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11 November 2019
On 8 October 2019 the US Department of Justice (DOJ) issued a new guidance memorandum entitled "Evaluating a Business Organisation's Inability to Pay a Criminal Fine or Criminal Monetary Penalty". This memorandum aims to provide greater clarity, transparency and uniformity as to how the DOJ's Criminal Division evaluates companies' claims that they cannot pay a proposed criminal fine or monetary penalty.
As Assistant Attorney General Brian A Benczkowski explained in announcing the guidance, the memorandum and accompanying questionnaire "provide an analytical framework for evaluating assertions by a business organization that it cannot pay a criminal fine or monetary penalty that it would otherwise concede is appropriate based on the law and the facts".
In particular, as an initial step, and before Criminal Division attorneys may consider inability-to-pay claims under this framework:
the parties must first reach an agreement as to both the form of a corporate criminal resolution (e.g., non-prosecution agreement, deferred prosecution agreement, or corporate guilty plea) and the monetary penalty that is appropriate based on the law and facts, irrespective of inability to pay considerations.(1)
In evaluating such a claim, the Criminal Division must consider (typically with the aid of an accounting expert) the:
statutory sentencing factors set forth at 18 U.S.C. § 3572(a) & (b), the guidance set forth in U.S.S.G. §§ 8C2.2 & 8C3.3, and the Justice Manual's principles regarding the consideration of collateral consequences in resolving a corporate criminal case.(2)
Part III of the memorandum, entitled "Relevant Factors for Assessing Whether a Business Organisation has Demonstrated an Inability to Pay the Otherwise Appropriate Criminal Fine or Monetary Penalty", sets out the DOJ's key considerations, including the following.(3)
Background on current financial condition
Alternative sources of capital
Victim restitution considerations
This considers whether a fine or penalty will affect the ability to pay restitution.
Importantly, where DOJ Criminal Division attorneys conclude that "an organization is unable to pay the otherwise appropriate criminal fine or monetary penalty, they should recommend an adjustment to the monetary penalty amount" – yet "only to the extent necessary to avoid (1) threatening the continued viability of the organization and/or (2) impairing the organization's ability to make restitution to victims".(4) Although a footnote leaves open the possibility of reductions for another "significant adverse collateral consequence" that does not threaten an organisation's viability, it remains to be seen what aid the memorandum will lend to corporations claiming such harm from potential fines or penalties.(5) Presumably, this scenario would include the DOJ considering the impact on innocent shareholders when it is clear that a massive penalty would punish them as a result of alleged misconduct by company executives. The memorandum also outlines the internal DOJ approvals required for reductions, with reductions in excess of 25% requiring approval from the Criminal Division assistant attorney general.
The memorandum itself includes an attached inability-to-pay questionnaire, which, as Benczkowski explained, "helps flesh out the company's full financial picture – requiring information about recent cash flow projections and operating budgets to acquisition or divestiture plans and encumbered assets". The questionnaire contains 11 categories of information, amounting to substantial transparency on the part of a corporation as to its overall financial status, including information regarding:
Arguments by corporations regarding their ability to pay, and consideration of such arguments by the DOJ's criminal and civil enforcement attorneys, are not new. In one high-profile Foreign Corrupt Practices Act (FCPA) investigation, Brazilian company Odebrecht SA argued – and the DOJ accepted – the claim that it could not pay the $4.5 billion fine due to authorities in three countries, with US authorities agreeing to apply an inability-to-pay analysis. The government's sentencing memorandum explained that:
based on Odebrecht's representations that it had an inability to pay a penalty in excess of $2,600,000,000… the parties agreed that the criminal penalty was subject to the government's completion of an independent analysis to verify the accuracy of Odebrecht's representations regarding its ability to pay the fine.(6)
Following that analysis, the parties agreed that Odebrecht had "an inability to pay a total criminal penalty in excess of $2,600,000,000", resulting in a reduced US share of the settlement amounting to $93 million.(7)
Likewise, inability-to-pay arguments have been accepted in other recent settlements following DOJ investigations, including as follows:
The DOJ's willingness to consider corporate defendants' financial capabilities is a longstanding practice, extending to the resolution of False Claims Act (FCA) cases in particular. Looking ahead, it appears that the following may occur:
Although the memorandum extends across the DOJ's Criminal Division – which prosecutes, among other crimes, FCPA violations, healthcare fraud and financial fraud – it does not address individuals. Further, its terms do not expressly apply to other DOJ divisions, such as the Antitrust Division or the National Security Division. That said, targets of investigations initiated by other DOJ prosecuting divisions should anticipate a similarly high degree of scrutiny of inability-to-pay claims. Moreover, individual executives could be subject to attempts by the DOJ to clawback past compensation during the course of the alleged misconduct – from the government's perspective, as a way to mitigate a reduced fine on the company based on its inability to pay a resolution.
In addition, inability-to-pay claims have been accepted by other US regulators that may also have an interest in the prosecutions covered or implicated by the memorandum. For example, the US Department of Treasury's Office of Foreign Assets Control recently announced a $4 million settlement with British Arab Commercial Bank PLC arising from alleged violations of US sanctions on Sudan, a sum reduced from the original proposed penalty of $228,840,000, in light of:
Moreover, the US Federal Trade Commission has a civil leniency programme which establishes criteria for it to apply when considering providing relief to small businesses raising inability-to-pay claims.
As Benczkowski highlighted in his 8 October 2019 speech, the memorandum is only the latest in a series of DOJ guidance and policy pronouncements. Earlier in 2018 then-Deputy Attorney General Rod Rosenstein issued a memorandum entitled "Policy on Coordination of Corporate Resolution Penalties", directing DOJ attorneys to "consider the totality of fines, penalties, and/or forfeiture imposed by all [DOJ] components as well as other law enforcement agencies and regulators in an effort to achieve an equitable result" – in other words, to help prevent undue 'piling on' by multiple enforcement authorities. Thereafter, on 11 October 2018 Benczkowski issued a memorandum entitled "Selection of Monitors in Criminal Division Matters", providing clarity as to the criteria to be considered when determining whether a corporate compliance monitor is warranted. On 30 April 2019 the DOJ issued a guidance document entitled "Evaluation of Corporate Compliance Programmes", which built on prior compliance guidance while emphasising the importance of implementing corporate compliance programmes that are not merely well-designed but also effective and adaptable. Broadly speaking, these directives reflect an effort to ensure greater consistency and transparency, while recognising and attempting to fairly account for the practical impact of enforcement action on companies.
As with these other guidance documents, time will tell whether the memorandum reflects any significant change in existing practices. For all of the reasons set out above – and in light of the memorandum's codification of these broad requirements for documentation – companies considering raising the issue of inability to pay with the DOJ should do so with eyes wide open as to the level of burden and scrutiny that they will face. Regardless, the memorandum provides some clarity for corporations seeking relief from potentially existential threats from looming fines or penalties.
For further information on this topic please contact Gejaa Gobena, Lillian S Hardy or Peter S Spivack at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email (email@example.com, firstname.lastname@example.org or email@example.com). Alternatively, contact Matthew C Sullivan at Hogan Lovells US LLP's Philadelphia office by telephone (+1 267 675 4600) or email (firstname.lastname@example.org). The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
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