Bart M Schwartz, Guidepost Solutions LLC
This is an extract from the third edition of GIR's The Guide to Monitorships. The whole publication is available here.
Understandably, there exists a fair amount of confusion among regulators, practitioners and the general public about monitors and their roles. For years, federal and state governments, regulatory agencies and quasi-governmental organisations have utilised independent, private individuals to assist in the monitoring of remediation efforts at entities (e.g., corporations, labour unions and non-profit organisations) found to have engaged in some form of misconduct. Broadly, these individuals may be referred to as monitors, although they are sometimes designated as independent consultants, compliance consultants, independent experts, independent reviewers or independent auditors. Regardless of the designation, the individual selected will be required to provide the regulator with an impartial evaluation of the monitored entity's remediation efforts. The extent to which the monitor is obliged to report on or make recommendations regarding aspects of the entity's activities and processes, organisational structure, or culture will depend upon the type of monitorship and its scope; not all monitorships are created equal.
Mechanisms for imposing monitors
Monitorships are generally the result of a legal settlement agreement reached between a government agency and an individual or organisation that is facing a criminal, civil, or administrative investigation or prosecution. These agreements most often take the form of a non-prosecution agreement (NPA), a deferred prosecution agreement (DPA), or a consent order or decree. An NPA is an agreement between a government agency and an entity or individual facing a criminal or civil investigation, whereby the government agency foregoes commencing or filing a case against that person or company. With a DPA, the government agency will have already commenced a case against the defendant, but simultaneously asks a court to postpone the prosecution. A consent decree is an agreement or settlement in either a criminal or civil matter that resolves a dispute between parties often without admission of guilt or assumption of liability. In other types of legal agreements there may be no allegations of illegal conduct but rather a perceived need by the regulators for the independent monitoring of some aspect of the agreement and the conduct under review. For example, a proposed corporate merger that requires approval by both the Antitrust Division of the US Department of Justice (DOJ) and ultimately a US federal court, may have requirements that necessitate the appointment of a monitor for independent confirmation.
The US DOJ entered into 24 NPA and DPA agreements in 2018, slightly more than the 22 in 2017, but substantially lower than numbers reported over the past seven years. In 2018, for the second year in a row, the Securities and Exchange Commission (SEC) did not enter into any NPAs or DPAs. Nevertheless, it has been observed that the DOJ 'continues to embrace corporate NPAs and DPAs as effective tools in resolving investigations into corporate criminal misconduct'.
Types of monitorships
Just as there are different terms to describe a monitor, there are different types of monitorships. Depending on the nature of the actual or alleged misconduct, or the perceived issues (e.g., how serious the behaviour, how widespread within the organisation, how long the duration, and the remediation desired by the authorising agency), monitorships tend to focus either on enforcement or corporate compliance and, occasionally, a combination of the two. Some monitorships require reporting to the court; others do not. The DOJ does not have a standard template that dictates the core terms required for every NPA or DPA; therefore, these may vary, and the role and responsibilities of a monitor, if one is required in the agreement, also vary.
Monitorships focused on enforcement
Government agencies, like the SEC, the Drug Enforcement Agency (DEA), the Environmental Protection Agency (EPA), the Federal Highway Safety Administration (FHSA) and the Food and Drug Administration (FDA), to name a few, routinely use monitors as an enforcement tool or remedy. In the early years, the federal government used monitors in labour unions, such as the teamsters' and carpenters' unions, to deal with corruption. In these instances, the monitored organisation may have violated a law or industry regulation and its agreement with the government requires remediation of that specific violative behaviour. The government appoints a monitor, typically referred to as an independent consultant or expert, to ensure compliance. These monitorships tend to be prescriptive, with the government detailing what is to be assessed to report to the government on the status of remediation. They are limited in scope and, generally, shorter in duration than a corporate compliance monitorship. They may be thought of as 'pass/fail exercises'. For example, Chapter 6 of the FDA Regulatory Procedural Manual discusses judicial actions. Exhibits 6–18 show how the FDA has created requirements for engaging 'independent experts' depending on the subject of the violation that has resulted in the consent decree. While these independent experts act like monitors in that they review, report and sometimes recommend, their roles are very circumscribed.
At the SEC, enforcement type monitorships use 'independent compliance consultants' to review, evaluate, remediate and oversee the specific controls in place to prevent a reoccurrence of the subject misconduct. The SEC also appoints 'independent compliance monitors', generally as part of parallel civil and criminal proceedings. Their role tends to be more expansive and may go 'beyond assessment of the company's remediation and extends more generally to compliance with applicable laws'. These monitorships, more like the corporate compliance variety, require the monitor to make recommendations for improvements to the design and efficiency of the organisation's compliance programme.
Corporate compliance monitorships
In a corporate compliance monitorship, the monitor does not focus exclusively on the predetermined remediation of an internal control or other compliance failure. Instead, as a result of an agreement between the corporation and the government, an independent individual is selected to review the corporation's compliance structure, its policies and procedures, internal controls and compliance culture to understand what happened to create the compliance failure, why it happened, and what can be done to prevent it from happening again. This is widely referred to among compliance professionals as 'root cause analysis' and it is key to the success of the monitorship.
