DOJ Signals Expanded Use of Independent Monitors for Corporate Criminal Enforcement

This article was originally published in Corporate Compliance Insights.

With corporate monitorships increasingly becoming a go-to tool for the DOJ, corporations need to understand what a monitor is, what a monitor does and how a monitor is selected. We will delve into the selection process for monitors, which should be a fulsome and transparent process that involves the corporation. We also will discuss the best characteristics for companies to examine when vetting monitor candidates. 

The DOJ on March 25 signaled its preference for expanding the use of corporate monitorships when Assistant Attorney General Kenneth A. Polite Jr. stated that “we can expect to see the department imposing independent corporate monitors whenever it is appropriate in order to satisfy our prosecutors that a company is living up to its compliance and disclosure obligations under a non-trial resolution.” 

This echoed an Oct. 28 memorandum in which Deputy Attorney General Lisa Monaco said the agency is “committed to imposing monitors where appropriate in corporate criminal matters.” 

Furthermore, in the first year of the Biden Administration, DOJ included corporate monitors in two resolutions. This reflects (at least in the short term) an increase in the use of corporate monitorships. Between 2016 and 2020, DOJ used monitors in only five resolutions. 

Monitorship duties

Monitors are independent third parties typically appointed to oversee a company’s compliance following resolution of a criminal case. Monitors are not tasked with enforcement but instead provide an extra layer of oversight, examining corporate compliance programs and reporting findings back to enforcement officials. 

In the memorandum, Monaco noted that the imposition of a monitor may be warranted as part of the resolution of a criminal proceeding, such as a deferred prosecution or plea agreement, or even while a criminal investigation is ongoing. She also reaffirmed the balancing test originally set out in the Morford 2008 memorandum for the use of monitors. That document stated that prosecutors should be mindful of both: “(1) the potential benefits that employing a monitor may have for the corporation and the public and (2) the cost of a monitor and its impact on the operations of a corporation.” 

Monaco’s memorandum also left unchanged the approval and selection process within the department for corporate monitorships as detailed in then-Assistant Attorney General Brian Benczkowski’s memorandum of Oct. 11, 2018.

With respect to the potential costs of monitorship, the Monaco memo instructs that prosecutors should strongly consider imposing a monitor where a company’s compliance program has proven to be ineffective or inadequate, whether in multiple respects or on a systematic basis, and the role should be tailored to address the specific issues necessitating a monitor in the first place. When a situation is limited to isolated incidents of non-compliance or minimally bad actors, Monaco suggests that the expense of a monitor may not be justified.

Monitor selection process

DOJ’s active monitorships are all currently in cases involving market manipulation or the Foreign Corrupt Practices Act, but monitors are likely to be used in other enforcement areas as well. The monitor is often a private practice white-collar criminal attorney or compliance officer with no connection to the company’s case or history.

The appointment of a monitor occurs after a lengthy and layered DOJ approval process. When Criminal Division prosecutors have reached an agreement in principle with a company regarding the resolution of a criminal investigation or proceeding, the company typically has a specified time frame to propose candidates for the monitorship to the Criminal Division, including a description of each candidate’s qualifications and credentials, and certifications by the company and candidate that no conflicts of interests exist or will arise over the course of the monitorship. 

The Criminal Division then reviews the company’s candidates, ultimately recommends one candidate and provides a memorandum in support of the candidate to the Criminal Division’s standing committee on the selection of monitors. Criminal Division attorneys must also certify that they have complied with applicable conflicts of interest guidelines throughout the selection process.

If the standing committee accepts the nomination, it forwards the nomination and supporting memorandum to the assistant attorney general for ultimate submission to the Office of the Deputy Attorney General. In addition to revising the supporting memorandum as they see fit, standing committee members should also include a certification from the ethics official for the Criminal Division that the recommended candidate meets the ethical requirements to serve as a monitor, the selection process was proper and Criminal Division attorneys complied with the relevant conflicts of interest guidelines.

