The decision whether to make a voluntary disclosure of potential corporate criminal conduct to the Department of Justice is one of the most difficult and high-stakes challenges a board is likely to face. As discussed in DOJ Announces Tougher Corporate Enforcement and Self-Policing Policies, September-October 2022 Update, the Biden Administration DOJ has emphasized that it expects companies to disclose potential misconduct voluntarily and promptly and, in appropriate cases, will reward those that do so by declining to prosecute or with “cooperation credit” in sentencing determinations. In a January 17, 2023 speech, Assistant Attorney General Kenneth Polite expanded on this theme, announcing revisions to the Department’s Criminal Division’s Corporate Enforcement Policy (“CEP”) that enhance the benefits for voluntary disclosure, cooperation, and remediation. However, he also promised “dire consequences” for companies that fail to take these steps.
Under existing DOJ policy, the Department may decline to prosecute a company that voluntarily reports misconduct, cooperates with the investigation, and appropriately remediates the underlying problem. However, such a “declination” is not available if certain aggravating circumstances are present, such as involvement of senior management in the violation. According to Assistant AG Polite, this has led companies and their counsel to conclude that, if aggravating circumstances are present, it is more prudent not to disclose the misconduct. The CEP revisions seek to change that calculus by offering the possibility of declination even if aggravating circumstances are present (and threatening “very different outcomes for companies that do not self-disclose, meaningfully cooperate with our investigations, or remediate”).
Specifically, the under the CEP revisions announced by Mr. Polite, prosecutors may determine that, notwithstanding aggravating circumstances, a declination is appropriate if the company can demonstrate that it has met three factors:
Voluntary self-disclosure to the Department immediately upon becoming aware of the allegation of misconduct.
An effective compliance program and system of internal accounting controls that enabled the identification of the misconduct and led to the company’s voluntary self-disclosure.
Extraordinary cooperation with the Department’s investigation and extraordinary remediation measures. (What constitutes “extraordinary” cooperation and remediation remains to be determined.)
Another revision to the CEP seeks to promote disclosure of wrongdoing by increasing the potential sentencing reductions for companies that voluntarily self-disclose, fully cooperate, and appropriately remediate, even if a criminal prosecution is brought. Finally, for companies that do not self-disclose but are prosecuted after the Department discovers the violation through other means, the revisions offer increased, but more limited, benefits in the form of potential sentencing reductions, provided the company cooperates in the investigation and undertakes appropriate remediation.
For audit committees, the most notable part of the CEP changes is the emphasis on an effective compliance program and a system of internal accounting controls that is geared to identifying misconduct so that it will come to the board’s attention and can potentially be disclosed to the Department. Audit committees may want to revisit whether the company’s compliance program and internal controls are appropriately designed and functioning effectively with respect to the objective of bringing potential criminal conduct promptly to the board’s attention.