Corporate Governance Challenges in an Evolving Risk Era
We are living in a rapidly changing economic landscape. Companies are under the gun to navigate “traditional issues,” such as challenging economic conditions ranging from inflation, and a predicted recession, to supply chain disruptions. It has been a long and difficult path in responding to two significant crises – first the pandemic in 2020 and then Russia’s invasion of Ukraine and the resulting global sanctions regime.
Companies face a serious storm cloud on the horizon that contains an incendiary mix of governance challenges. This cloud represents the mix of two important trends – technological threats and increased regulatory and enforcement risks. Underlying these important trends is a rapidly expanding concept of corporate accountability and focus on individual and organizational accountability.
DOJ’s New Enforcement Focus
In recent months, the Justice Department has taken several significant steps to unleash a number of initiatives that are intended to increase prosecution of individuals for white collar crimes, and corporate prosecutions for international trade violations, while incentivizing corporate compliance and enforcement efforts to prevent and detect such crimes and violations. Interestingly, DOJ is seeking to adjust its focus from securing large corporate penalties for criminal violations that ultimately fall onto shareholders, to targeting individuals for financial and personal punishment.
The Justice Department seeks to usher in this new era of corporate accountability in response to a significant reduction over the last ten years of white-collar prosecutions. As a consequence, the Justice Department’s leadership notified the business community through a series of speeches and actions designed to change its enforcement program to increase individual accountability. Specifically, in recent weeks, the Justice Department released revisions to its Evaluation of Corporate Compliance Programs, announced a new Three-Year Pilot Program regarding Compensation Incentives and Claw Backs, and assigned significant new resources for prosecutions of corporations for sanctions and export control violations.
The takeaway is that corporate and white collar prosecutions will increase in the near future, and the focus of this new initiative will extend beyond the traditional areas of securities fraud, anti-corruption and money laundering to include sanctions and export control compliance, particularly with respect to the new and comprehensive regime against Russia.
This focus on sanctions and export controls reflects its determination that the overlap between corporate crime and national security issues is growing. In response, the Justice Department explained that it has re-tooled its priorities to include national security crimes, including cybercrimes and illegal use of crypto-currency, along with sanctions and export controls. As an important step, the Justice Department appointed its first-ever chief counsel for corporate enforcement in the National Security Division. To execute this new approach, the National Security Division will add more than 25 prosecutors to focus on corporate violations of sanctions and export controls.
In recognition of the anniversary of Russia’s unprovoked invasion of Ukraine, the Justice Department’s Deputy Attorney General Lisa Monaco, the number two in command, specifically warned companies that sanctions and export controls risks should be at the top of every company’s risk compliance chart. In her recent speech, Deputy Attorney General Monaco revealed that DOJ is currently investigating corporations for sanctions evasions in a variety of industries, including transportation, fintech, banking, defense and agriculture.
In a related development, Deputy Attorney General Monaco stated that the Justice Department will make a “substantial investment” in the Bank Integrity Unit in the Criminal Division’s Money Laundering and Asset Recovery Section. The BIU plays a lead role in corporate prosecutions of global financial institutions for sanctions violations.
The Justice Department’s Perspective on Individual Accountability
This “new” perspective on individual accountability comes with certain risks that should be top-of-mind for every company. The Justice Department’s definition of malfeasance for accountability purposes extends to those individuals who had supervisory authority over the employees or business area engaged in the misconduct and knew of, or were willfully blind, to the misconduct.
Corporations have to anticipate evolving risks and adjust their risk management processes to reflect these changes. The Justice Department historically has given plenty of notice to potential subjects for prosecution. Invariably, after issuing its notice of policy direction, the Justice Department follows through by assigning resources, adjusting priorities, and demanding results.
When it comes to corporate crime, we are at the beginning stages of a new era of corporate criminal enforcement – the Justice Department’s direction is clear, and corporate boards have to respond accordingly.