The AAG may request additional information from Criminal Division attorneys or choose to interview the recommended candidate, and then will note a concurrence or disagreement with the proposed candidate or otherwise supplement or revise the supporting memorandum. The recommendation is then submitted to the Office of the Deputy Attorney General, which approves or rejects the proposed monitor.

Since each case presents unique facts and circumstances that may warrant an altered selection and approval process, the Criminal Division may submit requests for departures from this process to the standing committee as needed, or a judge may modify the process where the parties’ agreement is filed with the court.

The parties to an agreement may also negotiate for other adjustments. For example, a recent plea agreement stipulated that the defendant could express a preference among the candidates it proposed to the Criminal Division. No such language existed, however, in a different recent plea agreement in which a company pleaded guilty to major fraud against the United States in connection with providing military housing. These two plea agreements also contained other differing provisions regarding the monitorships. 

While both monitors were imposed for three years and were tasked with overseeing the companies’ adherence to corporate compliance programs as laid out in the plea agreements, one monitor was instructed to pay specific attention to particular federal criminal statutes related to fraudulent or manipulative trading practices, given that the defendant pleaded to a 10-year spoofing scheme to manipulate Treasury market prices.

Characteristics of an effective monitor

There are a number of overarching characteristics that make for an effective monitor:

• Integrity. Every defendant should seek a monitor who will fairly and honestly report updates on the company’s development to the government while remaining transparent and helpful to the company at the same time. The government’s trust and reliance on the monitor will be a huge factor in the success of the agreement between the parties. A final ultimate resolution with clear corporate governance improvements should be the goal of a monitorship. 
• A proven track record of compliance with similar organizations and systems. The monitor should have practical experience working with — and in — corporate structures of similar complexity and size to a defendant’s company, particularly in areas related to compliance. The monitor’s ability to integrate compliance into the company’s already-existing operations without needless disruption will directly correlate to the efficiency and impact of the monitorship for the company. A proven track record in the subject matter of the allegations is also significant since it will help avoid future issues. 
• Experience with enacting change in an organization. The monitor should be extremely familiar with the goals and objectives of the particular company’s remediation progress in order to give an accurate account to the government of the progress being made and in areas of improvement, as well as provide the company with constructive feedback at the same time.
• Independence. To get the job, a monitor will have to clear conflicts of interests checks with both the company and the government actors involved. The need for independence continues after the monitorship begins. The monitor should continue to exercise their own independent judgment and communicate their insights to both parties going forward. 
• Reputation. A monitor should be known for demonstrating effectiveness both to the government and to the company, showing both business acumen and proven integrity, even if the monitor does not have a legal background or practice. A monitor’s reputation will not only establish comfort for both parties, it will provide credibility and assurance to the public following a company’s criminal proceedings. 
• Candor. The chosen monitor should also have the ability to establish and lead open and frank discussions with both the company and the government, whether separately or together, in order to facilitate finding solutions and implementing changes to improve the company’s culture of compliance. Ideally, all employees at the company, regardless of seniority, should feel comfortable raising issues and receiving insights from the monitor throughout the process.
• Forbearance. The monitor should set a positive tone for the company and its relationship with the government moving forward from the criminal resolution agreement. Despite the difficult issues and the competing interests that may arise over the course of the relationship, a monitor should be able to thoughtfully and diplomatically work with both sides on their common goals and lead the way toward an effective resolution.
• A modern approach. The monitor should be well-versed in and open to innovative ideas to enact change and deter undesirable conduct going forward, including by taking a fresh approach to compliance policies and having a familiarity with the state-of-the-art compliance solutions and strategies used throughout the applicable industry. 

DOJ’s support of an increase in monitorships signifies a new era for corporate criminal compliance. A good monitor can help a company stay on track with compliance and reduce the risk of a relapse into the behavior that led to problems in the first place. Picking the right monitor is key, though. Particular attention should be paid to the monitor’s proven experience and personal integrity when selecting candidates for consideration. We will continue to follow DOJ policies and trends on corporate monitorships.