The rules of the road for corporate monitors

When dealing with a primary regulator, such as the Securities and Exchange Commission, companies have a pretty good idea what to expect. The process of examinations, comment letters, and no-action relief is time-tested and bears only occasional surprises. Corporate monitors? They are a much different story.

When a regulator, federal prosecutors, or even a judge sees significant malfeasance resulting from a weak or corrupted compliance program one remedy is to find an appropriate expert and drop them into the belly of the beast. The thinking: a critical eye from the outside can keep tabs on a company’s efforts to fix problems and help it to do.

Most companies will never face such a prospect—only about 25 percent of those facing a deferred prosecution or non-prosecution agreement from the Department of Justice will face the requirement—but those who do are likely in unchartered territory. How does the process work? What are the rules, not to mention proper etiquette, for having a monitor in your midst for upwards of three years?

By broad definition, a corporate monitor is an independent, neutral third party—working for nether the government or the company—brought in to assess compliance with the terms of a prosecutorial agreement. Positioned within the company, the monitor is also typically tasked for helping correct any observed lapses in procedures and protocols and help the company avoid a relapse. The term of a monitorship varies, but many are years long and come with a multi-million- dollar price tag.

Complicating matters for companies is that there are no stone-writ rules for how monitors are selected, how they perform their mission, or what the end product of that work is and whether a resulting report is made public.

“We have to start with the really important proposition that for a monitorship to succeed it has to be collaborative.”
Daniel Alonso, Managing Director and General Counsel, Exiger

There have, however, been attempts to offer some clarity. In 2008, the Justice Department issued the Morford Memo, authored by Acting Deputy Attorney General Craig Morford. It was the agency’s first effort to formalize internal guidance on the selection of monitors and the execution of their duties.

Ordinarily, “the government and the corporation should discuss what role the monitor will play and what qualities, expertise, and skills the monitor should have,” the memo says. Companies, at least in most Justice Department agreements, can nominate a slate of potential monitors, offering the government a pool of candidates to choose from. The memo stresses, however, that “there is no one method of selection that should necessarily be used in every instance.”

The guidance codifies several guiding principles:

A monitor is an independent third-party, not an employee or agent of the corporation or of the government

The monitor's responsibilities should be no broader than necessary to address and reduce the risk of recurrence of the corporation's misconduct

The duration of the agreement should be tailored to the problems that have been found to exist and the types of remedial measures needed for the monitor to satisfy his or her mandate 

That internal guidance was supplemented by a 2010 memo by Acting Deputy Attorney General Gary Grindler. “With respect to any monitor recommendation that the company considers unduly burdensome, impractical, unduly expensive, or otherwise inadvisable, the company need not adopt the recommendation immediately,” it says. Instead, the company “may propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose.” At least annually, representatives of the company and the Department should meet to discuss the monitorship and any suggestions, comments, or desired improvements.

A 2012 Foreign Corrupt Practices Act resource guide jointly published by the Department of Justice and SEC further details criteria that may warrant a monitor. Those factors include seriousness of the offense; duration of the misconduct; pervasiveness of the misconduct, including whether it cuts across geographic or product lines; quality of the company’s compliance program at the time of the misconduct; and subsequent remediation efforts.

Those guidelines, however, only apply to the majority of Justice Department NDAs and DPAs. Regulators, both federal and state, as well as judges in civil cases, can impose monitorships with terms that have far less in terms of written policies.

