DOJ Imposes New Standards for Evaluation of Corporate Compliance Programs: Compensations Structures that Promote Compliance (Part II of IV)
The Monaco Memo is a watershed moment as part of DOJ’s evolution and advocacy for effective ethics and compliance programs. We have seen prior moments of significant action — DOJ’s adoption of the FCPA Guidance, DOJ’s issuance of its Evaluation of Corporate Compliance Programs, and now the Monaco Memo which takes compliance into a new world with new opportunities and challenges.
The Monaco Memo starts its discussion of ethics and compliance by noting that compliance programs can have a direct and significant impact on the resolution of a corporate criminal case. Prosecutors are directed to evaluate a company’s compliance program at the time of the offense and at the time of resolution. Prosecutors are required to evaluate a corporation’s commitment to foster compliance at all levels of the company. The Monaco Memo cites as an example, prosecutors should review how the corporation has incentivized or sanctions employee, executive and director behavior, including through compensation plans.
In addition to the Evaluation of Corporate Compliance Programs (2020 ed.), the Monaco Memo unveils a set of new factors to evaluate a corporation’s compliance program and culture relating to compensation structures.
Compensation Systems and Compliance Programs: The Monaco Memo emphasizes that a company should seek to reward compliance behavior and penalize individuals who engage in misconduct. Companies deter misconduct if they commit to holding individuals who engage in or contribute to criminal misconduct personally accountable. In assessing a company’s compensation systems (compensation agreements, arrangements and packages), prosecutors should examine whether the company’s compensation system incorporates elements such as clawback provisions that enable penalties to be levied against former or current employees, executives or directors whose direct or supervisory actions or omissions contributed to criminal conduct. In particular, prosecutors should evaluate whether the company’s compensations systems allows for retroactive discipline, including the use of clawback measures, partial escrowing of compensation, or equivalent arrangements.
Conversely, corporations are able to promote an ethical corporate culture by rewarding those executives and employees who promote compliance within the organization. The Monaco Memo mandates prosecutors to determine whether a corporation’s compensation systems provide positive incentives for compliant behavior. DOJ cited a number of example of affirmative incentive policies applicable to any employee and any subordinates they supervise: the use of compliance metrics and benchmarks in compensation calculations; and the use of performance reviews that measure and reward compliance-promoting behavior. As the Monaco Memo concluded on this issue, “[w]hen effectively implemented, such provisions incentivize executives and employees to engage in and promote compliant behavior and emphasize the corporation’s commitment to its compliance programs and its culture.”
In assessing a company’s compliance program and compensation systems, prosecutors are directed to look at what happened in practice and not just what was written down in the compensation systems policies. If a corporation has included clawback provisions, prosecutors should determine whether, following the corporation’s discovery of misconduct, the company takes affirmative steps to clawback compensation paid to executives.
DOJ articulated another issue for examination in this area — whether a corporation uses or has used non-disclosure or non-disparagement provisions in compensation agreements, severance agreements or other financial arrangements to inhibit the public disclosure of criminal misconduct by the corporation or its employees.
The DAG Monaco has directed DOJ’s Criminal Division to develop further guidance by the end of the year to reward corporations that develop and apply compensation clawback policies, including how to shift the burden of corporate financial penalties away from shareholders.
Personal Devices and Third-Party Applications — The Monaco Memo cites the need for companies to monitor the use of personal smartphones, tablets, laptops, and other devices for misconduct and to recover relevant data from them during an investigation. In addition, DOJ noted that there has been an increase in use of third-party messaging platforms, including the use of ephemeral and encrypted messaging application, which has frustrated investigators.
As part of a review of a compliance program, prosecutors have to consider how companies address the use of personal devices and third-party messaging platforms, and whether the company preserves access to all business-related communications.
The Monaco Memo directs the Criminal Division to study the issue further to determine best practices regarding use of personal device and third-party messaging platforms and update the next edition of its Evaluation of Corporate Compliance Programs.