United States: DOJ Issues New Guidance On Necessity And Selection Of Corporate Monitors

Last Updated: October 22 2018
Article by Jose P. Sierra

Jose P. Sierra is a Partner in Holland & Knight's Boston office

HIGHLIGHTS:

  • Assistant Attorney General Brian A. Benczkowski's recent Memorandum on "Selection of Monitors in Criminal Division Matters" provides new direction to U.S. Department of Justice (DOJ) prosecutors regarding when to require the appointment of a corporate monitor as part of a resolution between the U.S. government and a corporation, as well as the process for selecting such a monitor.
  • The Benczkowski Memo is the first major DOJ pronouncement regarding corporate monitors under the Trump Administration and represents a significant shift from earlier guidelines, signaling to both prosecutors and businesses the Administration's view that monitorship appointments will not be taken lightly and will be required only when clearly warranted.
  • Although it remains to be seen whether the Benczkowski Memo improves the process for determining whether and how to appoint a monitor, or the quality of monitor appointments, the best outcome for corporations and their counsel remains to successfully argue that a monitor is not needed.

Assistant Attorney General Brian A. Benczkowski issued a Memorandum on Oct. 11, 2018, to all U.S. Department of Justice (DOJ) Criminal Division personnel entitled "Selection of Monitors in Criminal Division Matters" (Benczkowski Memo). The Benczkowski Memo provides new direction to DOJ prosecutors regarding 1) the decision on when to require the appointment of a corporate monitor as part of a resolution between the federal government and a corporation (whether by plea agreement, or by deferred or non-prosecution agreement, i.e., DPA or NPA), and 2) the process for selecting a corporate monitor.

The Benczkowski Memo supplements the March 7, 2008, Memorandum by then-acting Deputy Attorney General Craig S. Morford and the May 25, 2010, Memorandum by then-acting Deputy Attorney General Gary Grindler, and it supersedes the June 24, 2009, Memorandum by then Assistant Attorney General Lanny A. Breur. The Benczkowski Memo is the first major DOJ pronouncement regarding corporate monitors under the Trump Administration and represents a significant shift from earlier guidelines, signaling to both prosecutors and businesses the Administration's view that monitorship appointments will not be taken lightly and will be required only when clearly warranted.

Should a Monitor Be Appointed?

The Benczkowski Memo elaborates on the two broad considerations identified in the Morford Memo that should guide prosecutors when assessing the need and propriety of a monitor: "(1) the potential benefits that employing a corporate monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation." In evaluating the potential benefits of a monitor, prosecutors are directed to consider, among other factors:

  • whether the underlying misconduct involved manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal controls system
  • whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management
  • whether the corporation made significant investments in, and improvements to, its corporate compliance program and internal control systems
  • whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future

Where the misconduct occurred under different corporate leadership, prosecutors should consider whether there have been "changes to the corporate culture and/or leadership that are adequate to safeguard against recurrence of misconduct." Prosecutors are specifically directed to consider whether adequate remedial measures have been taken to address "problem behavior," including the termination of employees, management personnel, and/or third-party agent relationships and practices involved in the misconduct.

The Benczkowski Memo summarizes the DOJ's position on whether a corporate monitor is necessary, stating that "the Criminal Division should favor the imposition of a monitor only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens" on the corporation.

Process for Selecting a Monitor

The most significant change in the Department's view on monitorships under the Benczkowski Memo relates to the process and criteria that prosecutors and corporations must follow in the selection of a monitor once the decision has been made that a monitor is necessary. As an initial matter, prior to agreeing to the imposition of a monitor with a corporation, the prosecutors handling the matter must first receive approval from their supervisors, including the chief of the relevant section, and the Assistant Attorney General (AAG) for the Criminal Division or his/her designee. In addition, the plea agreement, DPA or NPA must include (1) a description of the monitor's qualifications; (2) a description of the monitor selection process; (3) a description of the process for replacing the monitor during the monitorship term, if necessary; (4) a commitment that the parties will endeavor to complete the monitor selection process within 60 days of the execution of the agreement; (5) an explanation of the monitor's responsibilities and the scope of the monitorship; and (6) the length of the monitorship.

The Benczkowski Memo also directs the Criminal Division to create a Standing Committee on the Selection of Monitors (the Standing Committee) responsible for approving the selection of a monitor and consisting of (a) the Deputy Assistant Attorney General (DAAG) with supervisory responsibility for the Fraud Section or his/her designee; (b) the Chief of the Fraud Section or his/her designee; (c) the Deputy Designated Agency Ethics Official for the Criminal Division; and (d) ad hoc members as determined by the DAAG, who shall chair the Standing Committee. All members of the Standing Committee reviewing the selection process of a monitor must adhere to the conflicts of interest guidelines set forth in 18 U.S.C.§208, 5 C.F.R. Part 2635 (financial interest) and 28 C.F.R. Part 45.2 (personal or political relationship).