ABA GUIDANCE

Doing its part to establish professional standards for lawyers involved with corporate monitorships, in August 2015 the American Bar Association issued its own suggested guidelines. Selections from the document follow:
When determining the necessary qualifications of the Monitor and when reviewing Monitor candidates, the following factors should be considered:
1.  Qualifications
a) The integrity, credibility and professionalism of the monitor.
b) The expertise or experience in the industry or specific subject matter of the monitorship.
c)  The relevant skills and experience necessary to discharge the duties of the monitor as described in the court order or the agreement.
d) The expected structure of the monitorship team and the ability of the monitor to access and deploy resources as necessary to discharge the duties of the monitor as described in the court order or the Agreement.
e) The commitment to serving as the monitor for the entire monitorship term.
2. Costs
a) The monitor’s cost structure for the monitorship team.
b) The monitor’s projected costs to discharge the duties of the monitor as described in the court order or the agreement.
c) Any other costs expected to be imposed on the host organization by reason of a particular monitor’s selection.
3. Mandatory exclusions
The following persons should not be permitted to serve as monitors:
a) Former government employees who, while employed by the government, were involved in the matter giving rise to the monitorship.
b) Any person who was involved in, supervised persons involved in, or otherwise had responsibility over the activity giving rise to the monitorship.
c) Any person who was involved in structuring, reviewing, supervising, or providing advice regarding the compliance program or the internal controls related to the wrongdoing and in place at the time of the wrongdoing, where an objective review of that compliance program or system of internal controls pursuant to the monitor’s mandate might reasonably call into question the efficacy and value of that work or the implementation thereof.
d) Any person who provided non-monitoring legal or other professional services to the host organization relating to the activity giving rise to the monitorship.
e) Any person who has a financial interest related to the host organization.
Source: American Bar Association

The key to surviving a monitorship, and emerging as a stronger company, requires both strategy and the right attitude, experts say.

“We have to start with the really important proposition that for a monitorship to succeed it has to be collaborative,” says Daniel R. Alonso, managing director and general counsel for Exiger, a global risk and compliance firm.

Exiger was initially launched to lead the court-appointed monitorship of banking giant HSBC. In that role, it evaluated the effectiveness of internal compliance controls used by the $2.7 trillion bank across approximately 6,000 offices in nearly 70 countries.

“The monitor and monitored entity both need to understand something about each other,” Alonso says. “The monitor needs to understand that their role is not to perform a ‘gotcha’ exercise and try to catch the monitored entity in some kind of violation. Obviously they are there to monitor if there are violations, but most importantly they are there to see that the company succeeds.

At the end of the day, the monitorship only succeeds if the company succeeds.” For their part, companies need to understand that “if they are really willing to look in the mirror, the monitor can be their ally.” “You can look at it as a huge pain in the neck for whatever number of years it is, or you can look at it as an opportunity to get a fresh set of eyes on the business processes that are implicated,” Alonso says.

“If you look at it that way, and it is truly a collaborative process, a company will definitely learn things that even its best, most objective people might not get at.” “If you have a really good chief compliance officer who is working in good faith, working in the best interest of the company, and is willing to work with the monitor the company could very well come out way better than the CCO could have imagined without the monitor,” he adds. “Let's not mince words. It is very difficult for a company to have a monitor. They have to be very introspective. They have to be thorough. They have to be sure, above all, not to run afoul of the requirement that they cooperate with the monitor and it’s a difficult logistical task. They really have to make sure they put in systems that don’t allow the fact of the monitorship to grind business to a halt.”

Cooperation will ease the pain

In February, Bonnie Jonas, a former assistant U.S. attorney for the Southern District of New York and deputy chief of its Criminal Division, teamed with Tiffany Moller, also a former SDNY prosecutor, to launch Pallas Global Group, a firm that provides monitorship services.

Jonas investigated and prosecuted individuals at WorldCom and Commerzbank and prosecuted and oversaw reforms through corporate monitorships of Deutsche Bank, Toyota, and General Motors. “Usually companies are not caught off-guard with the assignment of a monitor,” she says. “That allows them ample time to prepare, mentally and logistically.”

Jonas’ advice, before a monitor even sets foot on your property, is to assemble policies and procedures related to whatever led to the monitorship. An overview of regular meetings will enable the monitor to better schedule their time on-site.

It will also be helpful to provide organizational flowcharts that give insight into how the business is run and where key responsibilities lie. Another key step is to set up face- to-face meetings that allow a monitor to meet with executives, managers, and board members. “That way each can share their concerns and thoughts at the onset to discuss the process,” she says.

Another smart move, although one that comes at a cost, is to hire a new person to serve as a company liaison to the monitor. “That can work quite well,” Jonas says. “That person can make sure that they are the central contact with the monitor and handle document requests and logistical issues related to meetings or other administrative requests. There is a comforting aspect to having one person who works for the company, but is totally focused on the monitor’s needs.”

The right person, she says, will have “a collaborative attitude” and “really want things to work.” More nuts and bolts: before the monitor arrives set up workspace for they and their team. “If the monitor is going to come on a regular basis, they need a place to put their stuff and to work,” Jonas says.

