White-Collar Crime Enforcement 101

A squadron of Justice Department officials appeared at the Compliance Week 2010 conference last week to talk about effective compliance programs, and they all drilled home one message: They have declared war on “paper programs.”

“Don’t have just a paper program,” said Ryan McConnell, an assistant U.S. attorney in the department’s Criminal Division. “The biggest problem we see is lack of execution.”

The Justice Department will give consideration to companies that have made a good-faith effort at ethics and compliance, he and fellow prosecutors said. But that means they want working processes to inculcate ethical conduct among employees, to identify misbehavior, and to take corrective action—including alerting the Justice Department—as soon as possible.

“How good a compliance program is will speak to how we pursue a case,” said Denis McInerney, the new chief of Criminal Division’s Fraud Section. In particular, he said, the quality of a compliance program will affect whether prosecutors ask for a corporate monitor to be included as part of any settlement. Indeed, new amendments to the U.S. Sentencing Guidelines (which will formally go into effect on Nov. 1) eliminate the ban on receiving credit for having an effective compliance in place, and they outline the remediation efforts necessary for a company to get credit for its compliance program.

McConnell

McInerney and McConnell addressed an audience of about 100 at the conference, explaining their views on how the Justice Department prefers to work with companies when it launches an investigation. Typically, they said, a company should first conduct its own investigation and share those findings with the government, McConnell said. If prosecutors can’t find what they want through that voluntary cooperation, next come the grand jury subpoenas or search warrants.

When a company under investigation senses that charges are likely, it usually seeks to cooperate in hopes of leniency, McConnell said. Prosecutors welcome that cooperation, he said, but that does not mean the Justice Department can cook up a proposed settlement offer before prosecutors have seen all the evidence and understand the case.

“People will come and say they want to cooperate, so what can you offer me?” McConnell said. “I don’t know. What can you offer me? We don’t know at the beginning of the case what that decision is going to be.”

The Justice Department now can bring charges against a corporation more easily than ever before, McInerney said, because prosecutors can also offer deferred- or non-prosecution agreements as a way to resolve the cases—a trend in corporate prosecutions that has only emerged in the last several years. “Before … you either indicted or you declined” to press charges, he said. “There really was nothing in between.”

With a DPA or NPA, however, a company can avoid prosecution and a criminal record by meeting the terms of an agreement to correct the alleged bad behavior. DPAs and NPAs came into prosecutorial vogue after the indictment (and subsequent demise) of Arthur Andersen in 2002, which put tens of thousands of Andersen employees out of work. Most of them were innocent by-standers in Andersen’s role covering up the Enron fraud, and McInerney said the Justice Department is not eager to take such drastic action again. “We’re sensitive to job losses,” he said.

Growth

Although its resources are limited, the Fraud Section is hiring more prosecutors, McInerney said, and much of their focus will be on healthcare fraud. The U.S. Government Accountability Office pegs healthcare fraud at $97 billion annually, but as recently as five years ago it accounted for only a small part of Justice Department activity, he said.

“We understand that in order to really influence the corporate culture, we need to be willing to aggressively pursue individuals and prosecute.”

—Denis McInerney,

Chief of the Fraud Section,

Department of Justice

Thanks to the explosion in Medicare and Medicaid costs and the healthcare reform laws enacted this spring, that is going to change. McInerney said the Justice Department is “getting extremely aggressive” on healthcare fraud. “We’re no longer relying on grand jury subpoenas and cooperation. We’re doing search warrants, wire taps.”

Prosecutors are already applying those same techniques to crack down on bribery under the Foreign Corrupt Practices Act, McInerney continued. In fact, some of the new staff in the Fraud Section will be devoted to tying up loose ends on aging FCPA investigations, he said.

McInerney also offered a telling statistic: Since 2005, the government has resolved 37 corporate cases, but indicted 77 individuals—more than half of them since January 2009. That, he said, demonstrates the Justice Department’s interest in pursuing individuals rather than corporations.

“Individuals within companies that engage in misconduct are very much on the minds of prosecutors,” he said. “We understand that to really influence the corporate culture, we need to be willing to aggressively pursue individuals and prosecute.”

In fact, McInerney suggested corporate compliance officers use that fact when pursuing the resources they need to establish effective compliance programs. He pointed out a recent poll by Ernst & Young that found 75 percent of board members worry about their own personal liability in today’s environment. “Use that when you’re talking to the officers of the company,” he said.

Taylor

EFFECTIVE COMPLIANCE PROGRAMS

The Guidelines currently state that “to have an effective compliance and ethics program … an organization shall: (1) exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” To meet this standard, the Guidelines “minimally require” a compliance program to have seven features:

(1) Established standards and procedures to prevent and detect criminal conduct;

(2) Active oversight of the content and operation of the program by the organization’s Board;

(3) Reasonable efforts to exclude from positions of substantial authority any individuals that it knew or should have known engaged in conduct inconsistent with an effective compliance and ethics program;

(4) Reasonable steps to periodically educate an organization’s members on the compliance program’s standards and procedures;

(5) Reasonable steps to ensure that the program is followed, including monitoring and auditing to detect criminal conduct, periodic evaluations, and a system for employees to anonymously seek guidance regarding potential criminal conduct;

(6) The program is promoted and enforced consistently through appropriate incentives to comply, and through appropriate disciplinary measures for failing to do so; and

(7) Reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct.

Source

New U.S. Sentencing Guidelines

Jeff Taylor, a leader in Ernst & Young’s fraud services practice and a former U.S. attorney, said it’s an “opportune time” for corporate compliance officers to pursue direction and resources from their boards of directors.

“Everyone realizes times are tough,” he said. “But as companies begin to emerge from the economic downturn, now is the time to put in place the programs, the controls, and the protections to make certain that the coming growth doesn’t lead to trouble with regulators and enforcement agencies.”

McInerney and McConnell said companies can assure that their programs are active and robust with steps such as continual monitoring and periodic reviews to assure the program reflects current risks. “If you can show how robust it is in terms of implementation, you’re going to start scoring real points with us,” McInerney said.

McConnell emphasized that the Justice Department does not expect to see identical programs at every company; prosecutors understand that different companies will necessarily have different programs, depending on facts and circumstances specific to each. “There is no one size fits all,” he said.

The pair recommended a host of resources compliance officers can use to keep their programs current and in step with Justice Department thinking about robust compliance. In addition to the department’s Website (which includes the U.S. Sentencing Guidelines and the U.S. Attorneys Manual), they cited the guidance on internal controls, ethics, and compliance recently adopted by the Organization for Economic Co-operation and Development as a department-endorsed manual of best practices.