"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." Counsel must provide the prosecutors with a written proposal (within 20 business days after execution of the agreement) identifying the monitor candidates that includes, at a minimum:

  • a description of each candidate's qualifications and credentials in support of the listed "evaluative considerations and factors"
  • a written certification by the Company that it will not employ or be affiliated with the monitor for at least two years from the date the monitorship is terminated
  • a written certification from each candidate that he/she is not and (for the prior two years) has not been employed or affiliated with, or has not maintained a financial interest in, the Company or any affiliated entity of the Company
  • a written certification from each candidate that he/she has notified any client regarding any representation of the client by the candidate in a matter involving the Criminal Division section handling the monitor selection process, and has either obtained a waiver from those clients or has withdrawn as counsel in those matters
  • a statement identifying the Company's first choice to serve as monitor

The prosecutors handling the matter, along with their supervisors from the section, are required to promptly interview each candidate and address the "evaluative considerations and factors" supporting a candidate's qualifications for the proposed monitorship. The considerations and factors to be considered are:

  • each candidate's general background, education and training, professional experience, commendations, honors, licensing, reputation in the relevant professional community and prior experience as a monitor
  • each candidate's experience and expertise in the area(s) at issue in the case under consideration, including applying such experience and expertise in an organizational setting
  • each candidate's degree of objectivity and independence from the Company
  • the adequacy and sufficiency of each candidate's resources to discharge the monitor's responsibilities effectively
  • any other relevant factors as determined by the handling prosecutors

Following the interview process, the handling prosecutors and their supervisors shall either make a selection from the pool of three candidates, or direct the Company to submit another candidate or candidates within 20 days (or longer, if requested by the Company and circumstances warrant an extension). Moreover, if it is determined that the Company has failed to identify a suitable candidate for whatever reason, and such failure is negatively impacting the agreement or the prospective monitorship, then the handling prosecutors are free to evaluate alternative candidates that they identify in consultation with the Standing Committee.

Once the candidate is recommended, however, the selection process moves to the Standing Committee for review and approval. The handling prosecutors will need to prepare a written memorandum to the Standing Committee containing the following information: (a) a brief statement of the underlying case; (b) a description of the proposed disposition of the case, including any charges filed; (c) an explanation as to why a monitor is required in the case, based on the considerations contained in the Benczkowski Memo; (d) a summary of the monitor's responsibilities and his/her term; (e) a description of the process used to select the candidate; (f) a description of the selected candidate's qualifications and why the selected candidate is being recommended; (g) a description of countervailing considerations, if any, in selecting the candidate; (h) a description of the other candidates submitted by the Company; and (i) a signed certification from each prosecutor and supervisor that he/she has complied with the conflicts of interest guidelines.

Once the Standing Committee has the agreement and the Monitor Recommendation Memorandum, the members must vote on whether or not to accept the recommendation. The Standing Committee is free to interview the recommended candidate, as well as the other candidates submitted by the Company. The Standing Committee ultimately either accepts or rejects the recommended candidate and must memorialize its decision as per the Benczkowski Memo. If the Standing Committee rejects the recommended candidate, the handling prosecutors and their supervisors may either recommend an alternate candidate from the remaining two candidates or seek additional qualified candidates from the Company. If the Standing Committee rejects the recommended candidate or the pool of remaining candidates, the handling prosecutors and their supervisors should notify the Company. If the Standing Committee is unable to reach a majority decision regarding the proposed candidate, it must so indicate on the Monitor Recommendation Memorandum and forward the Memorandum (and all attachments) to the AAG.

Consistent with the Morford Memo, the AAG cannot unilaterally make, accept or veto the selection of the recommended monitor candidate, but can request additional information or interview the recommended candidate. After noting his/her concurrence or disagreement with the recommended candidate on the Monitor Recommendation Memorandum, the AAG must forward the Memorandum to the Office of the Deputy Attorney General (ODAG).

It is the ODAG that must ultimately approve or reject the recommended monitor candidate. If the ODAG does not approve the recommended candidate, the handling prosecutors should notify and request that the Company propose a new candidate or slate of candidates and begin the process anew. If, however, the ODAG approves the recommended candidate, the handling prosecutors should notify the Company, which shall then notify the three candidates of the final decision, and the monitorship shall be executed according to the terms of the agreement.

Conclusion

As detailed in this Holland & Knight alert, under the Benczkowski Memo, once a decision has been made that it is necessary to appoint a monitor pursuant to a plea agreement, DPA or NPA, the selection of a monitor takes on a long and rigorous review process. Although it remains to be seen whether the Benczkowski Memo improves the process for determining whether and how to appoint a monitor, or the quality of monitor appointments, the best outcome for corporations and their counsel remains to successfully argue that a monitor is not needed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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