Balancing corporate defence strategies with increased individual accountability
Following the billion dollar fines that have been imposed in antitrust cases in recent years, regulators are increasingly focusing on individual liability as an additional means of deterring corporate wrong-doing.
This is driven to some extent by a perception that shareholders of public companies have been punished by way of financial penalties while senior managers who either were involved in the conduct, or allowed it to occur, have been able to escape sanction.
In the US, criminal prosecution, incarceration and criminal fines remain the gold standard for deterrence, especially in cartel cases. On 9 September 2015, Deputy Attorney General Sally Quillian Yates issued a memorandum that established the DOJ’s mandate to use individual criminal and civil liability as complementary tools. The Yates Memorandum identifies two gaps in individual criminal liability that may be filled with individual civil liability. First, when the DOJ believes it cannot meet its criminal burden of proof and, second, when it could be used to punish individuals for conduct that may be proved but is not criminal in nature.
In the UK, following the widening of the criminal cartel offence for individuals in 2014, the CMA is actively building its capacity and skills to increase the number and speed of cases going forward. In addition, from 7 March 2016, there will be a new Senior Managers Regime for directors and other senior managers of financial institutions. The regime will enable the UK Financial Conduct Authority (FCA) to more readily hold these individuals to account for failures by the firm. Senior managers will have a “duty of responsibility” for certain functions or businesses which will include responsibility for appropriate processes and controls. Individuals may be personally responsible for a failure in systems and processes, even where they had no actual knowledge of the misconduct in question.
This trend towards greater individual liability for corporate wrong-doing will have material implications for corporate defence strategies in antitrust investigations and enforcement, including in the conduct of internal investigations.
“Increased regulatory focus on individual accountability, particularly in the US and UK, is leading to greater complexity for companies when devising corporate defence strategies.”
Bea Tormey, Partner, London
What effect will this have on corporate defence strategies?
One key effect of this trend may be an increased divergence in the respective desires of corporates and individuals implicated in wrong-doing to cooperate with regulators.
Individuals may become less willing to co-operate with their employers in making corporate immunity/leniency applications and in observing the obligations such applications impose in circumstances where they wish to defend their personal position and involvement in alleged misconduct. In the US in particular, employees of companies seeking cooperation credit from the DOJ Antitrust Division in criminal cases face increased risk of personal civil liability.
There is also a risk that regulators (particularly in the US) may prefer to cut deals directly with employees in order to obtain stronger evidence against the corporate entity or more senior individuals within a particular organisation.
Equally, cooperation agreements with key employees and decisions by corporate entities on whether to offer employment amnesty to individual employees may also become more difficult or may be discouraged by regulators.
This will not invariably be the case. The Yates Memorandum’s explicit carve-out of the DOJ Antitrust Division’s Corporate Leniency Program leaves in place a free pass from regulatory liability for employees of successful leniency applicants. In the UK, a successful leniency application can also extend immunity to that company’s employees.
The possibility of individual liability for employees also has implications for the way in which companies deal with employees implicated in misconduct, including the way in which they undertake internal investigations.
Regulators investigating individual conduct (including the UK FCA, Serious Fraud Office (SFO) and CMA) are becoming more prescriptive about the way in which companies are able to gather evidence and interview employees in the course of an internal investigation. In some cases, failure to comply with these requirements can lead to the loss of immunity and/or separate regulatory sanction.
Finally, the possibility of individual liability can lead to conflicting expectations about how and when employees involved in wrong-doing can and should be disciplined.
In the US, the recent Kayaba case indicates that the DOJ sees not just the existence of, but also the use of, disciplinary procedures for employees involved in wrong-doing as an important criteria for the granting of cooperation credit for companies who have a compliance programme. Other authorities, including the European Commission and CMA, arguably take a less prescriptive approach to sanctioning employees. They encourage companies wishing to benefit from leniency not to deprive themselves of the means of access to employees before all of the facts required to build a full picture of the evidence are obtained.
