Since about the early 2000s, corporate monitors have become a go-to weapon for the Justice Department in its battle against business crime. Imposition of such monitors often results in the disruption of companies’ activities and expenditures of millions of corporate dollars – that might otherwise go to benefit shareholders. In line with its more business-friendly approach, Attorney General Jeff Sessions’ Department of Justice has signaled a retreat from such intrusion on businesses’ operations. Last Friday, Brian A. Benczkowski, the Assistant Attorney General in charge of the Justice Department’s Criminal Division, delivered a speech at New York University School of Law revealing this change in the Department’s approach to the use of corporate monitors.

Benczkowski’s speech, delivered at the Corporate Compliance and Enforcement Conference, announced the issuance of new guidance relating to the use of corporate monitors in Criminal Division matters. The gist of the revised approach is to allow corporations that demonstrate a willingness to improve internal compliance to do so, rather than require them to take on costly and disruptive monitors. The guidance reflects the Trump Administration Justice Department’s more pragmatic approach to addressing corporate wrongdoing as reflected in the April 2017 statement by Sessions that federal prosecutors would “take into account whether companies have good compliance programs … and whether they take suitable steps to remediate problems” in making decisions about whether and how to charge corporate entities.

Previous Growth of Corporate Monitors

In recent years, federal and state prosecutors often have mandated independent compliance monitors as part of a settlement agreement with corporate wrongdoers to ensure that organizations root out and correct the type of conduct that got them into trouble. These monitors typically engage in extensive investigation, oversee company-wide compliance overhauls, and assess and report back to the government on a company’s compliance and ethics programs. The government’s use of monitors has grown virtually unchecked for the past two decades in the wake of the financial crisis and increased enforcement of laws such as the Foreign Corrupt Practices Act. In November 2015, the Obama Justice Department appointed a full-time compliance expert or “monitor czar” to oversee the process and to consult with and train prosecutors on compliance issues. Her role was pivotal to the government’s then-increasing demand that companies install a monitor as part of any significant federal criminal resolution. Other government regulators such as the Securities and Exchange Commission, the Federal Trade Commission, and the Commodities Future Trading Commission, also got in on the act, as did State attorneys general and regulators, such as the New York Department of Financial Services, and some foreign regulators.

Monitorships have become a practice unto themselves. Monitors have been appointed in cases involving a wide variety of underlying misconduct from money laundering and wire fraud to false statements, obstruction of justice, and violations of the Foreign Corrupt Practices Act. Monitors have been installed at companies big – Deutsche Bank, Apple, and JPMorgan Chase, for example – and small. In most cases, monitors are engaged for a period of two to three years but can extend beyond to even five years. The use of monitors has become so prolific that it has resulted in a cottage industry of lawyers – typically former prosecutors or even judges – from consulting companies or large law firms who serve as monitors with broad authority. These highly-qualified monitors, who often bring their own consultants and advisors to a company, frequently come with an equally high price-tag that can affect the bottom line. Monitorships often cost more than $30 million and, in one case, a company reportedly spent more than $130 million in monitor-related costs.

For years, the likelihood that prosecutors would insist on the installation of a monitor and its associated costs and substantial disruption to a corporation’s operations have played a large role in a company’s negotiation and resolution of a criminal case. The new guidance, as set forth in the Benczkowski Memorandum, signal that this outsized influence will be reduced. According to Benczkowski, the Department’s new guidance explicitly recognizes that, “the imposition of a monitor will not be necessary in many corporate criminal resolutions, and the scope of any monitorship should be appropriately tailored to address the specific issues and concerns that created the need for the monitor.”

This new policy, a clear shift away from the Department’s practice of the past, is consistent with the Sessions Justice Department’s increasing sensitivity to the over-penalization of corporate wrongdoing. As articulated by Deputy Attorney General Rod Rosenstein in March 2018, the Department no longer intends to “employ the hammer of criminal enforcement to extract unfair settlements” in recognition that highly regulated corporations too frequently face multiple duplicative penalties from multiple regulators.

The Justice Department’s New Policy on the Use of Corporate Monitors

In his speech, Benczkowski stated that the Department would not replace the now-vacated full-time “monitor czar” position, but instead would seek to hire attorneys who have compliance experience and develop training to teach prosecutors what good corporate compliance looks like. The October 11, 2018 Benczkowski Memorandum supplements a prior memorandum issued by then-Acting Deputy Attorney General Craig S. Morford. The Morford Memorandum set forth two broad considerations to guide prosecutors when assessing the need and propriety of a monitor: 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. The Benczkowski Memorandum elaborates on these considerations.

In evaluating the potential benefits of a monitor, the guidelines require prosecutors also to consider: 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 organization or approved or facilitated by senior management; c) whether the corporation has made significant improvements in and to its compliance program and internal control systems; and d) whether remedial improvements made by the corporation have been tested to demonstrate that they would prevent or detect similar misconduct in the future. These factors emphasize that if the misconduct is isolated to a few individuals or the corporation has taken efforts to implement internal processes to prevent similar future misconduct, the scales should tip against requiring the installation of an expensive outside monitor.

In weighing the benefit of a monitorship against the potential costs, the guidelines direct prosecutors to consider not only the projected monetary costs to the company, but also whether the proposed scope of a monitor’s role is appropriately tailored to avoid unnecessary burden to the business’s operations. This change is significant to rein in what to date have been broad and expansive grants of power to an external monitor which serve to lengthen the time a monitor may be in place and increase associated costs.

Under the new guidelines, the Criminal Division will create a Standing Committee which includes the Deputy Assistant Attorney General who supervises the Fraud Section, the Chief of the Fraud Section, and the Deputy Designated Agency Ethics Official for the Criminal Division. The Standing Committee will review each case in which a monitor is recommended. These recommendations also must be approved by the Deputy Attorney General’s office. Recommendations are made by Justice Department attorneys involved in the case who are guided by the guidelines on how to review, interview, and select a monitor from candidates proposed by a corporation.

Conclusion: Change is Good

The Benczkowski Memorandum challenges the status quo reliance on corporate monitors and their associated significant costs and disruption to business organizations. The Justice Department’s new policy stresses that a monitor is justified only when the high cost associated with monitors (costs that might otherwise be used to establish a sustainable internal compliance program) is outweighed by the benefits. This shift appropriately aims at reducing the burden on corporations and their innocent shareholders and employees and should be embraced as a positive aspect of the Justice Department’s new approach to corporate misconduct.

The full extent to which the new policy will reduce the burden on shareholders remains to be seen. The current administration’s new policy may bring additional pressure on companies to show that they have remediated their internal controls in advance of reaching a disposition with the Justice Department. In order to make that showing, companies often need to hire the same kind of lawyers and consultants who serve as monitors. To the extent companies incur costs in this regard, the amount likely will be less than would be required for a full-blown independent corporate monitor.