To Disclose or Not to Disclose: DOJ Revises Its Policy on How Corporate Criminal Matters Are Handled in an Attempt to Further Incentivize Voluntary Disclosure and Cooperation

In response to a recent Department of Justice (DOJ) request that all DOJ components write voluntary self-disclosure policies and “clarify the benefits of promptly coming forward to self-report [as] a good business decision,” on January 17, 2023, Assistant Attorney General (AAG) Kenneth Polite, Jr. announced updates to the DOJ Criminal Division’s Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP). The updated CEP, policy 9-47.120, which was previously known as the Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy, expands the applicability of the CEP to now apply to all corporate criminal matters handled by the DOJ’s Criminal Division. The updated CEP, which is effective prospectively only, offers new, significant, and concrete incentives to corporations to have effective compliance programs, to voluntarily disclose allegations of criminal misconduct (including that of its officers, directors and employees), to fully cooperate with the government’s investigation of alleged misconduct, and to timely and appropriately remediate the misconduct. In announcing the updated policy, AAG Polite stated, “Our number one goal in this area – as we have repeatedly emphasized – is individual accountability. And we can hold accountable those who are criminally culpable—no matter their seniority—when companies come forward and cooperate with our investigation.”

The updated CEP sets forth DOJ’s policy for handling the various ways that corporations may respond to corporate misconduct within their companies and provides a roadmap for determining what level of credit corporations should expect when dealing with DOJ on a corporate criminal matter as they decide whether to voluntarily disclose misconduct. Building upon last September’s Monaco Memo, the CEP doubles down on DOJ’s threat that “failing to self-report, failing to fully cooperate, failing to remediate, can lead to dire consequences . . . When a company has uncovered criminal misconduct in its operations, the clearest path to avoiding a guilty plea or an indictment is voluntary self-disclosure.” The DOJ policy attempts to demarcate those companies who self-disclose from those who do not by offering various “carrots” to those who cooperate and a firm “stick” for those who do not. Indeed, AAG Polite stated that “[t]he [CEP] revisions make clear that there will be very different outcomes for companies that do not self-disclose, meaningfully cooperate with our investigations, or remediate.”

Criteria for a Presumptive Declination

Under the updated CEP, when a company voluntarily discloses misconduct to the DOJ Criminal Division, fully cooperates, and timely and appropriately remediates, there is now a presumption that the company will receive a declination, as long as the company’s actions meet the standards for each of the three qualifying elements, and there are no aggravating circumstances involving the seriousness of the offense or nature of the offender.

Whether a company has met the standards to qualify for a presumptive declination requires a deeper dive into the detailed definitions of certain key terms - voluntary self-disclosure, full cooperation, and timely and appropriate remediation - as set forth in the updated CEP.

The updated CEP also offers incentives for companies in circumstances where misconduct is discovered during due diligence conducted in the context of a merger or acquisition or through post-acquisition audits or compliance integration efforts. In such circumstances, if the acquiring company voluntarily discloses the misconduct and takes other action consistent with the updated CEP, there will be a presumption of a declination (including, in appropriate cases, when aggravating circumstances exist).

Consideration of Aggravating Circumstances

Even though a company will not qualify for a presumption of a declination if aggravating circumstances (such as involvement by a company executive in the misconduct, significant profit to the company from the misconduct, the egregiousness or pervasiveness of the misconduct, or criminal recidivism) exist, the updated CEP sets forth factors which, if met, would permit prosecutors to determine that declination is still appropriate:

• If the voluntary disclosure was made immediately following when the company becomes aware of the misconduct;
• If the company had an effective compliance program and system of internal controls in place at the time of the misconduct and disclosure; and
• The company provided extraordinary cooperation with the DOJ investigation and undertook extraordinary remediation that exceeds the factors set forth in the definitions of those terms in the updated CEP. 

The updated CEP does not define what “extraordinary” means in this context, but AAG Polite explained in his comments announcing the updated CEP that immediacy, consistency, degree, and impact would be significant concepts considered by DOJ. It also is unclear what “immediate” means – immediately upon receiving a complaint/information that a company may be violating the law in some way, immediately upon substantiating an aspect of a complaint, or something else.

If a company voluntarily discloses misconduct to the DOJ Criminal Division, fully cooperates, and timely and appropriately remediates but a criminal resolution of the misconduct is still warranted due to aggravating circumstances, the updated CEP also offers increased incentives to those companies, including:

• Recommendation of a fine of a 50-75% reduction (the prior CEP was limited to 50%) off the low end of the Sentencing Guidelines range (as long as the company is not a repeat offender; however, repeat offenders are still eligible for a 50-75% reduction but generally not off the low end of the fine range);
• No requirement generally of a corporate guilty plea (absent particularly egregious or multiple aggravating circumstances); and
• No corporate monitor will be required if the company has demonstrated that as of the time of the resolution of the matter, it has implemented and tested an effective compliance program and remediated the root cause of the misconduct.

Limited Credit Without Voluntary Disclosure

If a company does not voluntarily disclose misconduct to DOJ but later fully cooperates and timely remediates in accordance with the standards set forth in the updated CEP, (a scenario which is far more common than those who voluntarily self-disclose), DOJ states that under the updated policy, it will recommend up to a 50% reduction (changed from a maximum of 25% in the prior CEP) off of the low end of the Sentencing Guidelines fine range (except in the case of a repeat offender, which will generally mean up to a 50% reduction but not from the low end of the fine range). 

Potential Quandary for Companies?

While AAG Polite remarked that “the government will not affirmatively direct a company’s internal investigation, if it chooses to do one,” in reality, the new DOJ Guidance can potentially lead to a crash collision for some companies who do cooperate as full cooperation may be intertwined with pressure to completely waive attorney-client and work-product privileges and provide a play-by-play to the government regarding the company’s internal investigation. 

Notably, DOJ does not seem to take into account that executives who find themselves accused of wrongdoing increasingly have been making the argument that their employers, who were facing criminal prosecution, have been “deputized” to act as government agents.  For example, in United States v. Coburn et al, Crim. No. 19-120 (KM), in the District of New Jersey, there have been extensive battles about waiver of attorney-client privilege in relation to an internal investigation conducted by a corporation in its attempt to obtain a declination from DOJ and the SEC in an FCPA matter. As the Court noted in that case, “By disclosing . . . information to the Government while under threat of prosecution, [the company] handed these materials to a potential adversary and destroyed any confidentiality they may have had, undermining the purpose of both attorney-client and work-product privileges.”

How the updated CEP will function in practice, and whether it will encourage corporations to come forward and self-disclose misconduct, is something that we will keep a close eye on at the Commercial Litigation Update blog.