In mid-February, the Department of Justice’s Fraud Section issued a publication entitled “Evaluation of Corporate Compliance Programs,” (“Compliance Memorandum”) which highlighted important topics and reoccurring problems in the compliance arena. This is the first such guidance that this Section has published on this topic since President Donald J. Trump assumed office.
This publication considers the “Filip Factors,” named for a Deputy Assistant Attorney General, who wrote the memorandum entitled “Principles of Federal Prosecution of Business Organization.” The Filip Memo highlighted 10 separate factors that federal prosecutors analyze when making charging decisions with respect to corporate officers. One of the main factors used is an analysis of “the existence and effectiveness of the company’s pre-existing compliance program.” The DOJ drafted the new Compliance Memorandum to provide more transparency to corporate officers regarding how federal prosecutors will undertake particularized evaluations of corporations’ unique compliance programs when making charging decisions in the wake of potential corporate wrongdoing.
The Memorandum stated that prosecutors will examine 11 different areas:
- Corporate Analysis and Remediation Regarding the Investigated Conduct
- Senior and Middle Management Involvement
- Autonomy and Resources
- Policies and Procedures
- Risk Assessment
- Training and Communications
- Adequate Internal Investigation and Reporting
- Incentives to Behave and Disciplinary Measures in the Event of a Lapse
- Improvement, Testing, and Review
- Third-Party Management (think outside law firm)
- The Effect of Mergers and Acquisitions on the Compliance Program
The Memorandum makes clear that the fourth area, Polices and Procedures, is a key area of focus for the Department of Justice. Prosecutors scrutinize the design and accessibility of a corporation’s compliance program, and specifically whether that program is tailored to the realistic risks of the corporation’s business. In considering the tailoring of the companying’s compliance program, the DOJ evaluates “the methodology the company used to identify [its] particular risks” and “the information metrics” the company used to help detect misconduct. Federal prosecutors also examine how and how effectively the program has been communicated to the average worker at the corporation.
The Memorandum places a strong emphasis on how much the corporation values its compliance program and what resources the corporation devotes to the program. It specifically asks prosecutors to examine how many resources (read: money) the company has given to its compliance program as compared to other programs that concentrate more intently on the company’s profit-generating mission. Prosecutors will also pay close attention to the autonomy of the compliance program; is it controlled by outside counsel or a cog of the CEO? Do compliance officers have “direct communication lines to the board of directors” or are they stuck in a broom closet? The Memorandum also cautions prosecutors to examine whether compliance officials have actually made a difference by stopping problem transactions before they occurred or peeling them back shortly after they occurred.
This Memorandum reiterates that the DOJ places great attention on companies that have overseas contacts and states that prosecutors should focus on how effectively compliance programs deal with potential foreign third-party risk. Specifically, the DOJ wants to see corporations engage in third-party due diligence and monitoring, enter into appropriate written contracts with third-parties on “appropriate” payment terms, and address any “red-flags” that arise during the relationship with the foreign third-party. All in all, this Memorandum reaffirms the need to have white-collar and compliance counsel consistently review and update corporate compliance programs.