United States: DOJ Issues New Guidance On Evaluating The Effectiveness Of Compliance Programs

On April 30, 2019, the Department of Justice (DOJ) Criminal Division published new guidance for corporate compliance programs. The new guidance (Updated Compliance Guidance) updates a prior guidance document providing factors that prosecutors should consider when evaluating the effectiveness of compliance programs for determining how to prosecute or resolve corporate criminal enforcement actions. Compliance program effectiveness is a key variable DOJ takes into consideration when (1) making charging decisions and exercising prosecutorial discretion; (2) making sentencing recommendations, including calculating recommended fines; and (3) deciding whether to impose reporting requirements or appoint an outside compliance monitor as part of a corporate resolution. The Updated Compliance Guidance provides useful additional insights into prosecutors' assessment criteria when making such decisions.

Expansion on the 2017 Compliance Guidance

The new guidance, entitled: "Evaluation of Corporate Compliance Programs," updates and expands a prior version that the Criminal Division's Fraud Section released in February 2017 (2017 Compliance Guidance).1

While the Updated Compliance Guidance incorporates and addresses the same general issues and topics as the 2017 Compliance Guidance, the new document provides additional factors, in the form of questions, that prosecutors may consider when assessing cases, and an overall framework for that evaluation.

As with previous DOJ guidance documents—including the 2017 Compliance Guidance, the FCPA Resource Guide, the U.S. Sentencing Commission Guidelines Manual, and the "Principles of Federal Prosecution of Business Organizations" in the Justice Manual—the Updated Compliance Guidance emphasizes that prosecutors' assessments of compliance program effectiveness are not based on a checklist or formula; rather, prosecutors make individualized determinations based on companies' particular risk profiles and the measures they have undertaken to mitigate such risks. The Updated Compliance Guidance, however, gives companies a clearer and more comprehensive sense of DOJ's views on the design, implementation, and operation of effective compliance programs. Notably, in heavily regulated industries, such as healthcare and finance, DOJ continues to recommend that prosecutors refer to industry-specific regulations and agency guidance when assessing compliance program effectiveness.

Additional Clarity on DOJ's Expectations

The Updated Compliance Guidance organizes 12 topics under the three "fundamental questions" about compliance program effectiveness found in Section 9-28.000 of the Justice Manual:

  1. Is the program well designed?
  2. Is the program being implemented effectively?
  3. Does the compliance program work in practice?

Part I discusses best practices and expectations related to the design of compliance programs, specifically the identification, assessment, and definition of the risks facing a given company; the existence of appropriate compliance policies and procedures; tailored risk-based training and communications programs; confidential reporting structures and investigation processes; third-party due diligence and management; and due diligence and integration processes in the context of mergers and acquisitions.

Part II examines hallmarks of effective compliance program implementation, including commitment by senior and middle management to a culture of ethics and compliance with the law; the autonomy of and the sufficiency of resources for the compliance function; and the establishment of incentive structures to encourage compliance and disciplinary measures to deter noncompliance.

Finally, Part III details metrics that prosecutors should use to assess the adequacy and effectiveness of the compliance program in practice, exploring a program's capacity for continuous improvement, periodic testing, and review; the existence of mechanisms to investigate misconduct in a timely and thorough manner; and the company's ability to conduct a thorough root-cause analysis of underlying misconduct and take steps to remediate those root causes and prevent future misconduct.

For each topic addressed, the Updated Compliance Guidance includes a short introduction that explains its broader context and importance and cites, where appropriate, relevant sections from the Justice Manual and U.S. Sentencing Guidelines.

Twice the length of the 2017 Compliance Guidance, the Updated Compliance Guidance adds 61 new factors that both companies and prosecutors should consider when evaluating the design, implementation, and operation of compliance programs. These new factors, which span 29 different categories and are presented in question form, are included in an Appendix to this Advisory. For example, when discussing the form, content, and effectiveness of compliance training, the previous guidance directed companies and prosecutors to consider whether " [t]he training [has] been offered in the form and language appropriate for the intended audience? How has the company measured the effectiveness of the training?" The new guidance provides four additional factors for consideration:

  • Is the training provided online or in-person (or both), and what is the company's rationale for its choice?
  • Has the training addressed lessons learned from prior compliance incidents?
  • Have employees been tested on what they have learned?
  • How has the company addressed employees who fail all or a portion of the testing?

The new guidance also provides some examples of measures that companies might consider incorporating into their own compliance programs, such as giving employees case studies to address real-life scenarios as part of their training curriculum.

As Assistant Attorney General Brian Benczkowski stated in remarks delivered the same day the new guidance was released, the goal of the Updated Compliance Guidance is "to provide additional transparency in how [DOJ] will analyze a company's compliance program." He added that DOJ "hope[s] this updated version provides additional insight to both prosecutors and companies with respect to evaluation of compliance programs."

