Enforcement risks increase: DOJ and SDNY initiate self-disclosure pilot programs for individuals

The DOJ’s Criminal Division introduced a pilot program to resolve charges brought against individuals who voluntarily self-disclose corporate misconduct in which they are directly involved with a non-prosecution agreement (NPA) (the “DOJ Pilot Program”).² A few weeks earlier, the U.S. Attorney’s Office for the Southern District of New York (SDNY) adopted a whistleblower pilot program with largely the same effect but a different scope of underlying misconduct (the “SDNY Pilot Program”).³

Further, Deputy Attorney General Lisa Monaco announced that the DOJ will soon introduce a whistleblower rewards program for individuals who report misconduct and are not themselves implicated. These individuals may be eligible for financial compensation.⁴ The U.S. Attorney’s Office for the Northern District of California has indicated that it will soon launch its own whistleblower pilot program based on the SDNY Pilot Program.⁵

These programs advance the DOJ’s overarching policy to encourage self-disclosure of misconduct with more “carrots.” They also amplify the effect of the DOJ’s expansion of corporate incentives for voluntary disclosures, such as increasing the discount off of the federal sentencing guidelines range.

Key features of the Pilot Programs

The goals of the Pilot Programs are twofold: first, to provide predictability and certainty by offering a pathway for culpable individuals to receive an NPA for truthful and complete self-disclosure to the DOJ, and second, to develop insiders who can provide credible and actionable information and first-hand testimony about corporate misconduct.

The typology of misconduct that each Pilot Program covers generally overlaps, but there are some notable differences. The DOJ Pilot Program’s subject matter includes misconduct by financial institutions or relating to financial market integrity, domestic and foreign corruption, health care fraud, or fraud against the U.S. government.

The SDNY Pilot Program applies to fraud affecting market integrity or public funds, bribery of state or local officials, and corporate control failures by or through public or private companies, exchanges, financial institutions, investment advisers, or investment funds. The SDNY Pilot Program does not apply to: (1) violations of the Foreign Corrupt Practices Act (FCPA); (2) violations of federal or state campaign financing laws; (3) federal patronage crimes; (3) corruption of the electoral process; (4) bribery of federal officials; (5) federal tax offenses, and (6) federal environmental crimes. However, presumably in a joint investigation between SDNY and DOJ where DOJ has a voluntary disclosure policy, that policy – and the benefits under it – would still apply.⁶

Here are the common key features of the Pilot Programs:

• Voluntary disclosure: Individuals must voluntarily disclose original, previously unknown information to the DOJ or the SDNY. Individuals must not be under a preexisting obligation to disclose this information and a government investigation or threat thereof must not be ongoing or imminent.

• Full, truthful, and complete cooperation: The disclosure must be truthful, substantial, and complete. Individuals are expected to provide all known details about the misconduct, including their role. Cooperation also involves assisting the government in ongoing investigations and prosecutions, which might include testifying and producing evidence and, if requested, providing proactive assistance in law enforcement investigations.

• Eligibility restrictions: Certain individuals are excluded from eligibility. The individual (1) must not have engaged in violent conduct, sex offenses, or terrorism; (2) must not be a high-ranking company officer; (3) must not be a foreign or domestic government official; and (4) does not have a previous felony conviction or a conviction of any kind involving fraud or dishonesty.

• Forfeiture: Individuals must forfeit or disgorge any benefit or profit from the misconduct. Under the DOJ Pilot Program, individuals must also compensate any victims.

Impact on integrity compliance

Effective integrity compliance programs and a culture of transparency may not only prevent misconduct but also position companies to respond proactively if issues arise. The DOJ is transparent about creating a race to the Department: “By providing incentives to the first person to report misconduct to the government, it puts pressure on everyone — including companies —to disclose misconduct as soon as they learn about it.”⁷

Companies should cultivate a culture that empowers employees to seek advice and raise concerns. They should also evaluate their reporting channels to ensure that they facilitate internal reporting of potential misconduct. Companies should also review and, where necessary, enhance hotline and advice line channels. When they receive credible allegations, companies should ensure that they thoroughly investigate them and engage with reporters. This minimizes the risk that misconduct remains undetected or that the reporter seeks recourse outside of the company, including the government.

Legal implications for companies

Companies and their counsel must navigate the intricacies of voluntary disclosure to increase the likelihood of a declination or mitigation under the DOJ’s corporate enforcement policy. If allegations are substantiated, companies should carefully assess whether to disclose them to the government.

Prior to the adoption of the Pilot Programs, the calculus typically accounted primarily for individuals with direct knowledge of misconduct who were not themselves implicated. Going forward, companies and their counsel should consider the possibility that implicated individuals may “race” the company to disclose first and seek safe harbor from prosecution.

If an individual discloses company misconduct to the government before the company does, the government may consider the misconduct as being “known” to the government. Further, the burden is on the company to demonstrate that its disclosure is timely. If misconduct is considered “known” to the government or “untimely” because an individual has already disclosed it, the company’s disclosure is likely to result in reduced mitigation credit under the corporate enforcement policy.

Nevertheless, even if a company’s disclosure is determined to be “known” or “untimely,” the government could still assess the disclosure as evidence of the company’s cooperation.

Legal implications for individuals

Satisfying the eligibility criteria to reap the benefits of the Pilot Programs may prove challenging for individuals. First, senior executives and government officials are ineligible for an NPA. Given the in-scope typology of misconduct, the mid and lower-level company employees likely form a much narrower group of individuals who can provide the government with information. Further, at least for the DOJ Pilot Program, these individuals will have to pay disgorgement and restitution, which may amount to sums far exceeding their ability to pay.

The incentives for individuals to cooperate and provide early disclosure are greater than ever; but seeking an NPA is not risk-free. Individual cooperators typically seek a “5K letter” from the government, requesting that the court depart from the sentencing guidelines in exchange for the cooperator’s substantial assistance. Now, individuals with valuable information could receive a far more lenient type of sanction, an NPA.

However, the Pilot Programs give the government substantial discretion to determine whether to enter into an NPA, leaving individuals with some degree of uncertainty. They may provide incriminating information but the government determines that an NPA is not an appropriate resolution mechanism.

Policy implications

For several years, the DOJ has adopted various policies on corporate enforcement seeking to incentivize companies to self-disclose misconduct. The impetus for these policies has been for companies to provide evidence that the DOJ can use in individual prosecutions. The DOJ sees the Pilot Programs as complementary to its number one priority: holding culpable individuals accountable. Thus, the government is expected to leverage information disclosed through the Pilot Programs to prosecute other individuals, potentially including company C-suite executives, who are not eligible to benefit from the Pilot Programs.

The DOJ and the U.S. Attorney’s Offices throughout the country are working hard to cultivate new sources of information to combat corporate crime. Only time will tell whether they can reap what they sow.

Authored by Peter Spivack, Tina Milburn, Shannon Zhang, and Nikolaos Doukellis.