U.S. Assistant Attorney General Brian Benczkowski Delivers Remarks on Achieving Effective Corporate Compliance: Part II –Memorandum on Monitor Selection

On October 12, the Assistant Attorney General for the Criminal Division at the United States Department of Justice, Brian A. Benczkowski, delivered remarks that addressed two significant aspects of corporate compliance: improving the compliance expertise of Criminal Division prosecutors; and the Department’s approach to corporate monitors.  This post will review his remarks on the latter topic, as well as the October 11 policy memorandum that he issued to provide guidance on corporate monitorships.

Benczkowski stated that he knew, from personal experience,

that the issue of whether a monitor will be required is one of the most significant aspects of any corporate resolution.   When the Criminal Division decides to impose a monitor, I believe we have an obligation to ensure that we have done so for the right reasons.  We also have a continuing obligation to interact with the monitor and address any problems that may arise during the course of the monitorship.

While Criminal Division attorneys “have performed quite admirably in this area,” he said, “there is always room for improvement in our policies and procedures to ensure we are acting responsibly when we impose this significant, but often times necessary burden on a corporation.”  After reviewing the Department’s monitorship policies and procedures, he issued a new policy memorandum titled “Selection of Monitors in Criminal Division Matters” (hereafter “Benczkowski Memorandum”).

The Benczkowski Memorandum states that it “supplements the guidance” provided by the March 7, 2008 Department memorandum by then-Acting Deputy Attorney General, Craig S. Morford, on selection and use of monitors (“Morford Memorandum”), and supersedes the June 24, 2009 memorandum by then—Assistant Attorney General Lanny A. Breuer on monitor selection (“Breuer Memorandum”).    It addressed seven topics relating to monitor selection:

1. Principles for Determining Whether a Monitor is Needed in Individual Cases: The Morford Memorandum included three considerations concerning the need for and propriety of a monitor: (a) “[a] monitor should only be used where appropriate given the facts and circumstances of a particular matter”; (b) prosecutors should consider, when assessing the need and propriety of a monitor, “(1) the potential benefits that employing a 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”; and (c) a monitor should never be imposed for punitive purposes.  The Benczkowski Memorandum elaborated on those considerations by addressing four issues:
   1. Weighing of Potential Benefits: It articulates four specific factors, “among others,” for prosecutors to consider in weighing the potential benefits:
      1. “whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems;”
      2. “whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management;
      3. “whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems;” and
      4. “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.”
   2. Adequacy of Changes in Corporate Culture and/or Leadership: It states that
      1. “[w]here misconduct occurred under different corporate leadership or within a compliance environment that no longer exists within a company, Criminal Division attorneys should consider whether the changes in corporate culture and/or leadership are adequate to safeguard against a recurrence of misconduct. Criminal Division attorneys should also consider whether adequate remedial measures were taken to address problem behavior by employees, management, or third-party agents, including, where appropriate, the termination of business relationships and practices that contributed to the misconduct. In assessing the adequacy of a business organization’s remediation efforts and the effectiveness and resources of its compliance program, Criminal Division attorneys should consider the unique risks and compliance challenges the company faces, including the particular region(s) and industry in which the company operates and the nature of the company’s clientele.”
   3. Cost-Benefit Factors: It requires that “[i]n weighing the benefit of a contemplated monitorship against the potential costs, Criminal Division attorneys should consider not only the projected monetary costs to the business organization, but also whether the proposed scope of a monitor’s role is appropriately tailored to avoid unnecessary burdens to the business’s operations.”
   4. Cost-Benefit Standard: It provides that “[i]n general, 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. Where a corporation’s compliance program and controls are demonstrated to be effective and appropriately resourced at the time of resolution, a monitor will likely not be necessary.”
   5. Punitive Monitorship:  In addition, on the latter consideration listed above, Benczkowski stated in his speech that the new approach “began with the foundational principle that the imposition of a corporate monitor is never meant to be punitive. It should occur only as necessary to ensure compliance with the terms of a corporate resolution and to prevent future misconduct.”
2. Approval, Consultation, and Concurrence Requirement for Monitorship Agreements: The Benczkowski Memorandum briefly states that before agreeing to a monitorship in any case, Criminal Division attorneys must first receive approval from their supervisors, including the concurrence of the Assistant Attorney General for the Criminal Division or his/her designee.
3. Terms of Criminal Division Monitorship Agreements: The Benczkowski Memorandum states, at greater length than the Breuer Memorandum, the contents of any DPA or NPA agreement that would require a monitorship.
4. Standing Committee: The Benczkowski Memorandum, in effect, recreates in modified form the Criminal Division Standing Committee on the Selection of Monitors that the Breuer Memorandum had created, and establishes procedures highly similar to those in the Breuer Memorandum for monitor selection and approval.
5. Selection Process: These provisions in effect track similar provisions in the Breuer Memorandum.
6. Retention of Records Regarding Monitor Selection: These provisions in effect track similar provisions in the Breuer Memorandum.
7. Departure from Policy and Procedure: These provisions in effect track similar provisions in the Breuer Memorandum.

