The recent settlement by Herbalife Nutrition Ltd. with the Securities and Exchange Commission, the U.S. Department of Justice, and the U.S. Attorney’s Office for the Southern District of New York totaling over $123 million is the latest in a string of enforcement actions under the Trump Administration that identified violations of the Foreign Corrupt Practices Act but noticeably did not also impose an independent corporate compliance monitor. Herbalife neatly illustrates the recent paradigm shift inside the DOJ, as the stipulated facts and extensive nature of the illicit scheme outlined in the deferred prosecution agreement are of the caliber that in previous days likely would have led to the imposition of an independent monitor. The decision not to impose one here was said to be due in part to the company’s cooperation and remedial efforts by the time of resolution. Even if the company’s cooperation and remedial efforts contributed to the government’s decision not to insist on a monitor, that decision likely was also part of a concerted effort by the current administration to sideline the use of monitorships generally.
Herbalife’s Scheme And Punishments
According to both the DOJ and the SEC, over a ten-year period from 2006 to 2016, Herbalife’s Chinese subsidiaries “engaged in a scheme to offer corrupt payments and other improper benefits to Chinese government officials” for the purpose of obtaining “direct selling licenses” to sell their products in China. Herbalife’s Chinese subsidiaries engaged in accounting efforts to cover-up the improper payments to government officials, including the submission of false invoices and expense reports and maintaining false Sarbanes-Oxley sub-certification letters. Although Herbalife’s U.S.-based executives received “reports of high travel and entertainment spending in China and violations of Herbalife’s internal FCPA policies,” the company’s internal controls failed to detect or prevent the scheme.
The DOJ, the USAO of the S.D.N.Y, and the SEC released strong statements condemning Herbalife’s actions:
- Acting Assistant Attorney General Brian Rabbitt stated “Herbalife misrepresented important information made available to investors” and tried to “conceal [its] widespread corruption scheme . . . by mischaracterize[ing] improper payments as permissible business expenses”;
- Acting U.S. Attorney Audrey Strauss of the Southern District of New York called the scheme “widespread” and “extensive and systematic”; and
- Senior Associate Director of the SEC’s New York Regional Office Sanjay Wadhwa noted that “Herbalife’s inadequate internal accounting controls allowed an environment of corruption to exist in its Chinese subsidiaries for more than a decade.”
Under recent prior administrations, these facts may well have led to the imposition of an independent monitor. On March 7, 2008, the Bush administration issued the “Morford Memorandum” which established the guidelines used for ten years on how federal prosecutors should select and implement corporate monitors in connection to DPAs and NPAs. This memo stated that the goal of a monitorship should be “to address and reduce the risk of recurrence of the corporation’s misconduct” but “should only be used where appropriate given the facts and circumstances of a particular matter.”
In Herbalife, however, acting under the directives of the current administration, an independent corporate monitor was found to be unnecessary. The DOJ even pointed out—in its DPA—that due to Herbalife’s “extensive remedial measures” prior to resolution in conjunction with an agreement by the company to report directly to the DOJ on further remediation efforts, that an independent compliance monitor was deemed to be “unnecessary.” This largely tracks the updated Department of Justice Manual 9-47.120, which has codified the apparent belief of the Trump Administration that FCPA matters “generally will not require appointment of a monitor if a company has, at the time of resolution, implemented an effective compliance program.” Given that Herbalife still operates in China, the country’s importance to Herbalife’s bottom line, and that the company likely has not substantially tested its newly implemented remedial measures, the government may well have deemed a monitor necessary and appropriate in the past.
Corporate Compliance Monitors Under The Current Administration
Herbalife hardly stands alone in its ability to resolve its recent case without the government imposing a corporate monitor. As previously observed by this blog in 2018, the Trump Administration diminished the Justice Department’s intrusion into the corporate sector. As observed then, the DOJ’s approach to reduce the imposition of the high cost of a monitor in some cases “should be embraced as a positive aspect of the Justice Department’s new approach to corporate misconduct.”
Now however, the results of the current administration’s actions are more apparent. Trump’s appointees have made a concerted effort to drive down white-collar prosecutions and to lessen the tools of the federal prosecutor to go after corporate misconduct. The 2017 elimination of the Obama administration’s “compliance counsel” at the DOJ—Hui Chen, the so-called “Monitor Czar”—in hindsight, was only the tip of the iceberg.
Indeed, according to one commentator, between 2016 and the middle of 2018, out of a total of 64 non-prosecution agreements or deferred prosecution agreements, only 26% of those agreements imposed a compliance monitor. By the end of 2018, that number had fallen to 23%. In 2019, only five independent monitors were imposed out of the 31 NPAs or DPAs entered into by Trump’s DOJ – a mere 16%. In 2020, zero have been imposed out of at least 18 resolutions. This is in stark contrast to the Obama administration, which demanded an independent monitor for around one-third of its compliance settlements.
Some have asked—without an independent monitor—who watches the store once a company has been found to have permitted wide scale criminal conduct? Even a company that is under a DPA or an NPA will have no one to confirm that its remedial efforts succeed except its own executives, which could easily lead to a concerted disregard for those remedial efforts in pursuit of the shareholder profits – the same thinking that likely landed the company in the government’s crosshairs in the first place. A monitor, even though it can be expensive, could ensure that the terms in the Justice Department’s agreement are given more than lip service – and in the best cases, even lead to the actual implementation of a robust compliance system.
Before the most recent administration came to power, the rising costs of monitorships placed a heavy burden on corporations and their shareholders. The decision by the Trump administration to abandon monitorships in favor of self-regulation may prove, however, to be too laissez-faire. Some monitors were able to create tangible benefits – including changing the compliance cultures of their charges. In some circumstances, where a company continues to do business in the very climate that led to government scrutiny, a monitor might still make sense – perhaps under a tighter scope. Without monitors, the future could include an increased amount of corporate recidivism or internally-created compliance programs that have power on paper to satisfy an agreement with the government but no power to enact change. One additional potential negative side effect may be to the current relatively positive perception of American companies internationally. U.S. corporations with strong compliance programs often are sought out as strategic partners by foreign governments and companies to help ensure compliance with local and international anti-corruption requirements (putting aside recent high-profile counter-examples).
In the absence of adequate regulatory federal oversight, some states may believe it has fallen to them to step boldly into the void to regulate corporations within their jurisdiction. The New York Department of Financial Services (“NY DFS”) has continued to engage independent compliance monitors to perform comprehensive reviews of compliance programs, most recently imposing an independent monitor on Deutsche Bank in April 2020.