Department of Justice Issues New Guidance on How It Evaluates Compliance Programs
Last week, the DOJ Criminal Division published a guidance document entitled "Evaluation of Corporate Compliance Programs" (ECCP). This document is meant to assist prosecutors in determining what credit should be given to a corporation for having an effective compliance program when prosecutors decide whether to bring charges, what charges to bring, what amount of penalties to seek, or whether to impose a monitorship or reporting obligations on a corporation. The document is equally useful to companies that want to assess their current compliance program and determine whether any changes need to be made.
The new ECCP is an update of an earlier version published in 2017 by the Fraud Section of the Criminal Division. The new ECCP expands on and reorganizes the prior version but does not make any major substantive changes. However, it contains some subtle shifts in emphasis. In particular, it elevates the importance of conducting risk assessments and calibrating compliance program elements to address high-risk areas. It also signals that DOJ may scrutinize more closely the actual effectiveness of compliance programs.
The Three Fundamental Questions
The new ECCP commences by noting that there are three fundamental questions a prosecutor should ask when evaluating a compliance program:
1. Is the program well designed?
2. Is the program being implemented effectively?
3. Does the program work in practice?
The rest of the ECCP addresses each of these three issues. It breaks them down into discrete topics and poses a number of subsidiary questions that should be asked to explore each topic. These questions are largely unchanged from the 2017 version of the ECCP, but they are now woven into the DOJ's risk-based approach. The relevant topics and the key questions relating to each one are as follows.
I. Is the Compliance Program Well Designed?
A. Risk Assessment
- Has the company properly identified, assessed, and defined its risk profile?
- What methodology has the company used to identify, analyze, and address the particular risks it faces?
- What information or metrics has the company collected; how has it used them?
- Does the company give greater scrutiny, as warranted, to high-risk transactions?
- Is the risk assessment reviewed and updated periodically?
B. Policies and Procedures
- Does the company have a code of conduct that is accessible and applicable to all employees?
- How are compliance policies and procedures designed and implemented?
- Are the policies comprehensive – do they deal with the full spectrum of risks?
- Are the policies and procedures communicated to all employees and relevant third parties? What about employees who speak another language?
- Who is responsible for integrating policies and procedures? Are they rolled out in an effective fashion?
- What guidance and training is provided to key gatekeepers – those with approval authority or certification responsibilities?
C. Training and Communications
- Is training risk-based? Is there tailored training for high-risk and control employees and for supervisors?
- Has the training been offered in the form and language appropriate for the audience?
- How has the company measured/tested the effectiveness of its training?
- How has the company addressed employees who fail the testing?
- What communications are made to other employees when an employee is terminated or disciplined for misconduct?
- What resources are available to employees to provide guidance relating to compliance?
D. Confidential Reporting Structure and Investigation Process
- Does the company have an anonymous reporting mechanism?
- How is the reporting mechanism publicized to employees?
- Is the reporting mechanism effective – has it been used? With what results? Do compliance personnel have full access to the information reported?
- How does the company determine which complaints merit further investigation?
- Who conducts an investigation and how is that decided?
- Are investigations independent, objective, appropriately conducted, and properly documented?
- Does the company have a process for monitoring the outcome of investigations, their timeliness, and ensuring a response to any findings or recommendations?
- Are the reporting and investigating mechanisms sufficiently funded?
- Does the company analyze the reports and investigative findings for patterns of misconduct or compliance weaknesses?
E. Third Party Management (Agents, Consultants, Distributors)
- Does the company have an understanding of the qualifications and associations of its agents, consultants, and distributors, i.e. third parties who are commonly used to conceal misconduct?
- How has the company's third-party risk management process been integrated into the procurement and vendor management processes?
- How does the company ensure there is an appropriate business rationale for the use of third parties?
- How does the company monitor its third parties? Does it have and exercise audit rights?
- How does the company incentivize compliance and ethical behavior by third parties?
- Does the company keep track of third parties that do not pass due diligence or that are terminated, and does it take steps to ensure they are not hired or re-hired at a later date?
F. Mergers and Acquisitions
- Does the company subject its acquisition targets to appropriate scrutiny?
- How has the compliance function been integrated into the merger, acquisition, and integration process?
II. Is The Compliance Program Being Implemented Effectively?
A. Commitment by Senior and Middle Management
- How have senior leaders, by their words and actions, encouraged or discouraged compliance? What concrete actions have they taken?