DOJ's Recent Focus on Corporate Compliance

The updated guidance is just the latest in a series of steps taken by DOJ in recent years to clarify its expectations for compliance programs and to emphasize the role that compliance plays in corporate criminal enforcement. In December 2017, the DOJ unveiled a revised Corporate Enforcement Policy for the US Foreign Corrupt Practices Act (FCPA) under which companies that self-disclose misconduct, cooperate with investigations, and strengthen their compliance programs can secure credit in enforcement actions and may even avoid prosecution;2 since 2018, DOJ's Criminal Division has been using that policy as guidance outside the FCPA context. In October 2018, AAG Benczkowski issued a memorandum explaining DOJ's position on the role of monitorships in corporate compliance and enforcement considerations. In a November 2018 speech, Deputy Assistant General Rod Rosenstein reiterated that one objective of DOJ's corporate enforcement policies is to "encourage companies to implement improved compliance programs." The importance of effective compliance programs has been a point of emphasis in for DOJ's Antitrust Division as well, as highlighted by AAG Makan Delrahim's speech the day after the updated guidance was released in which he confirmed that the Division was considering a "range of options" to "further encourage the adoption of robust compliance programs."

In fact, the Updated Compliance Guidance is the latest reflection of a shift in thinking about compliance program effectiveness that has been underway among prosecutors, regulatory agencies (such as the Office of Inspector General of the Department of Health and Human Services), and in-house legal and compliance departments for a number of years—namely, that compliance programs must be dynamic and compliance officers must implement meaningful tools for continuous improvement. The Updated Compliance Guidance, for example, mentions proactive risk assessment, monitoring, control testing, and periodic assessments of corporate culture as key tools to achieve such improvement. Taken another way, a compliance program that addresses "yesterday's risks" is unlikely to be viewed as favorably "effective" today.

The Updated Compliance Guidance reinforces the significance of a strong compliance program not only as a means to prevent and detect misconduct, but as a factor that prosecutors take seriously when determining whether and how to pursue a corporate criminal enforcement action. Indeed, AAG Benczkowski explained that the Updated Compliance Guidance is "part of [DOJ'] broader efforts in training, hiring, and enforcement to help promote corporate behaviors that benefit the American public and ensure that prosecutors evaluate the effectiveness of compliance in a rigorous and transparent manner." DOJ's message is clear: the effectiveness—not just the existence—of a compliance program matters, and companies should incorporate the insights and questions from the Updated Compliance Guidance into their broader efforts to assess and strengthen their compliance programs.

Appendix: 61 New Factors/Questions Added to the Updated Compliance Guidance

I. Is the Corporation's Compliance Program Well Designed?

A. Risk Assessment

Risk Management Process:

  • What information or metrics has the company collected and used to help detect the type of misconduct in question?
  • How have the information or metrics informed the company's compliance program?

Risk-Tailored Resource Allocation:

  • Does the company devote a disproportionate amount of time to policing low-risk areas instead of high-risk areas, such as questionable payments to third-party consultants, suspicious trading activity, or excessive discounts to resellers and distributors?
  • Does the company give greater scrutiny, as warranted, to high-risk transactions (for instance, a large-dollar contract with a government agency in a high-risk country) than more modest and routine hospitality and entertainment?

Updates and Revisions:

  • Is the risk assessment current and subject to periodic review?
  • Have there been any updates to policies and procedures in light of lessons learned?
  • Do these updates account for risks discovered through misconduct or other problems with the compliance program?

B. Policies and Procedures

Design: [no new content]

Comprehensiveness:

  • What efforts has the company made to monitor and implement policies and procedures that reflect and deal with the spectrum of risks it faces, including changes to the legal and regulatory landscape?

Accessibility:

  • If the company has foreign subsidiaries, are there linguistic or other barriers to foreign employees' access?

Responsibility for Operational Integration:

  • In what specific ways are compliance policies and procedures reinforced through the company's internal control systems?

Gatekeepers:

  • Do they know what misconduct to look for?

C. Training & Communications

Risk Based Training:

  • Have supervisory employees received different or supplementary training?

Form/Content/Effectiveness of Training:

  • Is the training provided online or in-person (or both), and what is the company's rationale for its choice?
  • Has the training addressed lessons learned from prior compliance incidents?
  • Have employees been tested on what they have learned?
  • How was the company addressed employees who fail all or a portion of the testing?

Communications about Misconduct:[no new content]

Availability of Guidance: [no new content]

D. Confidential Reporting Structure and Investigation Process

Effectiveness of the Reporting Mechanism:

  • Does the company have an anonymous reporting mechanism, and, if not, why not?
  • How is the reporting mechanism publicized to the company's employees?
  • Has it been used?

Properly Scoped Investigations by Qualified Personnel:

  • How does the company determine which complaints or red flags merit further investigation?
  • How does the company determine who should conduct an investigation, and who makes that determination?

Investigation Response:

  • Does the company apply timing metrics to ensure responsiveness?
  • Does the company have a process for monitoring the outcome of investigations and ensuring accountability for the response to any findings or recommendations?

Resources and Tracking of Results:

  • Are the reporting and investigating mechanisms sufficiently funded?
  • How has the company collected, tracked, analyzed, and used information from its reporting mechanisms?
  • Does the company periodically analyze the reports or investigation findings for patterns of misconduct or other red flags for compliance weaknesses?