The role of a corporate compliance monitor is also quite different from a monitor in a strictly enforcement scenario. In the latter, the monitor serves in a way as an agent of the government, in place to assess and confirm that required remediation has occurred. A corporate compliance monitor must be neither the agent of the government nor the monitored company. The fact that an agreement has been reached that allows for a monitor indicates that the government has sufficient trust in the corporation's commitment to an independent assessment of its compliance programme and any remediations effected to date, and that it will cooperate fully with the monitor and implement appropriate recommendations. The monitor must not be viewed or behave in a manner that is perceived as a punishment for wrongdoing, nor should the monitorship be thought of as just 'another investigation', following on the internal and external investigations the company has already undergone. The monitor must be impartial and independent of all parties. The process of selecting a monitor for a corporate compliance monitorship is paramount; see 'The selection of a monitor' for issues surrounding monitor selection.
To an even greater degree than for monitorships focused on enforcement, corporate compliance monitorships are not 'gotchas'. While it is essential to understand past bad behaviour to determine the root cause, the corporate compliance monitor must be forward-looking. To arrive at a successful conclusion of the monitorship, one that includes both remediation and sustainability, the monitor needs to understand and, if appropriate, use internal corporate resources, such as the company's internal audit staff, while retaining his or her independence. The monitor's recommendations must be rational and consistent with corporate culture to ensure their longevity. To be successful, the monitor must also strive to achieve changes in the corporate culture so that when the monitor departs, the changes remain. This requires corporate buy-in from the top down and the bottom up. Depending on the specifics of the agreement governing each particular monitorship, the process for review, acceptance and implementation of the monitor's recommendations will vary. In some instances, the government agency imposing the monitorship will have ultimate approval of the recommendations, while in other agreements the government essentially defers to the monitor's assessment regarding the nature and implementation of required remediation.
Which agencies impose monitors?
Since monitorships have been found to be useful in providing independent oversight and confirmation to government agencies, it is not surprising to find that they 'have become a common judicial, regulatory and conflict-resolution tool'. In the United States, this is true not only at the federal level by various divisions and departments of the DOJ, EPA and FDA, to name a few, but also at the state, and in some instances, local levels. And, as will be discussed in detail elsewhere in this guide, by governments in the United Kingdom, France, etc.
The New York State Department of Financial Services (DFS) has been particularly vigorous in appointing independent consultants to monitor settlements reached with large, multinational financial institutions. Its 2014 agreement with BNP Paribas SA, which was an extension of a 2013 memorandum of understanding, and in its 2012 agreement that DFS reached with Standard Chartered Bank over sanctions violations and inadequacies in its anti-money laundering compliance programme that was extended multiple times before expiring on 31 December 2018, are notable examples.
The Port Authority of New York and New Jersey (PANYNJ) and the New York Metropolitan Transportation Authority (MTA), two public-benefit corporations engaged in the construction and maintenance of transportation facilities, infrastructure and buildings, routinely use monitorship agreements. These frequently occur when a contractor, subcontractor, supplier, etc., has been involved in a city or state criminal investigation, or the subject of a DPA, consent order or a debarment proceeding, but would like to bid on and work on PANJNY or MTA projects. The agencies will appoint a monitor to verify any required remediations, assess internal controls and review and report on the compliance programme. The company's ability to work on agency projects is contingent upon a successful monitorship.
Over the past several years, agencies like PANYNJ and the MTA, the New Jersey Department of the Treasury, as well as large financial institutions like the World Bank, public private partnerships or large financial institutions that develop major infrastructure projects or are rendering disaster relief are appointing individuals called integrity monitors. These integrity monitors, who serve as independent eyes and ears on a project, are named to a project proactively to deter fraud, waste and abuse, rather than in response to discovered ethical, legal or regulatory non-compliance.
The decision to use a monitor
The decision to require a monitor as part of the resolution of most regulatory enforcement agreements is a fairly routine one. The subject company needs to remediate and the agency needs to verify remediation. The agency may not have the resources or technical expertise in house to do this so it turns to third parties for assistance. For example, the Federal Trade Commission's Bureau of Competition often uses monitors to enforce compliance with a merger remedy like those involving transfer of assets or intellectual property. However, the decision to require a compliance monitorship as a condition of resolving a corporate investigation or prosecution, usually as part of an NDA or DPA, is generally a more protracted process that has evolved over time.
Guidance concerning when to appoint a monitor and how to select one has been periodically published by the DOJ in the form of memoranda. An early example is the memorandum issued on 7 March 2008 by then Acting Attorney General Craig S Morford, 'Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations' (the Morford Memo), which outlined principals to consider when using and selecting a corporate monitor. Subsequent DOJ memoranda have dealt with such topics as the resolution of disputes that may arise between the monitor and the monitored corporation, the Grindler Memo, and individual accountability in corporate wrongdoing, the Yates Memo, most recently substantially revised by Deputy Attorney General Rod Rosenstein in November 2018.