- Have managers tolerated greater compliance risks in pursuit of new business or greater revenues?
- Have managers encouraged employees to act unethically to achieve a business objective, or impeded compliance personnel from effectively implementing their duties?
- What actions have senior leaders and middle managers taken to demonstrate their commitment to compliance or compliance personnel?
- Has the board held executive sessions with the compliance and control functions?
- What types of information have the board and senior management examined in exercising oversight in the area in which the misconduct occurred?
B. Autonomy and Resources
- Where within the company is the compliance function housed? To whom does it report? Does the chief compliance office wear more than one hat? Do compliance personnel have other responsibilities? Why has the company chosen the structure it has?
- How does the compliance function compare with other strategic functions in the company in terms of stature, compensation, rank/title, reporting line, resources, and access to key decision makers? What is its turnover rate?
- Has the company actually responded when compliance has raised concerns? Were transactions or deals stopped, modified, or further scrutinized?
- Do compliance and control personnel have the appropriate experience and qualifications? Who reviews their performance and through what process?
- Has there been sufficient staffing and funds for compliance efforts? Have requests for resources ever been denied and, if so, on what grounds?
- Does compliance have direct reporting lines to the board and/or audit committee? How often does compliance meet with directors? Is senior management present? How does the company ensure the independence of compliance and control personnel?
- If the company has outsourced all or parts of its compliance functions, who oversees the external firm? What level of access does the external firm have to company information? How has the effectiveness of the outsourced process been assessed?
C. Incentives and Disciplinary Measures
- Who participates in disciplinary decisions?
- Is the same process followed for each instance of misconduct? If not, why not?
- Are the actual reasons for discipline communicated to employees? If not, why not?
- Have disciplinary actions been fairly and consistently applied across the company?
- How does the company incentivize compliance and ethical behavior?
- Have promotions or awards been denied because of compliance or ethical considerations?
- Who determines the compensation, promotion, and discipline of compliance personnel?
III. Does The Compliance Program Work In Practice?
A. Continuous Improvement, Periodic Testing, and Review
- How does the company determine where and how often it will conduct internal audits?
- How are audits carried out?
- If misconduct has occurred, what types of audits would have identified it? Did those audits occur and what were the findings?
- What audit findings are reported to management and the board on a regular basis?
- How have management and the board followed up?
- What testing of controls, collection and analysis of compliance data, and interviews of employees and third-parties does the company undertake?
- How are the results reported and action items tracked?
- How often has the company updated its risk assessments and reviewed its compliance policies, procedures, and practices?
- Does the company measure its culture of compliance and seek input from all levels of employees about their perceptions of senior and middle management's commitment to compliance?
- What steps has the company taken in response to measuring its compliance culture?
B. Investigation of Misconduct
- How has the company ensured that investigations have been properly scoped, independent, objective, appropriately conducted, and properly documented?
- Have the investigations identified root causes, system vulnerabilities, and accountability lapses, including among supervisors and senior executives?
- How high up in the company do investigative findings go?
- What has been the response to investigations?
C. Analysis and Remediation of Any Underlying Misconduct
Finally, if misconduct has occurred, the following questions come into play:
- What was the root cause of the misconduct? Was it systemic? Who in the company analyzed the room cause?
- What controls failed? Were any applicable policies and procedures not followed?
- How was the misconduct funded? What processes could have prevented or detected improper use of funds?
- If vendors were involved in the misconduct, what was the process for vendor selection?
- Were there any prior opportunities to detect the misconduct? Why were they missed?
- What specific changes has the company made to reduce the risk of recurrence? Have those changes addressed the root cause and missed opportunity analyses?
- What disciplinary actions did the company take and were they timely? Were managers held accountable for misconduct that occurred under their supervision? What is the company's disciplinary track record in similar situations?
This is a long list of topics and questions. Not all of them may apply to every company, but they provide a comprehensive, sound framework for analyzing the compliance program of almost any company. Because of their breadth and detail, it is not possible to summarize these questions in a few paragraphs or takeaways. This is not surprising because there are no shortcuts when it comes to designing, implementing, or assessing an effective compliance program.
These questions are important not only for companies that are facing an investigation, but for all companies. Prudent companies should ask these questions of themselves to assess and enhance their compliance programs. Further, the time to ask these questions is now.
For more information about Holland & Knight's compliance program services, please visit our compliance services webpage.