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DOJ Begins Implementation of Compliance Compensation Requirements

The Justice Department has taken steps to implement its new compliance compensation requirement announced in its Corporate Enforcement Policy revisions.  With little fanfare, the Danske Bank $2 billion settlement with the Justice Department include an additional provision in its settlement papers outlining the new requirement.

DOJ’s settlement papers include standard provisions that have grown through the years.  Schedule C has set forth DOJ requirements for effective compliance programs.  Schedule C has been changed through the years as DOJ’s expectations and requirements have been modified. 

DOJ’s compliance expectations grew with advances in FCPA enforcement.  Over the years, DOJ developed additional compliance guidance and Schedule C has been a repository for ethics and compliance program requirements.  Tracking the requirements of Schedule C provisions as part of DOJ’s settlements is an important function of monitoring compliance expectations.

The language included in the Danske Bank settlement is instructive:

The Bank will implement evaluation criteria related to compliance in its executive review and bonus system so that each Bank executive is evaluated on what the executive has done to ensure that the executive’s business or department is in compliance with the Compliance Programs and applicable laws and regulations. A failing score in compliance will make the executive ineligible for any bonus for that year. The Bank will include in its evaluation criteria and bonus system provisions that allow the Bank to implement measures to incentivize future compliant behavior and discipline executives for conduct occurring after the filing of the Agreement that is later determined to have contributed to future compliance failures, subject to applicable law.

The provision includes three significant requirements that companies will need to address. 

First, the coverage of the provision is limited to implementation of evaluation criteria  in its “executive review and bonus system.”  Senior managers that do not fall under the “executive category” appear to be exempt.

Second, the requirement focuses on an evaluation of “what the executive has done to ensure that the executive’s business or department is in compliance.”  This language imposes an affirmative requirement on the actions of the executive to ensure compliance.

Third, the bank is required to make the executive “ineligible for any bonus that year” if the executive receives a failing score.  The language indicates that the evaluation must be conducted annually and bar  the executive from receipt of “any bonus” when the executive receives a failing score. 

Finally, DOJ’s intent is confirmed in the broad language applying the penalty language to “discipline executives for conduct that [has] contributed to [] compliance failures.”  This language defines potential accountability to situations in which an executive has not only engaged in misconduct but extends to oversight and monitoring failures of persons supervised by the executive.

DOJ’s expectations are clear – companies have to design and implement compliance compensation systems that restrict executive bonuses in response to misconduct and oversight failures.  In practice, companies need to formulate appropriate policies and procedures, maintain documentation of the system, and demonstrate commitment to enforcement of the policies to incentivize compliance behavior and create clear disincentives for non-compliant conduct.

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2 Responses

  1. Piero MOLINARIO says:

    Very interesting, clear and helpful summary.

  2. Christo Mey says:

    It is about time companies had similar policies to ensure that each executive is tested based on his/her commitment and actual furtherance of compliance with the Compliance Programs and applicable laws and regulations. Executives are granted bonuses for health and safety practices, but Compliance is an even more significant business risk that is ignored.