DOJ Policy Changes Have Made Internal Investigations More Important Than Ever

Internal investigations have long been a valuable tool for companies and their executives to manage civil, regulatory, and criminal liability. By investigating potential corporate misconduct with the help of counsel, a company can assess and address potential liability before either the government or private adversaries can impose consequences. Last month, the Department of Justice (DOJ) issued a revised “Corporate Enforcement and Voluntary Self-Disclosure Policy” that raised the value of internal investigations even higher by increasing, and clarifying, the benefits of self-disclosure. This month, Matthew Galeotti, the head of the DOJ’s Criminal Division, made a point of emphasizing the benefits of self-disclosure during a speech delivered at the ACI Conference on June 10. In the past, the DOJ’s messaging on self-disclosure has been more mixed and hedged. Now, the DOJ and the new head of the Criminal Division have set forth a detailed policy clarifying that self-disclosure, cooperation, and remediation will earn a company either a declination from federal prosecution or an attractive prosecution alternative, such as a non-prosecution agreement. And the best way to manage self-disclosure, cooperation, and remediation is with a careful but efficient internal investigation.

There is nothing new about self-disclosure and cooperation policies; these types of policies have been around for years. But in the past, the benefits from corporate self-disclosure were less clear. The revised corporate enforcement policy eliminates most of the DOJ’s policy ambiguities that served as escape hatches in the past to deny a company the benefit of a declination from criminal prosecution, notwithstanding self-disclosure. Although the existence of aggravating circumstances remains a basis to deny a declination request, in his June 10 remarks, Galeotti made clear that the DOJ’s new policy narrowly defines “aggravating circumstances” and that the DOJ’s discretion would not be used to play a game of “gotcha” against companies that self-disclose their misconduct. To ensure clarity and predictability, the DOJ has made the rules more definitive and has even included a flow chart mapping out the self-disclosure process and the attendant benefits. Overall, the DOJ is incentivizing more corporate confessions — which is essentially what “self-disclosure” is — by ensuring greater predictability.

To encourage corporate America to police itself, the DOJ has created different tiers of benefits under the revised corporate enforcement policy. A tier one resolution, referred to as a Part I “Declination under the CEP,” will result in a declination from prosecution. Companies that fall short of this tier one resolution may still receive consideration under Part II, “Near Miss Voluntary Self-Disclosures or Aggravating Factors Warranting Resolutions.” A “near miss” can result in a non-prosecution agreement for the self-disclosing company. Further, companies that cannot satisfy Parts I or II will fall under Part III, “Resolutions in Other Cases,” where prosecutors still “maintain discretion to determine the appropriate resolution including form, term length, compliance obligations, and monetary penalty.” A Part III resolution for a company may result in reduced monetary penalties, for example. Essentially, all may not be lost for the company that falls short of earning a declination under the revised corporate enforcement policy.

Declination From Prosecution

There are four core principles underpinning the DOJ’s revised corporate enforcement policy and the keys to securing a declination from federal prosecution for a company: (1) voluntary self-disclosure; (2) full cooperation with the government’s investigation; (3) timely and appropriate remediation of misconduct; and (4) the absence of aggravating circumstances and a criminal adjudication/resolution in the last five years of similar misconduct as that being self-disclosed by the company. Delivering on each of these requirements is essential to achieving a declination from prosecution under the revised corporate enforcement policy.

Voluntary Self-Disclosure

To satisfy the first requirement, voluntary self-disclosure, a company must provide the DOJ with information about misconduct that the DOJ does not already have, and which the company did not have a “preexisting obligation to disclose.” It cannot be that the DOJ should have been told of the information or has somehow already learned it. Further, the disclosure has to occur before there is any government investigation or “imminent threat of disclosure.” And finally, the company must disclose the misconduct to the DOJ “within a reasonably prompt time after becoming aware of the misconduct.”

