One of the Justice Department’s top corporate fraud prosecutors had tough words for attendees at Compliance Week 2007 last week: If you think the cost of having an effective compliance program is expensive, try seeing how much the company will pay for having an ineffective one.
“If you don’t have a good compliance program and we find out, we will give you a compliance program. I guarantee it will be something not to your liking,” said John Roth, chief of the fraud and public corruption section of the U.S. Attorney’s office for the District of Columbia. He jokingly described himself as “the guy that you hope your CEO never has to meet.”
What happens when the Justice Department steps into your compliance program? Instead of experienced, highly trained executives making business decisions, Roth told attendees, “You'll have a 30-something U.S. attorney who … doesn’t know your industry or your business challenges and has a mindset completely different than yours, determining what you need to do to get out of trouble.”
To stay out of the prosecutors’ crosshairs, he said, “A healthy [compliance] program is the best insurance against avoiding criminal liability or protecting against a criminal investigation.”
When asked whether the Justice Department really looks at or cares about corporate compliance programs, Roth responded: “Rest assured it’s something we look at—not at 30,000 feet, but granularly.”
Prosecutors weigh the criteria in the Federal Sentencing Guidelines as a model of what a compliance program should look like. In addition, Roth said, they look hard to make sure compliance program aren’t just “paper programs.” For example, prosecutors will look at how well a program is funded, to whom the compliance officer reports, and how often the company educates its employees on compliance issues as signs of how it views compliance.
Perhaps most important, he said, is how a company acts when it uncovers wrongdoing or potential wrongdoing. Roth was clear: “There's no such thing as minor or trivial or excusable criminal behavior. Treat every instance of criminal behavior seriously.”
A critical question prosecutors consider when they look at misconduct is whether those involved were held accountable. “If people are not held accountable, it sends a powerful message about what the corporate culture is,” Roth said.
Roth said a company’s best bet is to disclose issues to the Justice Department voluntarily, explaining the compliance program and how the wrongdoer beat the system.
And while self-reporting is “a critical factor in the principles of prosecution of corporations,” Roth said, he warned that disclosing only part of the issue can “actually create more harm than good for the company.”
“Be as complete and as full as possible,” he said. “If you have to caveat it with, `Our investigation is ongoing,' do so, but keep up-to-date as you go along.”
Asked about the Justice Department’s position on e-mail retention schedules, Roth answered: “If you have a reasonable document retention practice, stick with it and make sure it doesn’t deviate from one period to the next.” But when the company then receives a notice requiring documents to be preserved, “understand that you’re under investigation, [and that policy] has to be suspended.”
Roth also said, however, that the industry should educate investigators about the difficulties and expense associated with retrieving e-mails if a request is truly burdensome. “Don't presume that I understand your business and the challenges you have,” he said.
The Future Of Prosecutions
Roth outlined several enforcement trends within the Justice Department. Foremost, he said, the notion that securities frauds in general—and accounting frauds in particular—are no longer a problem now that Enron and WorldCom have faded, is one that corporate executives should assume “at your peril,” Roth said. Rather, the DOJ is taking a “far more nuanced approach” to such cases as prosecutors develop a better understanding of the difference between criminal securities fraud cases and civil cases.
“We're far better at developing theories of criminal liability and explaining those theories to a jury,” he said. “We've learned from some of the mistakes we’ve made … and we’re moving forward in a better fashion than we ever have before.”
The DOJ has also improved at conducting parallel investigations with the Securities and Exchange Commission and other agencies, he said, quipping that “We've developed terrific relationships with your regulators.”
Citing an increased “internationalization” of white-collar enforcement, he said corporations can expect more prosecutions related to the Foreign Corrupt Practices Act and to international tax. The FBI has dedicated resources specifically to assist the Justice Department in its investigation of those cases, Roth added.
In the international tax arena, he said the Justice Department is starting to use a tool allowed by the Supreme Court last year that allows it to bring mail or wire fraud charges in schemes to defraud where the victim is a foreign country fraudulently deprived of tax revenue.
Another area of increased enforcement will be national security cases, such as those related to bank secrecy and anti-money laundering rules, and violations of the Office of Foreign Assets Control regulations.
The DOJ has also formed a task force to look at procurement fraud. “The feeling I get within the field is that there’s a lot of low fruit here,” he said. “There are good cases to be made against folks who have been sloppy in their procurement work.”
He also cited a recent case brought against the maker of the painkiller OxyContin, which paid a total of $600 million in fines to settle criminal and civil charges related to misbranding for misleading the public about the risk of addiction and the drug’s potential for abuse.
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