The Department of Justice has just released its updated guidance for Evaluation of Corporate Compliance Programs. The DOJ Manual identifies factors that prosecutors take into account “in conducting an investigation of a corporation, determining whether to bring charges, and negotiating plea or other agreements.” Among these factors is the “adequacy and effectiveness of the corporation’s compliance program.” Although the guidance is designed to assist prosecutors in assessing and making informed decisions about the extent of “credit” to be attributed to a company in light of its corporate compliance program, the factors that prosecutors are advised to consider in evaluating these programs should not be lost on companies seeking to develop and implement their own compliance programs. Of course, the guidance is not intended to be formulaic and recognizes that the relevance and significance of the factors and questions identified will vary depending on a range of company attributes, including “each company’s risk profile and solutions to reduce its risks.”
The guidance is framed around three fundamental categories, and provides additional questions and other relevant information under each:
- “Is the corporation’s compliance program well designed?
- “Is the program being applied earnestly and in good faith? In other words, is the program being implemented effectively?
- “Does the corporation’s compliance program work in practice?”
Well Designed
The starting point effective design is the effort to create a risk profile: how the company has “defined its risk profile, and the degree to which the program devotes appropriate scrutiny and resources to the spectrum of risks.” Accordingly, the guidance suggests that the program be designed to detect the most likely types of misconduct given the company’s business, including the “location of its operations, the industry sector, the competitiveness of the market, the regulatory landscape, potential clients and business partners, transactions with foreign governments, payments to foreign officials, use of third parties, gifts, travel, and entertainment expenses, and charitable and political donations.” Programs that focus on high-risk areas appear to be especially prized, and one indicator of risk-tailoring is making “revisions to corporate compliance programs in light of lessons learned.”
The guidance advises that policies and procedures should “give both content and effect to ethical norms and…aim to reduce risks identified by the company as part of its risk assessment process.” In particular, the company’s code of conduct should be accessible and applicable to all employees and reflect the “company’s commitment to full compliance with relevant Federal laws….As a corollary, prosecutors should also assess whether the company has established policies and procedures that incorporate the culture of compliance into its day-to-day operations.” Areas of focus include the process for design and implementation, personnel and business units involved, comprehensiveness as to the spectrum of risks faced, communication to all employees and relevant third parties, personnel responsible for integrating policies and procedures, whether the roll out was designed to ensure employees’ understanding, whether the policies are reinforced through the company’s internal control systems and whether guidance and training has been provided to key gatekeepers in the control processes regarding, e.g., the types of misconduct to look for and how to escalate concerns.
Training and communications are also key ingredients, including “periodic training and certification for all directors, officers, relevant employees, and, where appropriate, agents and business partners.” Training might also include providing employees with “practical advice or case studies to address real-life scenarios, and/or guidance on how to obtain ethics advice on a case-by-case basis as needs arise.” Training should also be risk-based and tailored for the particular audience. Communications could involve making employees aware of available resources and even anonymized descriptions of the types of misconduct that have led to discipline in the past. There should also be a hotline or other mechanism (that does not raise fear of retaliation) for anonymous reporting of allegations of a breach of the company’s code of conduct, company policies, or suspected or actual misconduct, as well as appropriate follow-up investigations.
The guidance advises that a “well-designed compliance program should apply risk-based due diligence to its third-party relationships,” adequate to allow the company to understand “the qualifications and associations of third-party partners, including the agents, consultants, and distributors that are commonly used to conceal misconduct, such as the payment of bribes to foreign officials in international business transactions.” A good compliance program should also include “comprehensive due diligence of any acquisition targets. Pre-M&A due diligence enables the acquiring company to evaluate more accurately each target’s value and negotiate for the costs of any corruption or misconduct to be borne by the target.”
