Monitoring the Monitors

Monitoring the Monitors

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March 30, 2009

Imagine hiring a lawyer on the following terms: you may send as many associates as you like, at whatever hourly rate you choose, to as many of our domestic or foreign offices as you wish, for as long as you think appropriate. We’ll throw open our doors, waive any arguable attorney-client privilege and pay your bills without complaint, and we’ll do this knowing that you’ll report your findings to the government.

Why are we hiring you? Because the government made it a condition of settlement. Why you? Because your colleague, the company’s defense lawyer and an independent compliance monitor on another matter, recommended you and the government approved the choice because they have confidence that you’ll be thorough, even tenacious. How can you keep their confidence? By leaving no stone unturned.

If the odds sound stacked against corporations, they are. If the compliance monitor function seems fraught with potential conflicts of interest, it is.

The U.S. Department of Justice has been inundated recently with companies stepping forward to disclose potential violations of the Foreign Corrupt Practices Act, the law prohibiting inappropriate payments (bribes) to foreign government officials. These companies believe, correctly or otherwise, that they will be treated more leniently if they step forward voluntarily. Although not universal, the typical penalty includes a fine and the imposition of ongoing remedial steps, the design and implementation of which is overseen and reported to the government by a compliance monitor for a period of several years, all at the company’s expense. Record-breaking fines are tracked by practitioners and touted by the enforcers. The greater expense, however, is invariably the compliance monitor.

Companies probably won’t end up with a compliance monitor unless they have violated the FCPA. (They probably won’t, but they may. Bribery can involve difficult questions about what companies should have known about the conduct of their partners and third party intermediaries and these are not always resolved with perfect clarity by prosecutors and companies keen to settle.) For those companies that have violated the FCPA, it is difficult to feel sympathy for acknowledged bribe-payers. There are some companies that are so flawed or indifferent that it is easy to conclude that a compliance monitor, however onerous and expensive, is a reasonable price for a company to pay if it has violated the law.

On the other hand, in every recent case in which a company has ended up with a monitor, the company has voluntarily disclosed the misconduct and sought to settle the matter. That is, monitors are imposed when the company has uncovered, investigated and reported to the government the wrongdoing in question. Some would argue that such disclosure may be evidence of a compliance program that works and is almost certainly evidence of a company demonstrating an intent to be a good corporate citizen, and would question why a monitor is needed. Few imagine that companies can operate internationally without one or more rogue employees violating some law somewhere. It’s a company’s responsibility to ensure that opportunities are minimized, controls are robust, training is clear and penalties are enforced.

If a company agrees to a compliance monitor, the company may be invited to select the monitor subject to the DOJ’s approval. If corporate lore is to be believed, there are reportedly just a dozen or so monitors deemed acceptable to the DOJ; if this is true, the selection process is badly skewed. Even if not true, the perception is nevertheless likely to skew the selection process. A monitor may not be the company’s outside counsel and may not undertake work for the company for a period of years after the monitorship. This constraint is intended to minimize conflicted loyalties that might arise if a monitor is simultaneously investigating and marketing its services to a company.

What it appears to encourage instead, however, is a situation whereby outside counsel suggests a colleague at another firm as the monitor for its client and, when the opportunity arises, the colleague at the other firm repays the favor. There is nothing inherently wrong with this sort of informal arrangement, but it does serve to protect the small pool of potential monitors from interlopers. More insidiously, by keeping monitorships to a small cadre of FCPA practitioners, often an attorney is working “for” government prosecutors as a monitor in one case, while defending other clients before those very same prosecutors.

Once in place, the monitor is free to roam largely where he chooses, often with a team of associates. Access to records is largely unfettered and travel costs mount quickly. Proponents of monitors describe this freedom as essential to a complete and independent investigation. Others recount fishing expeditions where, for example, ten years’ worth of unrestricted e-mails were retrieved so the monitor’s team could review them and assess whether there was a “culture of corruption.”

The initial agreement with any monitor is meant to define the scope of the monitor’s inquiry. But if a monitor strays from this agreement, the company has little practical recourse but to cooperate. (The company is entitled to walk back into the DOJ and complain, but, not surprisingly, few think it is wise to complain to the DOJ that sanctioned them about the government-blessed monitor who is investigating them.) And some very practical problems are raised by this relationship. A monitor may be tasked with investigating global anti-bribery efforts. He may, while reviewing records directly related to this investigation, stumble across evidence of export violations or perhaps even sexual harassment. These are not within the scope of his review, but in reporting his findings to the government, should he ignore them? Report the isolated findings without context or additional research? Broaden the scope of the investigation beyond the bounds of the initial agreement?

Most monitors are very professional lawyers with very strong reputations as experts in their fields. All are expensive and all are short-term. With this in mind, an alternative compliance format seems worth exploring.

If companies have voluntarily disclosed past violations of the FCPA, they are likely to know already that they have a compliance blind spot and that their reputations and the patience of enforcement agencies won’t survive another incident. Most will be highly motivated. If monitors are supposed to be a remedial rather than a punitive measure, the DOJ and the company, working in collaboration, can ensure available resources are used to establish an internal monitorship. If the reporting lines were structured appropriately, this could be a more effective, more organic, less expensive and longer-term solution.

Currently, compliance monitors must learn their way around the company that they are investigating. These relationships often become strained as monitors must be told where to look by the very department they’re investigating. This can slow the pace of the monitor’s progress, while undermining the existing compliance team. Although undoubtedly there are exceptions, most internal compliance personnel are dedicated to helping the company avoid violations of law. It is far from certain that an external compliance monitor would be any more effective and having a multi-year monitor displace existing compliance personnel will do little to empower or enhance the stature of internal compliance professionals.

Instead of undermining the internal compliance function, the DOJ could help elevate it. Funding and staffing levels could be mandated and the DOJ could ensure that the internal monitor reported periodically directly to a committee of outside directors of the Board. Recent monitorships have cost tens of millions of dollars. That money could develop an extraordinary in-house capability over the long term.

Some independent compliance monitors undoubtedly add value both to the companies they investigate and to the agency to which they report. But as scrutiny surrounding the selection, scope, extraordinary expense and ultimate value of these monitorships increases, it seems likely that the system needs another look.

This article was originally published by Alexandra Wrage in the Federal Ethics Report, March 2008, Volume 15, Issue 3. Copyright 2008 CCH INCORPORATED. All Rights Reserved. Reprinted with permission from Federal Ethics Report.

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Monitoring the Monitors

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