United States: DOJ Announces Changes In White-Collar Criminal Enforcement In The Interest Of Transparency

The Situation<: On October 8, 2019, the U.S. Department of Justice ("DOJ") announced two significant developments relating to the enforcement of white-collar crime: (i) new guidance on how prosecutors should evaluate requests by corporate defendants for a reduction in fines and penalties based on a stated inability to pay; and (ii) the restructuring of DOJ's Securities and Financial Fraud Unit as the Market Integrity and Major Frauds Unit.<

The Result<: DOJ continues to prioritize the enforcement of corporate crime while simultaneously attempting to provide corporate entities greater "transparency" with respect to its decision-making process in key enforcement areas. DOJ hopes to increase incentives for companies to take affirmative steps to prevent fraud and other malfeasance, promote "consistency and predictability" in DOJ's decision-making, and clarify the factors that DOJ will and will not consider in evaluating corporate inability to pay claims.<

Looking Ahead<: The "Benczkowski Memorandum" on inability to pay became effective on October 8, 2019. While it disclaims the creation of any enforceable "substantive or procedural rights," corporate targets of DOJ criminal enforcement actions should be able to rely on its provisions when negotiating with DOJ a reduction in fines and penalties.<

DOJ recently announced new guidance detailing the criteria prosecutors will consider when evaluating corporate defendants' claims of an inability to pay a criminal fine or monetary penalty, as well as a restructuring within the DOJ Fraud Section. The announcements on October 8, 2019, by Brian Benczkowski, Assistant Attorney General for DOJ's Criminal Division, reflect DOJ's emphasis on enhancing transparency to the corporate community about its enforcement priorities, processes, and procedures.

AAG Benczkowski stated that while DOJ continues to pursue aggressively white-collar criminal cases, and that this "remains a top priority" for DOJ, the goal "is to not just punish corporate crime, but to deter it as well." To that end, DOJ has recently publicized its internal guidance defining the "criteria prosecutors will apply to key decisions" in several areas, including incentives for cooperation in Foreign Corrupt Practices Act cases (November 2017), when DOJ will impose a corporate monitor (October 2018), and how DOJ evaluates corporate compliance programs (April 2019). DOJ's guidance on factors relevant to the inability to pay analysis is the latest DOJ effort to increase the agency's transparency to the corporate community so that companies may "invest fully in compliance on the front end" and "make good decisions in the face of misconduct on the back end."

Inability to Pay Memorandum and Questionnaire

DOJ published a memorandum to provide an "analytical framework" for evaluating a company's inability to pay a claim ("Benczkowski Memorandum"). The Benczkowski Memorandum clarifies that the ability of a corporate defendant to pay is not a threshold issue in its negotiations with the government. Before DOJ will consider a claim of inability to pay, the corporate defendant and DOJ must first agree to the form of the criminal resolution, whether by guilty plea, a deferred prosecution agreement, or nonprosecution agreement, as well as the amount that the monetary penalty would be based on the conduct at issue without consideration of the company's financial condition. Only then should attorneys in DOJ's Criminal Division consider a range of factors enumerated in the Benczkowski Memorandum, including:

  • What gave rise to the organization's current financial condition? (e.g., whether the alleged lack of money is the result of intentional corporate decisions like dividends, distributions, or compensation to ownership and management; investments like capital improvements or acquisitions; or engaging in related party transactions);
  • Alternative sources of capital (e.g., whether the company has credit lines or booked reserves);
  • Significant and likely collateral consequences of the fine or penalty to the company (e.g., pension obligations, layoffs, or product shortages); and
  • Whether the proposed fine or penalty will impair the company's ability to pay restitution to victims.

These factors do not supersede, and should be applied in conjunction with, the statutory sentencing factors in 18 U.S.C. § 3572 and U.S. Sentencing Guidelines §§ 8C2.2 and 8C3.3.

A detailed questionnaire accompanies the Benczkowski Memorandum to provide objective data in support of a company's request. Corporate defendants are required to provide DOJ with voluminous information, including recent cash flow projections, operating budgets, acquisition or divestiture plans, encumbered assets, audited financial statements, and income tax returns for five years.

If a company is in fact unable to pay the agreed-upon fines and penalties after evaluation of these factors and its financial information, and often after consultation with an accounting expert for the government, Criminal Division attorneys should recommend an adjustment to the monetary penalties and fines "to the extent necessary to avoid (1) threatening the continued viability of the organization and/or (2) impairing the organization's ability to make restitution to victims."

Guidance on corporate defendants' ability to pay claims is consistent with DOJ's increased emphasis on transparency in its decision-making processes with respect to corporate prosecutions, including its April 2019 guidance on evaluating corporate compliance programs and the factors DOJ will use to determine if a program is operating effectively in practice. It is also in line with the October 2018 guidance clarifying that monitors should be approved only in cases where there is a demonstrable need and not as punishment.

Both the substance of DOJ's recent guidance and its strategy to publicize the guidance are "part and parcel" of DOJ's goal "to establish more predictable guideposts by which companies can gauge expectations, conform their conduct, and act as responsible corporate citizens."

Changes to DOJ's Securities and Financial Fraud Unit

AAG Benczkowski also announced that DOJ is reorganizing its Securities and Financial Fraud Unit within the Fraud Section, renaming it the Market Integrity and Major Frauds Unit "to capture the broad range of fraud enforcement work that its prosecutors actually perform." More importantly, DOJ is establishing five discrete teams of prosecutors that will specialize in the following substantive areas of white-collar crime: Securities Fraud; Commodities Fraud; Government Procurement Fraud; Fraud on Financial Institutions; and Consumer Fraud, Regulatory Deceit, and Investor Schemes. With increased subject matter specialization and DOJ's aggressive investigation of white-collar cases, we should expect DOJ to bring more fraud cases, including those with wide-ranging impacts in several industries.

Five Key Takeaways

  1. Criminal enforcement against corporations remains one of DOJ's top priorities.
  2. DOJ has shown a recent willingness to pull back the curtain to increase "transparency" of the factors it considers relevant in white-collar criminal enforcement.
  3. Corporate criminal defendants have more clarity on the factors DOJ will use to assess claims of an inability to pay criminal fines and penalties, as well as the financial records required to support such a request.
  4. DOJ has reorganized a key enforcement unit for white-collar crimes that should lead to larger and more impactful cases in five areas of substantive focus.
  5. DOJ wants companies "to trust that, if they respond appropriately to misconduct, they can be assured of fair and evenhanded treatment by the Department of Justice."

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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