The most recent guidance from the DOJ specifically regarding monitorships is the October 2018 memorandum issued by Assistant Attorney General Brian Benczkowski, the 'Selection of Monitors in Criminal Division Matters' (the Benczkowski Memo). After observing that corporate monitors 'can be a helpful resource and beneficial means of assessing a business organisation's compliance with the terms of a corporate criminal resolution,' Mr Benczkowski notes that '[d]espite these benefits, the imposition of a monitor will not be necessary in many criminal resolutions'. He reiterates two of the Morford Memo's considerations that should guide prosecutors when deciding whether a monitor is appropriate '(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'. He then elaborates on those considerations and adds the following factors:
(a) whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems; (b) whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management; (c) whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems; and (d) 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.
The Benczkowski Memo also addresses the selection process for corporate monitors, outlining a four-tiered process that begins with the names of three candidates who are proposed by the monitored company. These candidates are then reviewed by the DOJ attorneys handling the matter and one name is chosen and forwarded to a DOJ standing committee for review. If found acceptable, the name is sent to the Office of the Attorney General for final review and approval. All Criminal Division employees involved in any way in the process must comply with conflict-of-interest guidelines and provide written certification of same. In remarks Mr Benczkowski made at the NYU School of Law Program on Corporate Compliance and Enforcement Conference on Achieving Effective Compliance, which was held on the day following the distribution of his memo, he referenced the selection process and stated that:
the goal is to ensure that the process is fair, ensures the selection of the best candidate, and avoids even the perception of any conflicts of interest. For this reason, the Division's monitor selection committee will continue to include an ethics official from the Criminal Division. We want to ensure that businesses and the public are confident in the selection process, avoiding any suggestion that monitors are chosen for inappropriate reasons, including personal relationships or past employment in the Department.
The Benczkowski Memo also states that any agreement that requires a monitor should specify the terms of retention, including the monitor's qualifications, the selection process, the process for removing a monitor if necessary, the timeline for monitor selection, an explanation of the monitor's responsibilities and the scope and length of the monitorship. In short, over the years, partly in response to concerns about the cost of monitorships and imprecision in describing the monitor's scope and responsibilities, the DOJ has continued to refine its use of monitors and its guidance. While the Benczkowski Memo comes out of the Criminal Division and the breadth of its application elsewhere remains to be seen, its impact on the use of corporate monitorships may be significant if, as Mr Benczkowski said in his remarks at NYU, the imposition of a corporate monitor should be 'the exception, not the rule'.
In addition to these DOJ memoranda, the Fraud Section of the DOJ produced a guidance document intended to assist individuals appointed as corporate monitors in evaluating the adequacy of a corporate compliance programme. The evaluation guidance was significant because in addition to assisting the monitor, it provides a benchmark for companies to use in assessing their own internal compliance programmes and opens a window into the type of review the Fraud Section would undertake when negotiating a plea or other agreements.
The selection of a monitor
In DOJ memoranda issued over the years, and various regulatory agency manuals and guidance documents, the factors to be considered when selecting a monitor are generally clearly articulated. All regulators appear to be in agreement on the essentials: the monitor must be a highly qualified and respected person, should not present any conflict of interest or appearance thereof, and should instil public confidence.
Under both the Beneczkowski Memo concerning criminal matters and a 13 April 2016 memorandum from the Acting Attorney General Stuart F Delerey, 'Statement of Principles for Selection of Corporate Monitors in Civil Settlements and Resolutions' (the Delerey Memo),the selection process begins with the opposing party identifying three candidates for the position and providing detailed information on each candidate. This information is then reviewed by a screening or standing committee and the candidates undergo a conflict-of-interest clearance process. Both the Criminal Division and Civil Division of the DOJ interview their prospective candidates and make a recommendation, which is then reviewed and approved by senior DOJ personnel.
On occasion, individual US attorneys' offices, in connection with their criminal and civil enforcement efforts, may select, or participate in the selection of monitors, receivers, special masters, claims administrators, and similar appointments. In some instances, depending on the circumstances and exigencies of the case, the attorney's office will solicit applications for these positions.
Regulatory agencies, the bulk of whose monitorships are of the enforcement variety and usually require specific or technical expertise, may issue request for proposals (RFPs) to solicit qualified candidates. The RFP will request information similar to that required by the DOJ (e.g., credentials, experience, references and fee structure). The agency will then review submissions, winnow the field, interview the finalists and make a selection.
In some instances, individual agencies, for example the PANYNJ or the MTA, may establish a pre-qualified pool of candidates whose capabilities and reputation have been determined to be appropriate for the type of monitorship under consideration. While subject entities may be offered an opportunity to object to the selection of a particular monitor, unlike with corporate compliance monitorships, regulatory agencies do not typically solicit the names of candidates from the monitored entity.
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