Investigation and enforcement of financial crime

March 2019  |  SPOTLIGHT  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

March 2019 Issue

Motorcycle enthusiasts have Sturgis, beer-lovers have Oktoberfest, and compliance professionals have the annual ACI Conference on the Foreign Corrupt Practices Act (FCPA) held in Washington, DC in late November or early December. For the uninitiated, this event is resoundingly informative and a wonderful opportunity to meet the movers-and-shakers in the anti-corruption compliance world. For old hands, this event is still a ‘can’t miss’ item on the calendar, though it often involves practitioners well-known to the anti-corruption community working to bring their latest insights to core issues that have been discussed at prior years’ conferences for a decade or more.

The most recent conference, however, was different. US Deputy Attorney General (DAG) Rod Rosenstein and UK Serious Fraud Office (SFO) Director Lisa Osofsky both delivered keynote speeches that signalled major changes to the way that corporate criminal investigations are conducted on both sides of the Atlantic.

DAG Rosenstein kicked off the day by launching a slight policy change that could substantially change the calculus for businesses wishing to cooperate with the US Justice Department (DOJ) during criminal investigations.

A little background on recent US enforcement policy is necessary. Over the past two years, the DOJ has conducted a major self-evaluation of how it approaches the resolution of criminal investigations of corporations. Under prior policies, when a company under criminal investigation sought to cooperate with the government, the DOJ required that, as a prerequisite for cooperation credit, the company identify all individuals involved in the underlying conduct and turn over all relevant facts.

This may seem, on its face, to be a reasonable burden to bear for a company facing possible criminal charges. In practice, however, as the DOJ’s policy change acknowledged, this requirement has meant often very significant resources expended to track down information about a bottomless list of individuals, many of whom were, at best, tangentially related to the alleged wrongdoing. The marginal additional hours of document review and employee interviews add up quickly, not to mention the needless stress on employees who may have been remotely ‘involved’ – nearly all of whom have done nothing wrong, and rarely have much illuminating information that would be of interest to the DOJ. Also, fundamentally, the prior policy stoked concern among clients and counsel that the benefits of cooperation hung on the thread of a prosecutor’s determination of whether the ‘all’ – a broadly-interpreted term when in the context of a government request – standards had been met.

Enter DAG Rosenstein with a most welcome announcement. Instead of requiring companies to identify all individuals involved, he announced that the DOJ will instead require companies to identify all individuals ‘substantially’ involved in the alleged criminal activity. He acknowledged that “when the government alleges violations that involved activities throughout the company over a long period of time, it is not practical to require the company to identify every employee who played any role in the conduct”. Most compliance professionals working in-house know this too well, but the policy change does not seem to be driven as much by private sector concerns as much as the needs of the DOJ. Prosecutors have an interest in frank, timely discussions with cooperating companies and the speedy investigation and resolution of matters before them, but many DOJ trial attorneys had come to the conclusion that the previous ‘all individuals’ policy was hindering these aims. In fact, some DOJ employees told DAG Rosenstein that they had not “strictly enforced [the prior policy] in some cases because it would have impeded resolutions and wasted resources”. As DAG Rosenstein concluded: “Our policies need to work in the real world of limited investigative resources.” This is a line destined to appear in many a PowerPoint presentation during future DOJ resolution negotiations.

This policy change marks the latest evolution in the DOJ’s well-publicised efforts to bring more criminal prosecutions against culpable individuals in corporate investigations. Their reasoning is sound: “The most effective deterrent to corporate criminal misconduct is identifying and punishing the people who committed the crimes.” The DOJ had already made a number of other moves on this front in 2018. For example, in the past, more often than not a large corporate monetary settlement would be secured in a matter in which an individual would be going to prison, notwithstanding the fact that corporations are able to act only through their employees. Based on this last round of policy changes, the DOJ has now explicitly stated that corporate resolutions will no longer provide protection for culpable individuals, except in exceptional cases.

Not to be outdone, recently-appointed SFO director Lisa Osofsky provided some subtle but important hints regarding how that agency’s enforcement approach might change on her watch. One interesting allusion she made was to how the SFO might approach the issue of ‘de-confliction’ of witness interviews going forward. ‘De-confliction’ is the term used to describe some prosecuting authorities’, including the SFO’s, practice of sometimes not allowing a company to conduct interviews for its own internal investigations with certain employees until the investigating authority has had the opportunity to interview them first. US enforcers sometimes make similar demands, but in our experience such requests are more of a way of life ‘across the pond’. As she described it, rather than taking the more prescriptive approach to de-confliction her predecessor had enforced – summed up by the phrase ‘don’t trample the crime scene’, she posited a more nuanced approach focused on helping the SFO get “access to admissible evidence”.

In addition to being, in certain circumstances, a requirement under English law for the admissibility of certain evidence in criminal proceedings, getting this ‘first bite at the apple’ can be of significant value for government investigators as it ensures that prosecutors will get an unvarnished recitation of the facts from individual witnesses, and eliminates the possibility for the witness to have coordinated his or her story with other potential witnesses. But it puts corporate defendants, including those that have every intention to cooperate, at a large disadvantage by constraining their ability to conduct a thorough and timely internal investigation, and collect basic facts about possible criminal behaviour. It also puts corporate leadership in a bind – how can basic fiduciary duties of running an organisation, and investigating and remediating wrongdoing within that organisation, be squared with a government-imposed inability to actually speak to employees?

Ms Osofsky has, perhaps, mooted a possible answer to that question. Where her predecessor was most concerned with preserving the proverbial corporate ‘crime scene’s’ integrity, her approach seems to be, based on her limited public remarks, to leverage corporates and their investigators where she can to secure additional evidence rather than taking a more prescriptive approach. If we are reading the tea leaves correctly, this change of approach may signal a more flexible SFO on the de-confliction issue, and a similarly less absolutist position on privilege waiver.

In total, we detect the prospect of an ongoing effort on both sides of the Atlantic to rationalise investigation and enforcement policy to reflect reality and harness efficiencies – without giving up on key enforcement objectives. The DOJ is moving forward with enforcement policy changes which have, in total, further emphasised the prosecution of individuals, incentivised corporate voluntary disclosure, cooperation and remediation, and the more expeditious resolution of corporate matters, and the SFO’s new regime, while it is early days, appears to be seeking to do the same.

So, we feel it was pretty constructive on both sides of the Atlantic this year at the flagship conference, leaving us hopeful for more constructive comments from the authorities at the next event.

Matthew Herrington and Tom Best are partners and Brady Cassis is an associate at Steptoe & Johnson LLP. Mr Herrington can be contacted on +1 (202) 429 8164 or by email: mherring@steptoe.com. Mr Best can be contacted on +1 (202) 429 8079 or by email: tbest@steptoe.com. Mr Cassis can be contacted on +1 (202) 429 3773 or by email: bcassis@steptoe.com.

© Financier Worldwide

BY

Matthew Herrington, Tom Best and Brady Cassis

Steptoe & Johnson LLP