In his speech, Benczkowski also explained that while the Morford Memorandum applied only to DPAs and NPAs, the new memorandum “makes clear that the Criminal Division also will apply the same principles to court-approved plea agreements that impose a monitor.”

Note: To appreciate the significance of the Benczkowski Memorandum, it is important to understand the general nature and scope of the Morford Memorandum.   That Memorandum set forth nine principles, with associated comments, to guide prosecutors in drafting provisions pertaining to the use of monitors in connection with DPAs and NPSs with corporations.  Those principles dealt with the following topics: (1) monitor qualifications and selection; (2) independence of monitors; (3) the monitor’s responsibility; (4) scope of the monitor’s responsibilities; (5) periodic reporting by the monitor; (6) noncompliance with monitor recommendations; (7) required reporting of previously undisclosed or new misconduct; (8) duration of the agreement provisions on monitorship; and (9) opportunity for extension or early termination of monitorship provisions.  As Benczkowski’s speech indicates, the Benczkowski Memorandum continues to require adherence to those nine principles in any Criminal Division case in which monitorship is under consideration.

Where the Benczkowski Memorandum clearly breaks new ground is the specification of factors that Criminal Division prosecutors are to apply in weighing the benefits and costs of monitorship, as well as the cost-benefit test to be applied to any and all corporate monitorships in Criminal Division cases.  The Morford Memorandum, as mentioned above, broadly required prosecutors to weigh the benefits and costs of monitorships.  The Benczkowski Memorandum substantially expands on that general cost-benefit requirement.  It not only specifies the cost-benefit factors that prosecutors will be required to address, but states a general rule – i.e., a “demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens” — that indicates that the Criminal Division will favor a monitorship if and only if its projected benefits more than outweigh the projected costs.  Neither the Benczkowski Memorandum nor Benczkowski’s speech address by how much benefits must outweigh costs, but it is safe to assume that the Criminal Division’s approach going forward will be to require more than a a 51-49 balance of benefits and costs.

The Department likely considers this new approach generally beneficial to both prosecutors and companies, by guiding and confining prosecutors’ discretion in deciding whether to require a corporate monitorship.  The cost-benefit test that the Benczkowski Memorandum lays down, however, requires further consideration by the Department, principally because its current language is imprecise on a critical issue on which both prosecutors and companies need precision: by how much must benefits outweigh costs?  If the Memorandum tacitly indicates that 51-49 will not suffice as a general rule, will 55-45, or 60-40?

Moreover, future efforts to apply the Benczkowski Memorandum’s cost-benefit analysis in actual cases may prove the concept of a highly detailed cost-benefit analysis to be chimerical.  There is no mathematical formula or methodology by which companies, any more than prosecutors, can use quantitative measures to establish the benefits of monitorship.  So long as prosecutors and regulators continue to use imprecise and subjective terms, such as a “culture of compliance” and “adequacy of a compliance program,” in setting enforceable expectations for corporate conduct, they will have little choice but to use qualitative and subjective criteria in identifying the projected benefits of monitorships.

That, however, may be the decisive factor in future Criminal Division corporate cases in which prosecutors believe a monitorship to be appropriate.  If companies present highly detailed cost projections to the Department, and prosecutors can articulate only qualitative benefits, it may prove to be virtually impossible to show a “clear benefit” from monitorship except in the most extreme cases.  That may not be a policy goal of the new approach, but it is an entirely plausible outcome.

Postscript:  In an October 30 podcast with Professor Mike Koehler, “the FCPA Professor,” I commented about the Benczkowski Memorandum and other recent Department of Justice compliance developments.  The podcast is available here.