Corporate Crime
Preliminary Observations on DOJ's Use and Oversight of Deferred Prosecution and Non-Prosecution Agreements Gao ID: GAO-09-636T June 25, 2009Recent cases of corporate fraud and mismanagement heighten the Department of Justice's (DOJ) need to appropriately punish and deter corporate crime. Recently, DOJ has made more use of deferred prosecution and non-prosecution agreements (DPAs and NPAs), in which prosecutors may require company reform, among other things, in exchange for deferring prosecution, and may also require companies to hire an independent monitor to oversee compliance. This testimony provides preliminary observations on (1) factors DOJ considers when deciding whether to enter into a DPA or NPA and setting the terms of the agreements, (2) methods DOJ uses to oversee companies' compliance, (3) processes by which monitors are selected, and (4) companies' perspectives regarding the costs and role of the monitor. It also includes the results of GAO's recently completed work on DOJ's efforts to document the monitor selection process (discussed in objective 3). GAO reviewed DOJ guidance and 57 of the 140 agreements negotiated from 1993 (when the first 2 were signed) through May 2009; and interviewed DOJ officials, officials from 17 companies, and 6 monitors. While not generalizable, these results provide insight into decisions about DPAs and NPAs.
Prosecutors in all 13 DOJ offices with whom GAO spoke said that they based their decision on whether to enter into a DPA or NPA on DOJ's principles for prosecuting business organizations, particularly those related to the company's willingness to cooperate, collateral consequences to innocent parties, and remedial measures taken by the company. However, prosecutors differed in their willingness to use DPAs or NPAs. In addition, prosecutors' varying perceptions of what constitutes a DPA or NPA has led to inconsistencies in how the agreements are labeled. In March 2008, DOJ issued guidance defining DPAs and NPAs, but this guidance is not consistently followed, in part because not all DOJ offices view it as mandatory. DOJ plans to determine the need to take additional steps to require consistency in the use of the labels DPA and NPA. While DOJ and companies generally negotiated the terms of DPAs and NPAs--such as monetary payments and compliance requirements--DOJ also considered other factors in its decisions, such as monetary gains to the company as a result of the criminal misconduct. To ensure that companies were complying with the terms of the DPAs and NPAs, DOJ employed several oversight mechanisms, including the use of independent monitors, coordination with regulatory agencies, and other means. Of the 57 agreements GAO reviewed, 26 required the company to hire, at its own expense, an independent monitor. In the remaining agreements, DOJ relied, among other things, on reports from regulatory agencies or from monitors hired by companies under separate agreements with these agencies, and company certifications of compliance. For the DPAs and NPAs GAO reviewed, even though DOJ was not a party to the contracts between companies and monitors, DOJ typically selected the monitor, and its decisions were generally made collaboratively among DOJ and company officials. Monitor candidates were typically identified through DOJ or company officials' personal knowledge or recommendations from colleagues and associates. In March 2008, DOJ issued guidance stating that for monitor selection to be collaborative and merit-based, committees should consider the candidates and the selection must be approved by the Deputy Attorney General. However, because DOJ does not require documentation of the process used or the reasons for particular monitor selection decisions, it will be difficult for DOJ to validate whether its monitor selection guidance-which, in part, is intended to instill public confidence-is adhered to. Some company officials GAO spoke with reported that they had little leverage to address concerns about the amount and scope of the monitors' work and, therefore, would like DOJ to assist them. GAO in its ongoing work will assess this and other issues about the use and oversight of DPAs and NPAs.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-636T, Corporate Crime: Preliminary Observations on DOJ's Use and Oversight of Deferred Prosecution and Non-Prosecution Agreements
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Testimony:
Before the Subcommittee on Commercial and Administrative Law, Committee
on the Judiciary, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 11:00 a.m. EDT:
Thursday, June 25, 2009:
Corporate Crime:
Preliminary Observations on DOJ's Use and Oversight of Deferred
Prosecution and Non-Prosecution Agreements:
Statement of Eileen R. Larence, Director:
Homeland Security and Justice:
GAO-09-636T:
GAO Highlights:
Highlights of GAO-09-636T, a testimony to the Subcommittee on
Commercial and Administrative Law, Committee on the Judiciary, House of
Representatives.
Why GAO Did This Study:
Recent cases of corporate fraud and mismanagement heighten the
Department of Justice‘s (DOJ) need to appropriately punish and deter
corporate crime. Recently, DOJ has made more use of deferred
prosecution and non-prosecution agreements (DPAs and NPAs), in which
prosecutors may require company reform, among other things, in exchange
for deferring prosecution, and may also require companies to hire an
independent monitor to oversee compliance. This testimony provides
preliminary observations on (1) factors DOJ considers when deciding
whether to enter into a DPA or NPA and setting the terms of the
agreements, (2) methods DOJ uses to oversee companies‘ compliance, (3)
processes by which monitors are selected, and (4) companies‘
perspectives regarding the costs and role of the monitor. It also
includes the results of GAO‘s recently completed work on DOJ‘s efforts
to document the monitor selection process (discussed in objective 3).
