New Guidance From DOJ Clarifies that Corporate Monitor Selection Process Begins With the Company

Companies that may be subject to monitorship have significant opportunities to shape the outcome of the monitorship and its impact on their operations as illustrated by new guidance released by the Department of Justice (DOJ) on October 11.

The DOJ’s newly released Benczkowski Memorandum on the Selection of Monitors in Criminal Division Matters (the Benczkowski Memorandum) provides guidance on the process for selecting independent corporate monitors engaged in connection with deferred prosecution agreements (DPAs), non-prosecution agreements (NPAs) and plea agreements between companies and the DOJ’s Criminal Division. Monitors can have significant legal, operational and financial impacts on a company subject to monitorship. Thus, companies have a substantial interest in the selection of an appropriate monitor for the company’s industry and the issues contemplated by the monitorship agreement.

The Benczkowski Memorandum expands upon prior guidance provided by the 2008 Morford Memorandum on the Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (the Morford Memorandum). Where the Morford Memorandum described the benefits of monitorship and the scope of a monitor’s responsibilities, the Benczkowski Memorandum clarifies the considerations relevant to determining the propriety of a monitorship, the process for selecting a monitor and a company’s role in the selection process.

The 2008 Morford Memorandum – General Principles

The Morford Memorandum focused on considerations relevant to the decision to engage a monitor and the anticipated scope of a monitor’s duties. It provided only a high-level framework for the selection of a monitor, explaining that no one method of selection would be appropriate in every case, but that any method used should be designed to “select a highly qualified and respected person . . . avoid potential and actual conflicts of interests, and . . . instill public confidence.”¹

The Morford Memorandum also contemplated the creation of a standing committee with the power to select or veto monitor candidates and further suggested that, whenever feasible, at least three candidates should be considered for each monitorship—whether initially proposed by the Government or the company. The Office of the Deputy Attorney General would have final authority and responsibility over the review and approval of a proposed monitor before the monitorship commenced.

The 2018 Benczkowski Memorandum – Best Practices Begin With a Company’s Proposal

The Benczkowski Memorandum reiterates the Morford Memorandum’s direction that the process to select a monitor “instill public confidence,” and “result in the selection of a highly qualified person” who is conflict-free. However, it goes further by providing a supplemental set of specific considerations for deciding whether to engage a monitor, as well as a step-by-step process—beginning with a company’s initial proposal of a pool of monitor candidates—to be employed in the selection of monitors in most cases.

Propriety of a Monitorship

The Morford Memorandum set forth two basic factors for consideration when determining whether a monitorship would be appropriate in a particular case: (1) the potential benefits of engaging a monitor, and (2) the cost of a monitor and its impact on the company’s operations.  

The Benczkowski Memorandum expands upon this high-level guidance by providing a series of principles for consideration. With respect to evaluating the potential benefits of a monitorship, the Benczkowski Memorandum suggests consideration of whether:

• The underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal controls system.
• The misconduct at issue was pervasive . . . or approved or facilitated by senior management.
• The corporation has made significant investments in, and improvements to, its corporate compliance system and internal controls systems.
• Remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.²

The Benczkowski Memorandum further instructs Criminal Division attorneys to consider whether the circumstances that originally gave rise to the misconduct have fundamentally changed (i.e. changes in corporate leadership).

With respect to the consideration of cost, Criminal Division attorneys are advised to consider not only monetary costs, but also whether the monitor’s role is defined to avoid unnecessary operational hardship to the company. Ultimately, monitorships are only appropriate where there is a “demonstrated need for, and a clear benefit to be derived from, a monitorship relative to the projected costs and burdens.”

Monitor Selection Procedure

The Benczkowski Memorandum contemplates a 4-tiered process for the selection of a monitor. The company is given the initial opportunity to propose a pool of three monitors within 20 days after execution of the DPA, NPA or plea agreement. The DOJ attorneys handling the matter then evaluate the company’s proposed candidates. They will select their preferred candidate and make a recommendation to the Assistant Attorney General (AAG) of the Criminal Division in a Monitor Recommendation Memorandum. The AAG in turn reviews the recommendation and any additional information he or she requests and forwards his or her recommendation to the Office of the Deputy Attorney General, which has final authority to approve or reject the monitor candidate.

If at any time the government rejects the company’s pool of proposed candidates, the company is asked to propose additional monitor candidates and the review process begins anew.

Qualitative Considerations

While the Morford Memorandum provided little detail as to the qualitative considerations relevant to the selection of a monitor, saying only that the selection process should aim to select a “highly qualified person,” the Benczkowski Memorandum sets forth several factors relevant to the consideration of whether a monitor candidate is “highly qualified,” including:

• The candidate’s general background, education, training, experience, honors, licensing and reputation.
• The candidate’s expertise in the particular area(s) at issue.
• The candidate’s degree of objectivity and independence.
• The candidate’s resources to discharge his or her responsibilities effectively.

Implications

As an initial matter, there are steps a company can take to avoid the imposition of a monitor. Companies should consider whether proactively altering the conditions that gave rise to DOJ scrutiny might render a monitor unnecessary.

Comparing the Benczkowski Memorandum considerations to the company’s current situation is a good starting point. Legal counsel can advise whether an internal investigation to identify the select practices, party and/or parties responsible for the misconduct would be warranted in a particular case. In addition, companies can take steps to preemptively implement and/or revise compliance programs and internal controls before the DOJ even proposes a monitorship. 

If a monitorship cannot be avoided, the Benczkowski Memorandum makes clear that the selection of a monitor begins with the company subject to monitorship, and with the company’s proposal of monitor candidates well-suited to the industry and relevant compliance issues.

Companies have a substantial interest in approaching the monitor selection process with care. An under-qualified or ill-matched monitor can hinder a company’s growth and ability to serve its internal and external constituencies, while failing to provide the compliance benefits at the heart of the monitorship program.

Moreover, the careful selection of a well-qualified pool of monitor candidates at the outset—with an eye to the qualitative considerations set forth in the Benczkowski Memorandum—may reduce the likelihood of costly and disruptive delays by lessening the risk that the company’s initial pool of candidates will be rejected during the DOJ review process. 

Companies that find themselves the subject of investigation by the DOJ’s Criminal Division should consult with legal counsel early to determine whether a monitorship agreement is appropriate in their case and, if so, to begin the careful process of selecting a qualified pool of monitor candidates.

•  ¹Craig S. Morford, Memorandum for Heads of Department Components United States Attorneys: Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations, 3 (2008) (the “Morford Memorandum”)
•  ² Brian A. Benczkowski, Memorandum on the Selection of Monitors in Criminal Division Matters, 2 (2018) (the “Benczkowski Memorandum”).