Working With External Compliance Monitors

So your company has just entered into a settlement with a U.S. government agency and must now install a compliance monitor as part of the agreement. How do you respond? 

For many companies, choosing and working with an external compliance monitor can be an elusive and intimidating process. “One of the biggest misconceptions is that the monitor is there as an agent for the government and looks for things that the company is doing that are bad and gets them into more trouble,” says John Hanson, founder of consulting firm Artifice Forensic Financial Services, who has served four different monitorships.

Monitors who find rabbit holes to chase down “ultimately don’t help the company, and undermine the overall efficacy of the monitorship program that Department of Justice was trying to accomplish,” says Charles Duross, former deputy chief of Fraud Section at the Justice Department, now a partner at law firm Morrison & Foerster. “A monitorship was never designed to be a permanent, ever-existing internal investigation. That’s certainly not what it should be.”

Rather, Duross says, many monitorships share three underlying goals:

To evaluate the company’s existing compliance program and assess whether the recommendations made to enhance the program are within reason;

To look at the implementation of those recommendations and to test and understand the strength of the program overall; and

To determine the sustainability of the compliance program.

Traditionally there was a “strong likelihood” that a company entering into any type OF resolution with the government (absent a non-prosecution agreement) would get a monitor. “The thinking around when a monitor is appropriate has progressed a bit over time,” he says.

Nowdays, the government is more sensitive to the costs that a monitorship can imposes on a company—both in resources, and in business disruption. In the Fraud Section, for example, “we put a lot of thought into whether a monitor was necessary,” Duross says.

“One of the biggest misconceptions is that the monitor is there as an agent for the government and looks for things that the company is doing that are bad and gets them into more trouble.”
John Hanson, Founder, Artifice Forensic Financial Services

Take French power and transportation giant Alstom as an example. Even though the company paid the largest criminal penalty ever in an FCPA case, the Justice Department excused Alstom from a compliance monitor, so long as Alstom continued to work with another monitor it had agreed to accept as part of a settlement it reached with the World Bank in 2012.

That’s never happened in an FCPA enforcement action before. “I do think it shows a certain measure of flexibility that the department has with its approach to whether monitors are truly, in fact, necessary,” Duross says.

In some cases, the company may be able to avoid a monitor altogether, particularly “if you’re able to show that the events that drew the attention of the government resulted not from some corporate policy or procedure, but as a result of one rogue employee,” says Michael Weinstein, a former Justice Department trial attorney and now chair of the white-collar defense practice at law firm Cole Schotz.

If you can demonstrate to the government that you don’t need a monitor because the misconduct at issue was an isolated incident rather than systemic wrongdoing, “then you’re likely to make some headway arguing against the installation of a monitor,” Weinstein says.

Aluminum producer Alcoa is one such example. Even though the company violated the Foreign Corrupt Practices Act and paid $384 million to the Securities and Exchange Commission and the Justice Department, the violation itself was limited to a single business contract. “We didn’t think a monitor would be appropriate under those circumstances,” Duross says.

Monitor Selection

In some criminal cases, prosecutors will assign a monitor without any input from the company. Some agencies even advertise the monitorship on their website requesting applications. For example, earlier in November the National Highway Traffic Safety Administration started looking to hire AN independent monitor for Japan-based airbag supplier Takata, following its massive recall over defective airbags.

MONITOR SELECTION PROCESS

Below is an excerpt from a memo, “Selection of Monitors in Criminal Division Matters,” issued in 2009 by Lanny Breuer, then Assistant Attorney General for the Criminal Division.
Nomination of Monitor Candidates. At the outset of the monitor selection process, counsel for the company should be advised by the Criminal Division attorneys handling the matter to recommend a pool of three qualified monitor candidates. Within at least 20 business days after the execution of the agreement, the company should submit a written proposal identifying the monitor candidates, and, at a minimum, providing the following:

A description of each candidate's qualifications and credentials in support of the evaluative considerations and factors listed below;

A written certification by the company that it will not employ or be affiliated with the monitor for a period of not less than one year from the date the termination of the monitorship; and

A written certification by each of the candidates that he/she is not an employee or agent of the corporation and holds no interest in, and has no relationship with, the corporation, its subsidiaries, affiliates or related entities, or its employees, officers, or directors.
Initial Review of Monitor Candidates. The Criminal Division attorneys handling the matter should promptly interview each monitor candidate to assess his/her qualifications, credentials and suitability for the assignment and, in conducting a review, should consider the following factors:

Each monitor candidate's general background, education and training, professional experience, professional commendations and honors, licensing, reputation in the relevant professional community, and past experience as a monitor;

Each monitor candidate's experience with the particular area(s) at issue in the case under consideration, and experience in applying the particular area(s) at issue in an organizational setting;

Each monitor candidate's degree of objectivity and independence from the Company so as to ensure effective and impartial performance of the monitor's duties;

The adequacy and sufficiency of each monitor candidate's resources to discharge the monitor's responsibilities effectively; and

Any other factor determined by the Criminal Division attorneys, and by the circumstances, to relate to the qualifications and competency of each monitor candidate as they may correlate to the tasks required by the monitor agreement and nature of the business organization to be monitored.
Source: Justice Department.

The Justice Department’s Criminal Division handles the selection process by asking the company to submit three names of possible monitors and rank them in order of preference. The department then checks those names for any conflicts of interest and that the monitor is qualified to fill the role. “In most cases, the government will agree with the company’s top choice,” Hanson says.

When choosing a monitor, the company needs to consider several qualifications, including the integrity, credibility, and professionalism of the monitor; the level of experience in the particular industry or subject area at hand; and the relevant skills and experience necessary to carry out the monitor’s duties, just to name a few. “Look for somebody who has been involved in, or has served as a corporate monitor at least once, maybe even multiple times,” Hanson says.

You also want to look for an expert in corporate compliance and ethics, given that is the foundation of most settlement agreements, Hanson adds. That could include, for example, experience designing or reviewing corporate compliance policies, procedures, and internal controls.

Work Plans

The recommendations made at the beginning of an agreement to improve the company’s ethics and compliance program are “incredibly important, in part because the company ends up being evaluated based upon whether it ultimately implements those recommendations,” Duross says. So if you don’t feel like a specific recommendation is necessary, “I don’t think the company should be shy about working through their counsel to contact the government and raise issues, especially where you feel like you’re at an impasse,” he says. Maybe you’ll get what you want, maybe you won’t. At least you’ll know where the government stands on the matter, he adds.

The company also has a right to know what the monitor plans to do and how the monitor wants to achieve the goals of the work plan. “You want transparency,” Weinstein says.

The work plan should be the product of a “healthy dialogue between the company and the monitor,” Duross says. “What locations would be visited? Who would be interviewed? What would be tested? How would that whole process work?”

Both the company and the monitor should make an effort to leverage internal resources already available at the company. If the company must implement certain internal controls, for example, the monitor may be able to seek the help of internal audit to do some of that testing. “That not only saves the company costs, but also teaches the company what it will need to do anyway,” Hanson says.

That being said, the monitor still has discretion to determine whether the internal audit function is robust enough, or has enough resources, to accomplish the task at hand.

Communication will also be important. If you’re making a change to your compliance program, for example, you’ll want to solicit input from the monitor and try to put into context why you implemented a particular change, Weinstein says.

“You want to be as cooperative as possible,” Hanson says. You have to trust that the monitor is there to help you through the ordeal, he says, and to give good advice on how to remediate ethics and compliance issues.