Practical implications in investigations
The increased focus on individual accountability serves to heighten the need for corporate defence strategies in antitrust investigations to take account of employee rights and incentives:
- No stone unturned internal investigations jeopardised by uncooperative employees: the Yates Memorandum ratchets up the standard for cooperation credit. Cooperation will not be a mitigating factor if a company seeking cooperation credit “declines to learn of such facts or to provide the Department with complete factual information about individual wrong-doers.” Ironically, the ability of companies to conduct a thorough investigation, including through interviews, will be increasingly frustrated by the DOJ’s policy on individual liability.
- Whistleblowing: employees in most jurisdictions will be entitled to be protected in the event of whistleblowing, when being interviewed and in the period after they blow the whistle. Certain regulators now encourage direct whistleblowing by employees. Corporates may want to set up their own whistleblowing framework so that employees come to them first - allowing the corporate to have more control of the process.
- Data protection: in global antitrust investigations, the company’s interests have often meant it would voluntarily cooperate with US regulators in terms of conducting an internal investigation, and providing documents or other data from outside the US. Parties should ensure they understand their obligations under data protection rules before sending documents to overseas regulators. Obtaining employee consent for transfer of documents can be sufficient, but in some countries such as France and Germany, even employee consent may not be sufficient to allow data to be transferred across borders.
- Interviews with individuals: regulators are gaining greater access to employees, including the right to interview employees at the outset on dawn raids. In the UK, for example, antitrust regulators have the power to subject employees (current and former) to compulsory interviews without the company’s lawyers being present. Although US employees’ right to counsel and right against self-incrimination are sacrosanct, the DOJ Antitrust Division continues its practice of spontaneous, pre-dawn raid drop-in interviews of key employees to seek their cooperation before they, or their employer, have had time to hire a lawyer.
- Regulatory approach to internal interviews: in some jurisdictions, once a regulatory investigation has started, internal interviews with employees can be prohibited. In the UK, the SFO and FCA can prohibit businesses interviewing employees for fear of tainting the evidence - this can have implications for internal investigations and obtaining evidence necessary for immunity/leniency.
- Disciplinary processes: the US and UK have seemed particularly focused on individual accountability. In addition to ensuring complete cessation of the offending conduct, it can be important to be seen to be suspending or terminating the employment of individuals implicated in wrong-doing. At the same time in jurisdictions across Europe, labour laws give substantial protection to individuals which makes taking time-sensitive decisions about disciplinary action more challenging.
- Publicity: publicity around antitrust investigations is another issue to be wary of. Individuals have complained in employment tribunals and other proceedings that corporate settlement documents have not protected their anonymity and that the result is they have infringement decisions which implicate them in wrong-doing before they have had an opportunity to make representations. This right to anonymity is not a concern in the US.
“We are now seeing cases in the employment tribunals where individuals are airing their grievances about how they were treated by their employer in antitrust investigations. Companies will need to think about these issues proactively rather than just reacting when employment claims arise - familiarity with the intricacies of employment law in each jurisdiction will be key.”
Caroline Stroud, Partner, London
Looking ahead to 2016:
In 2016, companies will need to be ever more careful in balancing corporate defence considerations with individual rights:
Updated compliance programmes: while already a focus, the recent DOJ guidance and suggestions in the UK that senior financial services managers could be held individually accountable for conduct over which they were not aware is increasing the, already high, focus on compliance programmes and culture. Existing compliance programmes for dawn raids and investigations will need to be updated to reflect the changes.
Separate legal representation: given the increased risks, individuals will likely start asking for separate legal representation much earlier in investigation processes.
Employee actions: employee actions against employers for failure to protect their rights in investigations are an increasing risk area. We are already seeing employees bring actions for failure to protect their confidentiality in regulatory proceedings.
“The Yates Memorandum diverges from, but carves out, the DOJ’s highly successful Corporate Leniency Program. Its policies are having intended and unintended effects on the triangular relationship between the DOJ, companies and their employees.”
Rich Snyder, Counsel, Washington DC