Balancing a Carrot on a Stick: DOJ’s Revisions to its Corporate Enforcement Policy

On January 17th, the U.S. Department of Justice (“DOJ”) announced significant revisions to its Corporate Enforcement Policy, adding more incentives to companies that self-report corporate criminal misconduct. (Theodore Chung, JDSupra). The change marks the third major update to the policy since October 2021 as the Biden Administration tries to find the right balance between the hardline approach to white collar crime taken under the Obama Administration and the lax approach taken by the Trump Administration. (Chris Prentice, Reuters). In October 2021, the administration took an aggressive stance aimed at targeting repeat corporate misconduct and prioritizing the prosecution of individuals involved. (Prentice, Reuters). At that time, the DOJ required companies to name all people involved in misconduct, a shift from the previous administration’s requirement for companies to only provide names of people to have been “substantially involved.” Id. This policy change matched the hardline rhetoric coming from the new administration. Id. That policy did not last long though, as Biden’s DOJ softened its tone and put the onus on the company to self-report. (Luc Cohen, Reuters). 

In September 2022, the administration rolled out a carrot and stick approach, which encouraged companies to self-disclose misconduct in exchange for lesser fines and companies not being required to plead guilty. Id. The DOJ’s goal is to hold the bad actors themselves responsible rather than shareholders facing the brunt of the financial penalties, as a company’s stock price normally falls after the imposition of a penalty. Id. At the same time, the DOJ enhanced penalties for repeat offenders. Id. The DOJ stated that its leadership team would have to approve any company’s second non-prosecution or deferred agreement, which allows for fines rather than criminal penalties. Id. The softer approach for cooperative companies combined with the harder stance for repeat offenders has proven successful. (Chris Strohm, Bloomberg).  Last year, Glencore Plc had to pay $341 million in fines as part of its guilty plea for a first-time offense, this year the company faced fines of $428.5 million as a repeat offender in a new plea deal. (Luc Cohen, Reuters).

In January, the DOJ announced it is offering fine reductions to companies of up to 75% for voluntarily reporting misconduct. (Strohm, Bloomberg). This is up 25% from the policy announced last fall as the administration moves for a greater emphasis on self-reporting. (Chung, JDSupra). Even if a company does not self-report, it can still receive up to a 50% reduction if it exhibits extraordinary cooperation with the investigation. (Strohm, Bloomberg). The DOJ was clear that the extraordinary cooperation requirement means that the company must “go above and beyond the criteria for full cooperation.” Id. In the previous iteration of this policy, the reduction available was only 25%. (Chung, JDSupra). The new increased reduction demonstrates the administration’s emphasis on cooperation during an investigation. Id. Companies will have to wait to see how this plays out in practice to understand how to demonstrate extraordinary cooperation. Id. Incentivizing cooperation above all else should allow for the DOJ to achieve wins with hefty fines even if the “stick” of prosecution and guilty pleas is less severe. Glencore Plc may be the first example of how this new policy will play out. As the company was still able to demonstrate cooperation and significant improvements to its compliance and ethics which resulted its fine of $428.5 million being 15% below recommended sentencing guidelines. (Cohen,Reuters).

The further softening of the administration’s original hardline approach is clear, as companies with aggravated circumstances can now also qualify for the maximum fine reductions, previously unavailable under the old policy. Id.Aggravated circumstances include: “involvement by executive management of the company in the misconduct; a significant profit to the company from the wrongdoing; . . . and a history of prior misconduct by the company.” Id. In order to qualify for the fine reductions, companies must meet three requirements: 1) voluntary disclosure must be made immediately upon the company becoming aware of the misconduct; 2) the company had an effective compliance program at the time of the misconduct and disclosure; and 3) the company provided extraordinary cooperation to the DOJ’s investigation. Id. Though the benefits of the carrot are pervasive, the requirements pose a challenge. Id. Companies must determine if alleged misconduct merits being reported to the DOJ, which may hinder the immediacy of reporting. Id.Companies will need an effective compliance program that can diligently assess the validity of the alleged misconduct to meet the immediacy requirement. Id.  

The new policies show how the DOJ is trying to find a balance between being tough on white collar crime and incentivizing companies to self-report misconduct and cooperate with investigations. (Prentice, Reuters). However, the policy is not binding on prosecutors, who will “retain significant discretion” to award reductions and can evaluate prior misconduct when determining a starting point for fines within the guidelines. (Chung, JDSupra). The further down the road this policy goes, the more effective it can be as companies see how lenient prosecutors will be in awarding reductions, which will show the benefits of self-reporting and cooperation.

The Biden Administration seems focused on rewarding companies whose self-reporting and cooperation helps ease the administration’s burden in white collar cases. This can save all parties time and litigation costs while appearing as significant victories for the DOJ through noteworthy, if not as severe, fines. The administration’s carrot and stick approach may help with short-term wins for the DOJ but at a cost that seems to fall closer to the approach taken under the Trump Administration because of the reliance on self-reporting. Policies can only last as long as an administration, which after three iterations of administrative changes leads to uncertainty in the long-term governance of corporate misconduct. So perhaps the delicate balance the Biden Administration seeks helps to bridge the gap between the two polars of the previous presidencies and provides some consistency for companies moving forward.