These rules naturally suggest the need for an internal investigation. A company must have a good grip on what the misconduct is, and whether the government may already know about it, before it chooses to self-disclose. Ordinarily, an internal investigation is prompted by issues raised internally by a company’s compliance department (if it has one), in-house counsel, human resources, the accounting department, employee grievances, and customers or vendors. Once an issue is raised, that’s when the internal investigation begins. A company needs to know whether there is anything to disclose, what to disclose, how to disclose, and the legal implications and potential collateral consequences of such disclosure. Outside counsel is best equipped to make these judgment calls after conducting a thorough but still efficient and targeted internal investigation.

After conducting an internal investigation, counsel may determine that there is nothing to disclose. By using outside counsel to conduct the investigation, it also ensures the preservation of attorney-client privilege and protection of work product. Unlike individuals, companies don’t have a Fifth Amendment privilege against self-incrimination. Thus, protecting privileged communications and work product matters a great deal to a company investigating itself and contemplating self-disclosure to the government.

As noted above, a company’s self-disclosure must be “reasonably prompt.”  Timing always matters; here, it’s no different. Companies that want to take advantage of the revised corporate enforcement policy don’t have the luxury of time in waiting to make their disclosure to the DOJ. Given the leniency being offered by the DOJ, a disclosing company may find itself confronting a less patient DOJ. Outside counsel handling the internal investigation needs to strike the right balance between making a timely self-disclosure and ensuring that such disclosure is accurate and sufficiently thorough. Ultimately, a self-disclosure may have to be made before an internal investigation is finished.

Taking too much time to make a self-disclosure runs the risk that an outside party beats the company to the DOJ’s front door. And sometimes a self-disclosure by one company discloses the misconduct of another, as Galeotti pointed out in his recent remarks, “so you benefit from being first in the door.” If the DOJ learns of a company’s misconduct before it can self-disclose, it would either deprive the company of a declination under the revised corporate enforcement policy or result in a “near-miss” scenario, discussed below.

Cooperation

Once a self-disclosure is made, the task is not complete. The DOJ will expect cooperation from the company, especially in the identification of individuals who are responsible for the alleged misconduct. All of this favors the use of outside counsel to conduct the internal investigation and lead the effort to cooperate with the DOJ.

Again, timing matters. In his June 10 remarks, Galeotti noted that “[p]roducing documents swiftly in response to requests, promptly identifying key evidence, quickly making witnesses available, and effectively navigating complex global legal regimes are just part of what we expect cooperating companies to do.”

As part of cooperation, the DOJ demands that the company retain relevant business records and prevent the improper destruction or deletion of those records.  This is one of the core responsibilities of the outside counsel handling the internal investigation. In fact, the first order of business for an internal investigation is to ensure the preservation of records through the issuance of a hold notice. Preserving documents ensures that the company does not get penalized for failing to maintain relevant records.

Remediation

To receive a declination, a company must also show that it has corrected its behavior or addressed the conditions that led to its misconduct. In particular, the revised corporate enforcement policy requires that remediation be “[d]emonstrated thorough analysis of the causes of underlying conduct (i.e., a root cause analysis) and, where appropriate, remediated to address those root causes.” This is another place where the internal investigation is important. In fact, a root cause analysis is a natural byproduct of the internal investigation where facts are gathered, individuals responsible for misconduct are identified, shortcomings in company policies are flagged, gaps in compliance measures are identified, and conditions leading to misconduct are encountered.

“Near-Miss” Disclosures

In a change from the past, a company still has much to gain in a “near-miss” scenario. The DOJ’s revised corporate enforcement policy offers reduced, but still significant, benefits to companies that self-disclose in good faith but report their conduct after a third party has done so unbeknownst to the company. The benefits in a Part II “near-miss” scenario include a non-prosecution agreement with a term of fewer than three years, a 75% reduction of the criminal fine, and non-imposition of a corporate monitor. The same benefits are offered to companies that are denied a declination because of aggravating circumstances but, nevertheless, satisfy all of the other requirements under a Part I declination.

