Scott Moritz, Managing Director
Leader, Protiviti’s Fraud Risk Management Practice
On September 9, 2015, U.S. Department of Justice Deputy Attorney General Sally Quillian Yates distributed a memorandum across the Department of Justice, entitled “Individual Accountability for Corporate Wrongdoing,” that has far-reaching implications for government and private-sector investigations of corporate misconduct.
While the memorandum does not have the force of law, it nonetheless provides specific direction to every federal prosecutor to hold individuals accountable for corporate crimes and to make as a condition of an individual company’s cooperation the extent to which they “give up” the individuals responsible for the corporate crimes.
Holding individuals accountable for corporate crimes is a very effective way to change behaviors. While the U.S. Sarbanes-Oxley Act (SOX) has significantly changed the business landscape for U.S. publicly traded companies, perhaps its biggest effect was that by holding the CEO and CFO accountable for the accuracy of the quarterly and annual reports they sign, there have been a number of enduring changes in how these leaders behave.
First and foremost, before SOX, many internal investigations at public companies, large and small, never saw the light of day. “Big picture” issues often overrode what was right. With the CEO and CFO now held accountable, the default setting has shifted to performing internal investigations and then disclosing the results, to the extent that the findings suggest the need to do so. This is a direct result of the accountability component of SOX Section 302 and the upgrade that has occurred across audit committees in terms of financial aptitude since the inception of SOX.
The same sea change could result from the Yates memorandum, which sets out six steps that government attorneys should take to ensure individuals believed responsible for corporate crime are held accountable.
- Before being eligible for any cooperation credit, corporations must disclose all relevant facts about the individuals involved in corporate misconduct.
This step, perhaps more so than any other, could have the greatest long-term impact. Knowing this requirement, government investigations and internal investigations alike will have to be structured in such a way as to enable the ability to identify individual conduct. It also creates a financial incentive for companies to disclose the responsible parties within their organizations in order for them to be eligible for cooperation credit. This will, in all probability, cause individuals to “break ranks” earlier in the process and seek their own outside counsel, rather than wait for the company to deliver them on a silver platter to the government in an effort to obtain cooperation credit. It could also result in many more individuals seeking whistleblower status rather than trusting that their employers or former employers will be unbiased in their investigations.
- Both criminal and civil corporate investigations by DOJ attorneys should focus on individuals from the inception of the investigation.
This is really more of a reminder than it is anything radically new. By their nature, investigators must focus on the actions of individuals. What is important here is that the DOJ attorneys and investigators make it clear to companies once they know of the existence of the investigation that any internal investigation must provide meaningful information about the responsible individuals.
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
Coordination between the SEC and DOJ has improved quite significantly since 2008. That being said, civil and criminal investigations are fundamentally different and, historically, holding individuals accountable has fallen to the criminal investigators. What the Yates memorandum points out, though, is that sometimes civil investigations provide substantive information about criminal wrongdoing, and by being in routine communication with one another that information is less likely to fall through the cracks.
- Absent extraordinary circumstances, no corporate resolution will provide protection for any individuals from criminal or civil liability.
This step could also have long-term implications on the scope of investigations and the extent to which individuals will be held accountable for corporate crimes. By making it clear to government attorneys that corporate resolutions should not routinely provide individuals protections from criminal or civil liability, it puts the burden on individual government attorneys to make the internal argument that their proposed settlement agreement meets the criteria of “extraordinary circumstances,” increasing the likelihood that more individuals will be held accountable since the majority of such agreements will not inhibit the government’s ability to hold individuals accountable.
- Corporate cases should not be resolved without a clear plan to resolve individual cases before the statute of limitations expires, and declinations as to individuals in such cases must be memorialized.
This step is in recognition of the fact that individual cases often continue after the corporate cases have been settled. It will help ensure that appropriate forethought is given with regard to individuals who could be held accountable if not for mismanagement of the statute of limitations.
- Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
This step, again, is a reminder of the different lenses through which civil enforcement attorneys and criminal prosecutors view their cases, as well as the importance of considering the totality of the facts regarding each individual in determining the appropriate means by which he/she is held accountable.
While each of these steps detailed in the Yates memo sends a clear message to the DOJ attorneys responsible for criminal and civil enforcement, in-house and outside counsel, chief compliance officers and senior executives should also take notice. As it has on a number of occasions since the Federal Sentencing Guidelines went into effect, the government is again putting corporations on notice that people, not companies, commit crimes.
Corporations are expected to focus their internal investigations in such a way as to identify the people responsible, not just scape goats, and that their ability to receive cooperation credit depends on it. As Ms. Yates stated in her public remarks about the memo: “We’re not going to be accepting a company’s cooperation when they just offer up the Vice President in Charge of going to jail.”
Difficult though it may be for companies to be completely transparent in their identification of the people responsible, no matter how senior and important to the company’s future they may be, management will be forced to make decisions for the good of the company that will very likely result in some of their former colleagues going to prison.