It has been an eventful six months in the world of corporate compliance. In September 2022, Deputy Attorney General (AG) Lisa Monaco introduced major updates to the U.S. Department of Justice’s (DOJ’s) corporate criminal enforcement policies. Among other things, she stressed that the DOJ would favor companies that have cultivated the “right” culture of compliance through effective compliance programs. She also instructed the DOJ’s Criminal Division to develop guidance for evaluating two particular aspects of a corporate compliance program: how a company deals with business communications on alternative messaging platforms, and how a company uses its compensation structure to promote compliance.

Now, six months later, that guidance is ready. On successive days at the American Bar Association’s annual conference on white collar crime, Deputy AG Monaco and Criminal Division Assistant Attorney General (AAG) Kenneth A. Polite Jr. announced revisions to the Evaluation of Corporate Compliance Programs (ECCP), the DOJ’s published criteria for compliance programs. Then, they went one step further and unveiled the groundbreaking Pilot Program on Compensation Incentives and Clawbacks, which pushes companies to make their employees internalize a culture of compliance by putting it where they will feel it the most—their paychecks.

Deputy AG Monaco’s and AAG Polite’s speeches send a clear signal to all corporate leaders: if you have not reviewed your company’s compliance policies on messaging apps and compensation in the last six months, now is the time.

Revisions to the ECCP

Messaging Applications

While the DOJ recognizes that in the modern working environment, employees frequently send work-related communications on their personal devices or on third-party messaging apps, such as iMessage or WhatsApp, it also expects companies to reflect that reality in their compliance programs, which it evaluates in part based on how well they manage these “off-channel” communications.

Polite explained that, under the revised ECCP, the DOJ will ask the following questions about how a compliance program deals with messaging applications:

• Is it tailored to the company’s risk profile and specific business need?
• Does it ensure that business-related electronic data and communications are being preserved and accessed?
• How does the company communicate these policies to employees?
• Does the company enforce these policies on a consistent basis?
• What are the preservation and deletion settings on the electronic communication channels used by the business?
• Does the company have a “bring your own device” program and an associated preservation policy?

If a company under investigation does not produce communications from third-party messaging applications, it will have to explain to the DOJ where the information is stored and whether the company can access the communications.

Much of this guidance was expected. As we have discussed before, Deputy AG Monaco signaled an interest in evaluating corporate policies on off-channel communications in her September 2022 memo to federal prosecutors, and the U.S. Securities and Exchange Commission (SEC) showed that it was also serious in policing this issue when, shortly after Deputy AG Monaco’s speech, it imposed $2 billion in collective fines—among other remedial measures—on 11 banks for letting their employees conduct business over personal messaging apps. Still, the DOJ’s formal implementation of these signals and settlement terms emphasizes that this issue is top-of-mind for prosecutors, which means that it should be top-of-mind for corporate leaders as well.

Compensation Policies

In AAG Polite’s speech, he focused on compensation structures that effectively impose financial penalties for misconduct and how this can deter risky behavior and foster a culture of compliance. But AAG Polite also emphasized that compensation structures should reward ethical behavior. For example, companies should grant promotions, rewards, and bonuses to employees who improve a compliance program or demonstrate ethical leadership. In other words, it may not be enough for a company under investigation to point to a historical lack of a need to punish unethical behavior as evidence of an overall culture of compliance. Instead, the DOJ will expect to see instances of positive financial reinforcement. Just as the DOJ uses an array of carrots and sticks to encourage companies to increase their compliance efforts, it expects companies to use carrots and sticks to ensure that each individual employee focuses on compliance.

These compensation policies are a continuation of the DOJ’s recent emphasis on holding individual employees accountable for wrongdoing. In particular, the DOJ aims to shift the financial burden of corporate noncompliance away from the shareholders of a company, who frequently have no involvement in the misconduct, and onto individual wrongdoers. That objective is on display with even more force in the DOJ’s new Pilot Program on Compensation Incentives and Clawbacks.

The Pilot Program on Compensation Incentives and Clawbacks

While compliance professionals will want to pay close attention to everything that Deputy AG Monaco and AAG Polite discussed, the Pilot Program on Compensation Incentives and Clawbacks was the biggest revelation and the most significant change to the DOJ’s current practices. The Pilot Program, which will last initially for three years, contains two components.

First, every corporate resolution will now require the company to include compliance-related criteria in its compensation and bonus structure. Deputy AG Monaco pointed out that the DOJ has already started implementing this requirement in recent resolutions. For example, she pointed to the plea agreement with Danske Bank in December 2022 where the DOJ required the bank to evaluate executives based on what they did to ensure compliance in their respective departments and, among other things, withhold bonuses from executives with failing compliance scores. AAG Polite added that in addition to using compliance criteria to punish misconduct, prosecutors will also focus on implementing criteria that provide financial rewards for ethical behavior. This focus on connecting compliance to compensation offers new avenues for companies negotiating with the DOJ to create unique solutions, and as more settlements are reached, we will gain more insight into the DOJ’s aspirations for this pilot program.

Second, the Criminal Division will reduce fines for companies that seek to claw back compensation from corporate wrongdoers. AAG Polite emphasized that the DOJ expects companies to pursue clawbacks not only against the employees who engaged in wrongdoing but also against any supervisors who knew of the misconduct or were willfully blind to it. And to incentivize this practice, as long as the company has initiated clawback procedures by the time it enters into a resolution, its fine will be reduced by the amount that the company is seeking to claw back. If the company’s clawback efforts are ultimately successful, the company will get to keep the money. The goal of this program is to ensure that the financial burden of these individuals’ misconduct stays squarely on them and does not impact the company’s shareholders. If the company is not able to claw back compensation despite making good faith efforts, prosecutors will have discretion to reduce the fine by up to 25 percent. That aspect of the Pilot Program continues a recent trend where the DOJ grants companies more opportunities for fine reductions.

AAG Polite did acknowledge that in some circumstances, a company might determine that the costs of clawback litigation and its prospects of success outweigh the value of the amount that it seeks to recoup. He noted that in those situations, the DOJ would not want to incentivize companies to waste resources pursuing a clawback.

Conclusion

As with all new DOJ policies, questions remain about how the Pilot Program and its changes will function in practice. For example:

• What qualifies as a “good faith effort” to claw back compensation? Relatedly, is the 25 percent maximum reduction for unsuccessful clawback attempts sufficient to incentivize companies to take the risk of engaging in litigation against its former employees and executives?
• Does the compensation referred to in the Pilot Program include all compensation or just incentive-based compensation, and how does the DOJ’s policy square with the SEC’s new clawback rules, which apply only to incentive-based compensation?
• Will there be negative consequences for a company that elects to not pursue compensation clawback? On the one hand, AAG Polite acknowledged that there are situations where a clawback attempt would be wasteful. On the other hand, in Deputy AG Monaco’s September 2022 speech, she said that prosecutors would evaluate the strength of a company’s compliance program in part by whether a company not only has compliance-inducing compensation policies but also “actually claws back compensation or otherwise imposes financial penalties.”

For more information on the changes to the DOJ’s criminal corporate compliance initiatives, how to establish or bolster your compliance program and internal controls, how to respond to a government investigation, or any related matter, please contact a member of the white collar crime and government investigations practices at Wilson Sonsini Goodrich & Rosati.