E. Third-Party Management

Risk-Based and Integrated Processes: [no new content]

Appropriate Controls:

  • How does the company ensure there is an appropriate business rationale for the use of third parties?
  • If third parties were involved in the underlying misconduct, what was the business rationale for using those third parties?

Management of Relationships:

  • Does the company have audit rights to analyze the books and accounts of third parties, and has the company exercised those rights in the past?

Real Actions and Consequences:

  • Does the company keep track of third parties that do not pass the company's due diligence or that are terminated, and does the company take steps to ensure that those third parties are not hired or re-hired at a later date?
  • If third parties were involved in the misconduct at issue in the investigation, were red flags identified from the due diligence or after hiring the third party, and how were they resolved?

F. Mergers and Acquisitions (M&A): [no new content]

II. Is the Corporation's Compliance Program Being Implemented Effectively?

A. Commitment by Senior and Middle Management

Conduct at the Top:

  • Have managers tolerated greater compliance risks in pursuit of new business or greater revenues?
  • Have managers encouraged employees to act unethically to achieve a business objective, or impeded compliance personnel from effectively implementing their duties?

Shared Commitment:

  • Have [senior leaders and middle-management] persisted in that commitment in the face of competing interests or business objectives?

Oversight: [no new content]

B. Autonomy and Resources

Structure:

  • Where within the company is the compliance function housed (e.g., within the legal department, under a business function, or as an independent function reporting to the CEO and/or board)?
  • To whom does the compliance function report?
  • Is the compliance function run by a designated chief compliance officer, or another executive within the company, and does that person have other roles within the company?
  • Are compliance personnel dedicated to compliance responsibilities, or do they have other, non-compliance responsibilities within the company?
  • Why has the company chosen the compliance structure it has in place?

Seniority and Stature:

  • How has the company responded to specific instances where compliance raised concerns?
  • Have there been transactions or deals that were stopped, modified, or further scrutinized as a result of compliance concerns?

Experience and Qualifications:

  • Has the level of experience and qualifications in these roles changed over time?
  • Who reviews the performance of the compliance function and what is the review process?

Funding and Resources:

  • Has there been sufficient staffing for compliance personnel to effectively audit, document, analyze, and act on the results of the compliance efforts?
  • Has the company allocated sufficient funds for the same?

Autonomy: [no new content]

Outsourced Compliance Functions: [no new content]

III. Does the Corporation's Compliance Program Work in Practice?

A. Continuous Improvement, Periodic Testing, and Review

Internal Audit:

  • What is the process for determining where and how frequently internal audit will undertake an audit, and what is the rationale behind that process?
  • How are audits carried out?

Control Testing: [no new content]

Evolving Updates:

  • Has the company undertaken a gap analysis to determine if particular areas of risk are not sufficiently addressed in its policies, controls, or training?

Culture of Compliance:

  • How often and how does the company measure its culture of compliance?
  • Does the company seek input from all levels of employees to determine whether they perceive senior and middle management's commitment to compliance?
  • What steps has the company taken in response to its measurement of the compliance culture?

B. Investigation of Misconduct

Properly Scoped Investigation by Qualified Personnel:

  • How has the company ensured that the investigations have been properly scoped, and were independent, objective, appropriately conducted, and properly documented?

Response to Investigations:

  • Have the company's investigations been used to identify root causes, system vulnerabilities, and accountability lapses, including among supervisory manager and senior executives?
  • What has been the process for responding to investigative findings?
  • How high up in the company do investigative findings go?

C. Analysis and Remediation of Any Underlying Misconduct

Root Cause Analysis: [no new content]

Prior Weaknesses:

  • What controls failed?
  • If policies or procedures should have prohibited the misconduct, were they effectively implemented, and have functions that had ownership of these policies and procedures been held accountable?

Payment Systems: [no new content]

Vendor Management: [no new content]

Prior Indications: [no new content]

Remediation: [no new content]

Accountability:

  • What disciplinary actions did the company take in response to the misconduct and were they timely?
  • Were managers held accountable for misconduct that occurred under their supervision?
  • Did the company consider disciplinary actions for failures in supervision?
  • What is the company's record (e.g., number and types of disciplinary actions) on employee discipline relating to the types of conduct at issue?
  • Has the company ever terminated or otherwise disciplined anyone (reduced or eliminated bonuses, issued a warning letter, etc.) for the type of misconduct at issue?

Footnotes

  1. "The 2017 Compliance Guidance itself built upon the ten "Hallmarks of Effective Compliance Programs" identified in the DOJ and Securities and Exchange Commission (SEC)'s 2012 joint publication, "A Resource Guide to the U.S. Foreign Corrupt Practices Act" (the "FCPA Resource Guide").

  2. For additional analysis of the FCPA Enforcement Policy, see Arnold & Porter's Advisory, " DOJ Announces New FCPA Corporate Enforcement Policy," (Dec. 4, 2017). In March 2019, DOJ announced that it was formally incorporating several changes to the policy, including expressly expanding it to cover transactional compliance due diligence and integration in the context of mergers and acquisitions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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