An earthquake in the world of Foreign Corrupt Practices Act enforcement occurred in September, and it relates to the Justice Department’s now stated goal of pursuing culpable individuals rather than simply settling with corporations that pay large fines for misconduct. It was announced by Deputy Attorney General Sally Yates in a speech to the New York University School of Law titled, “New Policy on Individual Liability in Matters of Corporate Wrongdoing.” At the same time the Justice Department released a memo titled “Individual Accountability for Corporate Wrongdoing” (the “Yates Memo”) laying out the parameters of the new policy.
Ever since former Attorney General Eric Holder’s remarks about banks being “too big to jail” (in the context of prosecuting individuals whose actions helped lead to the financial crisis of 2007-08) critics have panned the government’s lack of prosecutions of Wall Street. Even a sitting federal judge, U.S. District Court Judge Jed Rakoff, has been unrelenting on the Justice Department. Clearly in response to these criticisms, the Yates Memo and the Yates speech promise that the Justice Department will reprioritize their focus on individual prosecutions.
In her speech, Yates vowed: “Effective immediately, we have revised our policy guidance to require that if a company wants any credit for cooperation, any credit at all, it must identify all individuals involved in the wrongdoing, regardless of their position, status or seniority in the company and provide all relevant facts about their misconduct. It’s all or nothing. No more picking and choosing what gets disclosed. No more partial credit for cooperation that doesn’t include information about individuals.”
This statement ties directly into the first point of the Yates Memo, which has the title, “To be eligible for any cooperation credit, corporations must provide to the department all relevant facts about the individuals involved in corporate misconduct.” [Emphasis on original]
In her remarks, Yates recognized the basic fact that corporate governance makes identifying senior executives who engage in bribery and corruption difficult in FCPA cases. Her words: “In modern corporations, where responsibility is often diffuse, it can be extremely difficult to identify the single person or group of people who possessed the knowledge or criminal intent necessary to establish proof beyond a reasonable doubt. This is particularly true of high-level executives, who are often insulated from the day-to-day activity in which the misconduct occurs.”
Every chief compliance officer and compliance practitioner needs to review his or her company’s investigation protocol and make sure all steps are present to triage incident reports quickly and efficiently as they come in, secure all evidence, and move forward to initiate an internal investigation sooner rather than later.
I think the Yates Memo and Yates’ remarks portend a new era. She wants the Justice Department and Securities and Exchange Commission to investigate individuals immediately at the start of investigations. She stated, “The department yesterday instructed its attorneys that, going forward, they are to focus on individuals from the start of an investigation, regardless of whether the investigation begins civilly or criminally. Moreover, once a case is underway, the inquiry into individual misconduct can and should proceed in tandem with the broader corporate investigation. Delays in the corporate case will no longer suffice as a reason to delay pursuit of the individuals involved.”
The memo outlines an internal Justice Department review of all cases brought, where questions will be asked about why only corporations are being prosecuted and not individuals. It articulates an “extraordinary circumstances” standard as to why individuals should not be prosecuted, and internally prosecutors will have to explain to their superiors why individuals were not prosecuted in cases where only corporate charges are brought.
Even though these remarks were directed at government lawyers, this clearly means that corporations will be required to change the focus of their investigations from attempting to perform any type of root cause analysis, to obtaining evidence against individuals and turning it over to the government as soon as possible. Yates made clear in her speech that under this new policy, the government wants companies to give up senior executives involved in illegal conduct.
Again, from her speech: “We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.” The Yates Memo puts the onus on companies to immediately begin to investigate and identify senior executives who may be involved in nefarious acts. All of this means that high heads in an organization could start to roll.
As Yates said in her speech, this new standard for corporate cooperation credit is “all or nothing. No more picking and choosing which facts to disclose. No partial credit [will be given] for less than full cooperation.” This means that companies must new now identify all individuals involved in any conduct which could violate laws such as the FCPA, and turn over all facts supporting such identification.
Yet this may also pit corporations against their employees and senior executives because companies, which want any cooperation credit, will have to give up all employees and senior executives involved. For starters, this probably means that lawyers asked to perform internal investigations will be immediately pitted against lawyers for all senior executives (particularly in FCPA investigations) because the policy asks companies to choose between their own financial well-being and the freedom of their senior executives.
This could turn not only investigations upside down, but also the corporate calculus on disclosure and settlement. Corporations have often settled cases to protect senior management. Now the Yates Memo precludes this approach. Further, corporate counsel, who typically conduct or head investigations under the cloak of attorney-client privilege and who may selectively reveal the results of the investigation; must now discard that practice and fully disclose all facts to the government.
Moreover, if senior executives, on the advise of their personal counsel (and just wait until senior executives start insisting in contracts that companies pay for their external counsel) decline to cooperate with an internal corporate investigation—will a company then be penalized and not receive full credit for cooperation if it does not have all the facts, because the internal investigation is deemed insufficient or even stymied? Put another way, by requiring more corporate cooperation, does the Justice Department create a more adversarial relationship inside a company?
There is another issue that may not have received consideration previously. Under the Yates Memo, companies will now have an ongoing duty to continue to report any violations they may uncover. It is almost continuous monitoring, and more importantly, continuing self-disclosure obligation going forward. If a company finds new facts, which may or may not rise to a criminal violation, they may have to provide those facts to the government.
Every chief compliance officer and compliance practitioner needs to review his or her company’s investigation protocol and make sure all steps are present to triage incident reports quickly and efficiently as they come in, secure all evidence, and move forward to initiate an internal investigation sooner rather than later. If the Justice Department determines the focus of your investigation was not on individuals immediately, you may well find yourself not receiving any credit for cooperation going forward. All of these changes will make a difficult situation even more challenging.