Experts: DOJ clawback pilot to be ‘work in progress’

The clawback pilot program, announced March 2 by Deputy Attorney General Lisa Monaco, is part of a series of recent policy changes by the DOJ aimed at incentivizing companies to stay on the right side of ethics and the law. The agency also announced revisions to its Evaluation of Corporate Compliance Programs guidance regarding off-channel communications and new criteria for selecting compliance monitors in criminal cases.

The clawback pilot, launched Wednesday, will last three years and consists of two primary parts. First, companies are expected to link employee bonuses to compliance metrics. Second, businesses that get into trouble with the DOJ can earn a fine reduction, in whole or in part, if they seek to claw back compensation from corporate wrongdoers. If a company is successful and claws back the money, any potential fine could be reduced by the entire amount.

If a company exerted a “good faith” effort but failed to claw back the bonus, the DOJ might credit the company by knocking up to 25 percent from the penalty.

The agency’s decision to issue a pilot program rather than a codified policy “suggests it’s going to be a work in progress,” said Ed Imperatore, partner in Morrison Foerster’s investigations and white-collar defense practice group.

John Pease, partner at Morgan Lewis, agreed and said the DOJ wants flexibility. The clawback pilot will likely be applied differently depending on the specific circumstances of the company and the misconduct, said Pease, a former assistant U.S. attorney for the Eastern District of Pennsylvania.

‘Vague terminology’

Flexibility makes for a more challenging policy to implement, said Imperatore, a former assistant U.S. attorney for the Southern District of New York.

“This clawback policy is very general, includes vague terminology, and gives a lot of discretion to the DOJ as to how it will apply to a corporate resolution,” he said.

For example, the pilot mentions businesses rewarding employees who demonstrate their “full commitment” to compliance processes. It’s unclear how the DOJ would measure “full commitment,” Imperatore said.

At the same time, the DOJ said it might require companies to withhold bonuses for employees that fail to meet compliance performance requirements. It’s not entirely clear how employees can demonstrate meeting those requirements, Imperatore said.

Whom the clawbacks apply to is also open to interpretation; the policy mentions those with supervisory authority over the employees involved in misconduct, including supervisors who knew of or were “willfully blind” to those actions, Imperatore noted.

“It’s not clear from the pilot whose burden it is to demonstrate a lack of compliance and how that lack should be resolved,” he said, adding the “good faith” element “creates a lot of uncertainty as to how this program will be applied.”

“The expectation isn’t that the DOJ snaps its fingers and expects you to have a fully functional clawback program. But it is expecting you to start that process.”

John Pease, Partner, Morgan Lewis

The DOJ will scrutinize serious misconduct in addition to criminal behavior, according to agency officials. So, there is the question of when a company should attempt a clawback—only when a federal crime has been committed or also when a policy has been violated, Pease pondered.

“It remains to be seen how this pilot program will be implemented,” Imperatore said. As time goes on, DOJ criminal resolutions with companies will be instructive to businesses, compliance professionals, and counsel, he said.

Practical challenges to implementation

Parts of the clawback pilot are likely to put the interests of a company at odds with those of employees and lead to litigation, Imperatore said.

What happens if the business acts in good faith to claw back the bonus, but the individual lacks the ability to pay? It’s unclear how the company—and the individual—should proceed in that situation, Imperatore said.

The DOJ refers to the “conclusion of the resolution term” as the point at which the company should have either clawed back the bonus or not. But that point could easily drag on for years or be unpredictable.

“One could imagine a dispute between a company and an employee may not be resolved within the term of the resolution,” Imperatore said.

Another possible stumbling block to implementing a clawback policy is that some states require corporations to indemnify senior employees. In those situations, would a company be on the hook for both seeking to claw back a bonus and paying the legal fees of the individual fighting to keep that payment?

Similarly, C-suite executives and high-level managers typically have signed employment agreements with companies, and those agreements might provide indemnification.

The DOJ pilot is “silent” on how companies should implement a clawback policy if it’s at odds with employment agreements, Imperatore said.

Compliance considerations

The best step companies can take to stay on the right side of the DOJ’s pilot program is to have policies in place that demonstrate they are trying to act in good faith, Imperatore said.

Companies must conduct risk assessments to determine how their existing compliance policies dovetail with the agency’s recent policy announcements. They should evaluate how they are compensating employees and what incentives/disincentives for ethical behavior exist, Imperatore said.

If a company doesn’t have a clawback policy now, it should start creating one, Pease said.

“The expectation isn’t that the DOJ snaps its fingers and expects you to have a fully functional clawback program. But it is expecting you to start that process,” he said.

Businesses that are more heavily regulated are expected to have a more defined process for seeking clawbacks, Pease said. And larger companies are expected to employ the resources to have a more comprehensive compliance program and clawback policy in place, he said.

Companies that have already included key performance indicators (KPI) in their contracts with employees will probably have an easier time updating the contracts to meet the objectives of the DOJ’s recent policies, Pease said.

Typical KPIs link measurable metrics, like the number of compliance hotline complaints, to performance bonuses. The KPIs are generally reviewed each year by the company, which “decides how that bonus is going to be earned,” Pease said.

“Adding a performance indicator related to compliance is no different than adjusting the sales threshold or any other KPI,” he said.

The flip side is incentivizing good behavior by increasing bonuses for senior employees who demonstrate commitment to ethical culture, such as regularly messaging employees about the importance of compliance, Pease said.