“Resolutions in Other Cases”

Where a company does not voluntarily self-disclose its misconduct to the DOJ, either by choice or lack of awareness, all is not lost if the DOJ comes knocking. The DOJ’s revised corporate enforcement policy anticipates these circumstances. A company that fails to voluntarily self-disclose, but “fully cooperate[s] and timely and appropriately remediate[s]” its misconduct, may enjoy up to a 50% reduction off the monetary penalty recommended by the U.S. Sentencing Guidelines. Federal prosecutors “maintain discretion to determine the appropriate resolution including form, term length, compliance obligations, and monetary penalty,” so a favorable resolution of the criminal investigation still may be achieved.

With respect to Part III resolutions under the revised corporate enforcement policy, cooperation and remediation matter most of all. That’s where the internal investigation team comes in. When the company is late to the game, outside counsel can swiftly conduct an internal investigation to diagnose the company’s legal problems. Once these issues are identified, the remediation process can begin.

Cooperation by the company will be key to achieving a favorable outcome in the absence of self-disclosure. The benefit of hiring outside counsel, especially counsel that has prior experience serving as a federal prosecutor, is that outside counsel understands what it means to cooperate in the DOJ’s mind. And in the context of a Part III resolution, the DOJ will not accept anything less than full and complete cooperation. To put a fine point on it, where a criminal resolution is unavoidable, “the extent and quality of a company’s cooperation will be an important part of the Criminal Division’s overall analysis of the case and may impact the proposed form of the resolution, as well as the fine range and fine amount,” as noted in the DOJ’s Justice Manual. Even the term of a non-prosecution or deferred prosecution agreement will depend, in part, on the company’s degree of cooperation. Regardless, if a company wants to achieve a Part III resolution, conducting an internal investigation is usually part of the solution. Self-investigation allows a company to get ahead of the DOJ’s investigation, appropriately remediate any prior misconduct, and fully cooperate, as appropriate, with the DOJ’s investigation.

The Road Ahead

If a company thinks it doesn’t need to self-disclose because the DOJ has decided not to focus on white collar matters, it should think again. In Galeotti’s remarks at the ACI conference, he made clear that “[f]ighting white-collar and corporate crime is a critical component of the Criminal Division’s priorities” and “[p]rotecting the American people requires an aggressive and robust strategy to investigate and prosecute white-collar and corporate crime.” From the horse’s mouth, the DOJ’s Criminal Division remains open for business in the investigation and prosecution of corporate crime.

If companies still aren’t convinced that they need to seriously consider self-disclosing their misconduct to the DOJ, here are some additional reasons why it might be a good idea. First, the DOJ is a bureaucracy filled with career federal prosecutors at Main Justice and 93 U.S. attorney’s offices. And one thing about bureaucracies is that they have a life of their own and outlive administrations. Even under this new administration, there will be federal prosecutions of companies, notwithstanding the DOJ’s refocused priorities. Second, most federal crimes have, at minimum, a five-year statute of limitations, and artful conspiracy charges may extend far longer. That means companies that run afoul of the law will be subject to prosecution for years after this administration has left power. Third, why not take advantage of the DOJ’s revised corporate enforcement (or leniency) policy while it’s available? For some companies, at least, the DOJ’s revised policy is a golden opportunity to get the corporate house in order without suffering federal prosecution.

The bottom line is that it’s a good day for U.S. companies that face criminal exposure and want to become compliant. The DOJ has provided clear guidance in how a company can limit its criminal exposure and obtain a declination or a prosecution alternative resolution. To take advantage of this moment, companies need to ensure their internal compliance programs are operating effectively and when a problem is detected, hire outside counsel to conduct an internal investigation to determine whether self-disclosure is advisable. If and when self-disclosure is made to the DOJ, outside counsel will navigate the company through the cooperation and remediation processes. For once, corporate America and those who police corporate America seem to be rowing in the same direction — identify and correct corporate misconduct without inflicting unnecessary collateral damage on the engines of commerce.