Penalties, Monitors, and More

Last week the head of enforcement at the Securities and Exchange Commission made notable remarks about more aggressive use of monetary penalties in SEC enforcement actions. A friend of mine then asked an excellent question: Could more aggressive use of penalties also affect how companies deal with the Justice Department? 

For lots of compliance officers, this could be the bigger issue to watch. The SEC rarely imposes massive penalties, while the Justice Department sometimes does; and the Justice Department can also sanction more businesses with more sweeping settlement terms. So perhaps we should unpack my friend’s question and consider its implications.

We can begin with a recap of what the SEC enforcement director, Gurbir Grewal, actually said. Grewal delivered a speech last week where he talked about the purpose of monetary penalties, and how the SEC will try to use them in the future. He identified two goals for penalties: to punish the actual misconduct, and to deter similar episodes of misconduct in the future. 

In that case, Grewal continued, it would be reasonable for the SEC to impose larger monetary penalties over time even for similar episodes of misconduct — because if the misconduct is still happening, that means the penalties didn’t have the desired deterrent effect. 

So, my colleague asked, should we expect a similar penalty policy from the Justice Department? 

Of course the most accurate answer right now is, “We don’t know,” and compliance officers should wait for a similar speech by an appropriate Justice Department official; maybe assistant attorney general Kenneth Polite, or even deputy attorney general Lisa Monaco. They would typically be the ones to announce such a policy shift. 

On the other hand, the reality is that the SEC and the Justice Department preach pretty much the same gospel on matters of enforcing against corporate misconduct. In my observation, whatever one agency says first about corporate enforcement, the other one says essentially the same thing soon thereafter. 

So I fully expect that we will see the Justice Department sometime soon embrace at least the idea of larger corporate penalties. I’ll even wager that Monaco or some other department functionary will make that news in early December, when many of them will be speaking at ACI’s annual FCPA Enforcement conference in Washington

If you’re skeptical about that, just try to imagine the converse: the Justice Department saying it won’t increase corporate penalties even in the face of persistent, egregious misconduct. That makes no sense, especially in a Democratic administration. 

What Else Should We Watch Here?

My compliance colleague also asked me whether the threat of larger penalties might scare companies away from participating in the Justice Department’s FCPA Corporate Enforcement Program. My gut tells me no. 

First let’s remember the precepts of the Corporate Enforcement Program, first unveiled in 2017. The program says that if a company… 

  • Voluntarily self-discloses its FCPA misconduct; and
  • Cooperates fully in any ensuing investigations, including help with prosecuting individual wrongdoers; and
  • Remediates the underlying failures that allowed the misconduct to happen

…then the Justice Department’s presumption will be not to prosecute. The company would still need to disgorge ill-gotten profits, plus interest; but no criminal charge or deferred-prosecution agreement. 

Well, if a company goes through the FCPA program and ends up with a declination to prosecute, by definition that means the company won’t pay any monetary penalties. So any threat of higher penalties won’t matter, because there’s no threat of penalties at all. (If I’m missing something here, feel free to email me at [email protected] and let me know.) 

We do have one exception to consider here: aggravating circumstances. The FCPA Enforcement Policy expressly says that some offending companies might meet all three of the above criteria and still face a potential criminal charge — and therefore, potential monetary penalties too — if the facts of their case include aggravating circumstances. 

As outlined in the U.S. Attorney’s Manual, those circumstances could include:

  • Involvement by executive management of the company in the misconduct; 
  • A significant profit to the company from the misconduct; 
  • Pervasiveness of the misconduct within the company; and 
  • Criminal recidivism.

But I still don’t think any threat of higher monetary penalties will scare even egregious FCPA offenders away, simply because such offenders are already in very hot enforcement water. If they keep quiet and then get caught anyway, the keeping quiet part will have the Justice Department looking to make a painfully expensive example out of that company. It’s still better to come clean, implement compliance reforms, and argue for the smallest penalty possible. 

Will some companies still decide to keep quiet and hope they never get caught anyway? Sure. But I suspect those companies were always going to keep quiet, no matter what regulators’ approach to monetary penalties might be. 

Meanwhile, Monitors

I also chatted this week about monetary policies with another friend and colleague, Tom Fox. He raised another excellent question: If the ultimate goal is to deter future instances of misconduct, wouldn’t another way to do that be more aggressive use of compliance monitors? 

Well, yes. If you don’t want to impose a monetary penalty on a company (which, critics will say, only harms shareholders), but you do want the company to take its compliance obligations seriously, then requiring a compliance monitor is one way to achieve that goal. That theory is logically sound.

Now, a move like that would have serious implications for corporate compliance officers, since you’re the ones who have to deal with these monitors when they show up at your company. Compliance monitors aren’t necessarily cheap, either. But one can imagine a scenario where regulators use the threat of higher monetary penalties to get an offender to agree to a compliance monitor instead. 

The Justice Department does have a policy about when it will impose compliance monitors. It was drafted during the Trump Administration, so of course the document is a hands-off sort of thing meant to use monitors sparingly. Therefore my question is whether we’ll see the Justice Department revise this policy sometime soon — which, in my humble opinion, would be more interesting to compliance officers than any proclamations about larger monetary penalties. 

So pull up a chair and stay tuned, folks. I think there’s more to come here.

Leave a Comment

You must be logged in to post a comment.