- The U.S. Department of Justice Fraud Section recently published its "Evaluation of Corporate Compliance Programs," which outlines how it assesses the effectiveness of a corporate compliance program.
- The publication is divided into 11 areas and sets forth the questions that the Fraud Section commonly asks in determining whether to bring charges or in negotiating plea or other agreements.
- Companies can use the guidance to help improve the functioning of their compliance programs and reduce the risk of facing prosecution for misconduct.
The U.S. Department of Justice (DOJ) Fraud Section recently published its "Evaluation of Corporate Compliance Programs" that lists 1) the topics it explores and 2) the questions it asks when it assesses the effectiveness of a corporate compliance program in the course of determining whether to bring charges or when negotiating plea or other agreements. This document is a valuable tool not only for companies under criminal investigation but also for any company that wants to objectively evaluate the effectiveness of its existing compliance program. It enables a company to ask itself the hard questions about its compliance program's effectiveness in order to avoid a situation where it might have to answer those same questions being posed by a prosecutor.
The 11 topics covered below canvass the elements of an effective compliance and ethics program laid out in the Sentencing Guidelines, with some modifications.
1. Analysis and Remediation of Underlying Misconduct. Since the document is designed for prosecutors, it starts from the premise that misconduct has been identified. What is the company's root cause analysis of the misconduct at issue? What systemic issues were identified? Who performed the analysis? Were there audit reports or other prior opportunities to detect the misconduct? What is the company's analysis of why warning signs were missed? What specific changes has the company made to ensure the same or similar issues will not occur again?
2. Senior and Middle Management. Next are a series of questions about the conduct at the top of the company. Did senior leaders encourage or discourage the type of misconduct in question? What actions have senior and middle management taken to demonstrate a commitment to the company's compliance and remediation efforts? Does the board of directors meet privately with top compliance officials? What oversight took place in the area in which the misconduct occurred?
3. Autonomy and Resources. These questions focus on the compliance unit. What role, if any, did compliance play with respect to the misconduct — was it involved in relevant training or decisions? What stature does compliance have in the company in terms of compensation levels, rank, reporting line and access to key decision-makers? Do compliance personnel have the appropriate experience and qualifications? Do they have sufficient resources? Do they have independence to pursue and report the results of their investigations? How has the company responded to any concerns raised by the compliance unit?
4. Policies and Procedures. These questions probe the design, implementation and effectiveness of the company's compliance program. How has the company designed and implemented its compliance policies and procedures? Was there a policy or procedure that prohibited the misconduct at issue? Has clear guidance and/or training been provided to key gatekeepers (e.g., the persons who issue payments or review approvals) in the control processes relevant to the misconduct? How has the company communicated its policies and procedures to relevant employees and third parties? How have policies been rolled out and implemented? What controls failed or were missing? How was the misconduct funded? Did an approval or certification process fail?
5. Risk Assessment. These questions concentrate on risk assessment and management. How has the company identified, analyzed and addressed the risks it faces? What information has the company collected and used to help detect misconduct? How has the risk assessment process accounted for manifested risks?
6. Training and Communications. These questions explore the effectiveness and specific content of training programs and informational resources provided to employees. Has the company provided tailored training for high-risk and control employees in the area where the misconduct occurred? How does the company determine who should be trained and on what subjects? How has the company measured the effectiveness of its training? How does senior management advise employees when an employee is terminated for failure to comply with policies, procedures or controls? What additional guidance resources are available to employees? Do employees know about these resources?
7. Confidential Reporting and Investigation. These questions focus on effectiveness of reporting processes and how companies have handled investigations. How has the company collected and assessed information reported to it? Has the compliance unit had access to all such information? How has the company ensured that investigations are independent, objective, and properly scoped, conducted and documented? How does the company respond to investigative findings? How high up in the company do such findings go?
8. Incentives and Disciplinary Measures. These questions focus especially on the issue of accountability for misconduct. What disciplinary actions were taken and when? Were managers held accountable for misconduct that occurred under their supervision? What is the company's overall record on employee discipline (relating to the type of conduct at issue), including the number and types of disciplinary actions? Has the company ever terminated or otherwise disciplined anyone for the same or similar misconduct? Have disciplinary actions been fairly and consistently applied across the organization? Who makes the disciplinary decisions? How has the company incentivized compliance and ethical behavior?
9. Continuous Improvement, Periodic Testing and Review. These questions explore a company's internal audit process and how it updates its risk assessments and compliance policies, procedures and practices. What types of internal audits are conducted? Did they identify the misconduct at issue? If not, why not? How often are internal audits performed in high-risk areas? What internal audit findings are reported to management and the board on a regular basis? What control testing has the company performed? How often has the company updated its risk assessments and reviewed its compliance policies and procedures?
10. Third Party Management. These questions come into play when the misconduct involves third parties, such as agents (a recurring issue under the Foreign Corrupt Practices Act). What is the business rationale for using the third party? How does this correspond to the nature and level of the enterprise risk identified by the company? Has the company analyzed the third party's incentive model against compliance risks? How has the company monitored the third party? What mechanisms exist to ensure that the contract adequately specifies the services to be performed by the third party, that the described work is performed, that the payment terms are appropriate and that the compensation is commensurate with the services performed? What action (e.g., suspension, termination or audit) has been taken with respect to a third party where compliance issues have arisen?
11. Mergers and Acquisitions (M&A). The final topic deals with problems inherited through a merger or acquisition. The focus of the questions is on both the due diligence process before the M&A and the integration process following the M&A. Was the misconduct identified during due diligence? How is due diligence geared toward identifying risks? How is the compliance function integrated into the M&A process? What has been the company's process for implementing compliance policies and procedures at new entities?
A company that asks itself these questions, answers them candidly and takes any needed corrective actions will improve the functioning of its compliance program. It will also reduce the risk that it will ever have to answer these questions to the satisfaction of a prosecutor who is considering whether to prosecute the company for misconduct.