New Guidance on Inability to Pay Penalties

The Justice Department has published fresh guidance about how it will evaluate a company’s claims that it can’t afford to pay monetary penalties, for all you legal and compliance officers trying to convince everyone that your firm lives in the poorhouse. 

Assistant attorney general Brian Benczkowski announced the new guidance Tuesday while giving a speech in New York, and the Justice Department then released a memo with all the details that went to all Criminal Division prosecutors. 

“Where legitimate questions exist regarding a company’s inability to pay, the government will consider a range of factors,” Benczkowski said. “The factors include the company’s ability to raise capital, the circumstances giving rise to the organization’s current financial condition, the significant and likely collateral consequences of the fine or penalty to the company, and whether the proposed fine or penalty will impair the ability to pay restitution to victims.”

How will prosecutors decide whether a company’s inability to pay is legit? Benczkowski’s memo to prosecutors includes an 11-point laundry list of financial data that companies will be expected to supply: cash-flow projections, operating budgets, proposed changes to capital structure, acquisition and divestiture plans, insurance claims, liens on assets, audited financial statements, tax returns (so that rules out the Trump Organization ever participating in this program), and more. 

So basically, prosecutors will evaluate a claim of inability to pay on its merits; and where warranted, will recommend penalties lower than usual. Just be prepared to submit every scrap of paper that has come within a country mile of the CFO’s office. 

One crucial point: per Benczkowski’s new memo, inability-to-pay claims will only be considered after company and prosecutors agree on settlement of a case. That includes both the form of resolution (non-prosecution agreement, deferred-prosecution agreement, corporate guilty plea); and what an appropriate penalty should be given the law and the facts at hand. Only then can the company try pleading that it doesn’t have enough money to pay the penalty and needs a break.

This is important because it means all the other issues compliance officers consider when dealing with the Justice Department, such as whether to disclose misconduct voluntarily and how to remediate weaknesses in the compliance program — those things still need to happen first. 

In fact, one could even argue that this guidance about ability to pay isn’t terribly relevant to corporate compliance officers themselves, because whatever settlement you have to implement will already be decided before this ability-to-pay issue is even considered. At that point, it’s just negotiations among lawyers, accountants, and prosecutors. 

A Brief History of Inability to Pay

The Justice Department said last month that this guidance would be forthcoming, so unto itself this is no surprise. 

Moreover, this guidance is useful. The U.S. Sentencing Guidelines do address inability to pay in Sections 8C2.2 and 8C3.3, but those sections mostly talk about the court going below recommended penalty guidelines after a “preliminary determination” of inability to pay. The Sentencing Guidelines don’t say anything about what that determination process should actually look like. Now we have a better sense of things. 

The Sentencing Guidelines do make clear that a penalty should not be so large that it endangers the company’s ability to pay restitution to victims; Benczkowski stressed that point again in his speech on Tuesday. Nor, however, should a reduction in penalty be “more than necessary to avoid substantially jeopardizing the continued viability of the organization.” 

In other words, a penalty should only be reduced by the minimum amount necessary to give restitution to victims and to keep the company viable — no more than that. 

One question I’ve had on my mind is how this inability-to-pay guidance might fit with the idea that companies generally shouldn’t pay any penalties at all, since that only victimizes shareholders who had no role in the misconduct. (SEC chairman Jay Clayton, for example, is a proponent of this view.) 

Benczkowski’s new memo broaches this subject in a section about the collateral consequences of a penalty, and which of those consequences are or aren’t suitable grounds for a reduction. 

For example, a penalty so large that it harms the company’s ability to meet its employee pension obligations is one collateral consequence worth considering. So are penalties that might lead to layoffs, product shortages, or cuts to legally required capital reserves. 

On the other hand, collateral consequences generally not relevant in assessing ability to pay include “adverse impacts on growth, future opportunities, planned or future product lines, [and] future dividends.” 

That sounds to me like the penalties-harm-shareholders theory has no place in these calculations — which is sensible, but a bit surprising to hear from the Trump Administration. 

Anyway, we have the guidance. Let’s see how it plays out in practice.