“If they are constantly moving around, it is very disruptive. Also, if people know who the monitor is and where they sit there is a routine associated with them and it won’t seem so out of the ordinary.” A pre-arrival orientation for staff may also minimize disruptions and set expectations. “

It makes sense to make sure the monitor is as comfortable as possible,” says Julie Myers Wood, chief executive officer of Guidepost Solutions, an investigative compliance consulting firm that includes monitorships among its services. “If you are arguing with a monitor about space or other things it can bleed over into other, more substantive issues. It is important to think about giving monitor appropriate space, giving them access to information and, most critically, a dedicated project management person.” There may be hundreds of requests coming in all the time, she explains. A project manager can help track them, chase them down, and help ensure that the information presented to the monitor is consistent.” They will also ensure there are few surprises for executives or directors along the way.

Wood also advises that companies study other agreements to gain a sense of what to expect.

It is also helpful for company lawyers to look at ways to narrow the scope of the monitorship. “That’s not always possible, but in some industries and with some agencies you can do it,” she says. “It makes a big difference if you get the terms up front, for example in terms of the monitor’s access to materials. I’ve been on some monitorships where we only had access to non-privileged information; on others, the company will make an effort to give you everything.”

The golden rule: cooperation will ease the pain. “I’ve been on monitorships where an institution leaned forward and tried to be very helpful,” Wood says. “We’ve seen other situations where an institution was not been helpful and that ultimately hurt the company. Think about how can you can make the situation into something that is productive versus frustrating.”

It is also important to realize that a monitor will likely not have an intimate knowledge of your business from Day One. “You have the job of educating them early on,” Wood says. “For a company that is trying to do the right thing, it is very much in your interest to give that education because a monitor is going to come up with all sorts of recommendations and some of them may really be not wise and not fit with your industry and business model. If they are not educated, it’s going to cause friction as the monitor moves through the process.”

Another way to improve the process is to, when possible and advisable, to allow the monitor to leverage internal resources, including internal audit. “A monitor can help give guidance on testing and other things,” Wood says. In a similar vein, the monitor’s recommendations can be transferred over to internal audit for follow-up. “Be sustainable even after a monitor leaves,” Wood suggests.

Understanding the full scope of the monitorship is crucial, says Amy Walsh a partner with law firm Morvillo and former chief of the Business and Securities Fraud Section of the U.S. Attorney’s Office in the Eastern District of New York. One issue to be aware of when a monitor requests documents is that overseas privacy laws may be a sticking point and require compromise.

While there are ways a company can improve how it works with a monitor, the process itself can also be improved, Walsh says. In particular, she describes the selection process as “opaque.” “

Each process seems to vary depending on the company involved,” Walsh says. “There is none of the selection process that you would traditionally see in other industries. There is no bidding process, no formal advertising, and no link on a U.S. attorney’s website that shows the monitorships they are taking applications for.”

Brandon Garrett, a professor at the University of Virginia School of Law and author of the book “Too Big to Jail: How Prosecutors Compromise with Corporations,” would prefer to see corporate monitor reports made public on a more frequent basis. “What is more typical is that there will be a very brief statement by the prosecutors and the company saying that the terms of the agreement have been satisfied,” he says. “It’s a very brief boilerplate statement.”

In his view, prosecutors have conflicting goals. They want the public to know they have done important work and to send a message to industry. On the other hand, “they want to expeditiously settle these cases, which sometimes means doing things quietly because that’s what the companies want.”

“Prosecutors could provide the public a detailed description of what the company has done to implement the terms of its agreement, but that doesn’t happen,” Garrett says. “We almost never see the text of a monitor’s report … Some of these monitors are doing really hard, important work which is of great public interest. They are producing these 1,000 page reports describing both successes and failures at companies and yet no one ever sees their work product. Other companies might want to learn from that experience. If there are tools a monitor used to detect or prevent problems, it would be very useful for other companies to learn from that experience.”

On a more promising note: “There has been more discussion and more statements from the Justice Department that it is important for a monitor to actually audit how well compliance is working.”

“It is not enough to just check boxes and make sure the company has procedures that are up to industry standards,” Garrett says. “They actually have to do auditing and assessment. Its sometimes not easy to generate data to do those audits, but hopefully that means monitors will take a more active role in independently assessing how well things are working, rather than just reviewing documents that the company provides and making sure the procedures are good ones.”