Effective Implementation
Prosecutors are on the lookout for compliance programs that are not adequately implemented and really nothing more than “paper programs.” And, in any case, companies will want to implement their programs effectively, including, the guidance suggests, having a staff that is “sufficient to audit, document, analyze, and utilize the results of the corporation’s compliance efforts” (presumably, varying based on the size, complexity and risk profile of the company), and employees that “are adequately informed about the compliance program and are convinced of the corporation’s commitment to it.” In essence, the company should seek to foster a “culture of compliance and ethics,” which would include “awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated.”
Not surprisingly, a culture of compliance starts with the tone at the top. To what extent have senior management “clearly articulated the company’s ethical standards, conveyed and disseminated them in clear and unambiguous terms, and demonstrated rigorous adherence by example”? Has middle management “reinforced those standards and encouraged employees to abide by them”? For example, 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?” Do any directors have compliance expertise? Have they (or the outside auditors) met in executive session with the compliance and control functions at the company?
According to the guidance, for a program to be “truly effective, compliance personnel must be empowered within the company.” To that end, factors that would be considered include reporting structure (autonomy, line of reporting, board access), funding, resources, seniority and stature within the company of compliance personnel, experience and qualifications of compliance personnel, and quality of outsourcing, if any. Do personnel “responsible for compliance have: (1) sufficient seniority within the organization; (2) sufficient resources, namely, staff to effectively undertake the requisite auditing, documentation, and analysis; and (3) sufficient autonomy from management, such as direct access to the board of directors or the board’s audit committee. The sufficiency of each factor, however, will depend on the size, structure, and risk profile of the particular company.”
Another factor related to effective implementation is the establishment of incentives and disincentives, including clear appropriate disciplinary procedures and consistent enforcement across the organization, both for misconduct and “for failing to take reasonable steps to prevent or detect criminal conduct.” To what extent do “the company’s communications convey to its employees that unethical conduct will not be tolerated and will bring swift consequences, regardless of the position or title of the employee who engages in the conduct”?
Work in Practice
Although the “existence of misconduct does not, by itself, mean that a compliance program did not work or was ineffective at the time of the offense,” if misconduct was identified on a basis timely enough for remediation and self-reporting, that would strongly suggest that the program was effective. If misconduct does occur, the guidance suggests an “honest root cause analysis to understand both what contributed to the misconduct and the degree of remediation needed to prevent similar events in the future.”
An effective program will typically evolve “over time to address existing and changing compliance risks,” involving periodic evaluations of the program, monitoring of compliance and investment in and testing of remedial improvements. As changes occur in the business, legal environment and other areas, the program will need to evolve, especially to incorporate any “lessons learned.” To address those changes, the guidance suggests, the company should engage in “meaningful efforts to review its compliance program and ensure that it is not stale.” Even the “actual implementation of controls in practice will necessarily reveal areas of risk and potential adjustment.” Areas to be considered include internal audit (frequency of audits and the board’s and management’s follow-up with regard to reported findings), extent of testing and analysis of controls and reporting of results, frequency of program review and update (including gap analyses), frequency of assessment of culture of compliance (including assessments from all levels of employees and actions in response).
The guidance also indicates that another “hallmark of a compliance program that is working effectively is the existence of a well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents. An effective investigations structure will also have an established means of documenting the company’s response, including any disciplinary or remediation measures taken.” Were investigations undertaken properly scoped by qualified personnel, independent and documented? Did they seek to identify “root causes, system vulnerabilities, and accountability lapses, including among supervisory manager and senior executives”? To what extent was the company “able to conduct a thoughtful root cause analysis of misconduct and timely and appropriately remediate to address the root causes”? If policies or procedures failed to prevent the misconduct, were they otherwise effectively implemented? Were the corporate functions that had ownership of these policies and procedures held accountable? Has the company taken “disciplinary action against past violators uncovered by the prior compliance program,… including those identified by the company as responsible for the misconduct, either through direct participation or failure in oversight, as well as those with supervisory authority over the area in which the criminal conduct occurred”? If third parties were involved, were there lapses in the selection process? Were past opportunities to detect the misconduct missed? What steps were taken in remediation and were responsible personnel held accountable on a timely basis, including for failures of supervision?
