo and subsequent guidance spoke largely to when a monitor will be necessary, and how to select one. Very little was said about when a monitor would not be necessary, and now the Benczkowski Memo elaborates on that topic.  Where the Morford Memo suggested only that a monitor “may not be necessary” when “a company has ceased operations” in some respect, the Benczkowski Memo states that “where a corporation’s compliance program and controls are demonstrated to be effective and appropriately resourced at the time of resolution, a monitor will likely not be necessary” (emphasis added).
  • The distinction is important, and reflects a growing understanding by DOJ that a company under investigation may have been proactively remediating and improving compliance all along the way, at great expense and effort. So as a practical matter, the settling company may bear very little resemblance to the offending company, at least in terms of compliance, controls, and culture.  That reality suggests that in many cases – even those in which the conduct was severe and widespread – a monitor would be unnecessary and unduly punitive. 
  • Companies under scrutiny by DOJ are therefore well advised to proactively consider and undertake remedial measures that could help avoid a costly and intrusive monitorship, including: demonstrable efforts to change corporate culture, potentially including changes in leadership; addressing bad behavior through, where appropriate, termination of problematic personnel, business relationships and practices, and perhaps even ceasing certain business activities or operations; developing and implementing robust internal controls and compliance program improvements; and monitoring and testing new policies and procedures to ensure – and demonstrate – their effectiveness prior to settlement.
  • There was very little mention of scope in prior DOJ guidance, which is now rectified in the Benczkowski Memo. The Memo emphasizes at least twice that the “scope of any monitorship should be appropriately tailored to address the specific issues and concerns that created the need for the monitor.”  In practice, DOJ has often attempted to ensure that the monitor’s scope is clearly defined and adhered to, but by placing special emphasis on the duty of federal prosecutors to ensure that monitors operate within the scope of their mandate, the Benczkowski Memo will be an important tool for compliance-minded companies seeking to avoid a “monitor gone wild.”

Companies approaching settlement negotiations with federal criminal authorities face enormous pressure, and the prospect of enduring a monitor after inking a resolution with the government is an unpleasant one.  But the tone and the substance of the Benczkowski Memo should give compliance-minded companies some comfort that DOJ is increasingly aware of the burdens monitors present, and that their usage should be the exception rather than the rule.  Perhaps more importantly, the Memo is a useful reminder to companies of the importance of proactive consideration and implementation of compliance improvements and remediation, which are easy to sideline in the middle of an intense factual investigation.  Careful attention to those issues, however, could ultimately help lead to a resolution without the burdens of a corporate monitor.

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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