GAO reviewed DOJ guidance and 57 of the 140 agreements negotiated from
1993 (when the first 2 were signed) through May 2009; and interviewed
DOJ officials, officials from 17 companies, and 6 monitors. While not
generalizable, these results provide insight into decisions about DPAs
and NPAs.
What GAO Found:
Prosecutors in all 13 DOJ offices with whom GAO spoke said that they
based their decision on whether to enter into a DPA or NPA on DOJ‘s
principles for prosecuting business organizations, particularly those
related to the company‘s willingness to cooperate, collateral
consequences to innocent parties, and remedial measures taken by the
company. However, prosecutors differed in their willingness to use DPAs
or NPAs. In addition, prosecutors‘ varying perceptions of what
constitutes a DPA or NPA has led to inconsistencies in how the
agreements are labeled. In March 2008, DOJ issued guidance defining
DPAs and NPAs, but this guidance is not consistently followed, in part
because not all DOJ offices view it as mandatory. DOJ plans to
determine the need to take additional steps to require consistency in
the use of the labels DPA and NPA. While DOJ and companies generally
negotiated the terms of DPAs and NPAs”such as monetary payments and
compliance requirements”DOJ also considered other factors in its
decisions, such as monetary gains to the company as a result of the
criminal misconduct.
To ensure that companies were complying with the terms of the DPAs and
NPAs, DOJ employed several oversight mechanisms, including the use of
independent monitors, coordination with regulatory agencies, and other
means. Of the 57 agreements GAO reviewed, 26 required the company to
hire, at its own expense, an independent monitor. In the remaining
agreements, DOJ relied, among other things, on reports from regulatory
agencies or from monitors hired by companies under separate agreements
with these agencies, and company certifications of compliance.
For the DPAs and NPAs GAO reviewed, even though DOJ was not a party to
the contracts between companies and monitors, DOJ typically selected
the monitor, and its decisions were generally made collaboratively
among DOJ and company officials. Monitor candidates were typically
identified through DOJ or company officials‘ personal knowledge or
recommendations from colleagues and associates. In March 2008, DOJ
issued guidance stating that for monitor selection to be collaborative
and merit-based, committees should consider the candidates and the
selection must be approved by the Deputy Attorney General. However,
because DOJ does not require documentation of the process used or the
reasons for particular monitor selection decisions, it will be
difficult for DOJ to validate whether its monitor selection guidance-
which, in part, is intended to instill public confidence-is adhered to.
Some company officials GAO spoke with reported that they had little
leverage to address concerns about the amount and scope of the
monitors‘ work and, therefore, would like DOJ to assist them. GAO in
its ongoing work will assess this and other issues about the use and
oversight of DPAs and NPAs.
What GAO Recommends:
GAO recommends that the Deputy Attorney General adopt internal
procedures to document both the process used and reasons for monitor
selection decisions. DOJ agreed with our recommendation.
View [hyperlink, http://www.gao.gov/products/GAO-09-636T] or key
components. For more information, contact Eileen Larence at (202) 512-
8777 or larencee@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to participate in today's hearing to
discuss the Department of Justice's (DOJ) use and oversight of deferred
prosecution and non-prosecution agreements. According to DOJ, one of
its chief missions is to ensure the integrity of the nation's business
organizations and protect the public from corporate corruption. Recent
high-profile cases of fraud and mismanagement in the financial services
sector have heightened the need for the government to determine the
most appropriate tools it can use to punish and deter corporate crime.
Federal prosecutors continue to prosecute company executives and
employees, as well as companies themselves, for crimes such as tax
evasion, securities fraud, health care fraud, and bribery of foreign
officials, among others. However, over the past decade, DOJ has
recognized the potential harmful effects that criminally prosecuting a
company can have on investors, employees, pensioners, and customers who
were uninvolved in the company's criminal behavior. The failure of the
accounting firm Arthur Andersen, and the associated loss of thousands
of jobs following its indictment and conviction for obstruction of
justice for destroying Enron-related records,[Footnote 1] has been
offered as a prime example of the potentially harmful effects of
criminally prosecuting a company. To avoid serious harm to innocent
third parties, DOJ guidance allows prosecutors to negotiate agreements
that may require companies to institute or reform corporate ethics and
compliance programs,[Footnote 2] pay restitution to victims, and
cooperate with ongoing investigations of individuals in exchange for
prosecutors deferring the decision to prosecute. These types of
agreements have been referred to as deferred prosecution (DPA) and non-
prosecution (NPA) agreements. As part of these agreements, prosecutors
may also require a company to hire, at its own expense, an independent
monitor to oversee the company's compliance with the agreement. Based
on our analysis of DOJ data, DOJ has made more frequent use of DPAs and
NPAs in recent years, entering into 3 agreements in 2002 compared to 41
agreements in 2007 and 22 agreements in 2008.
DOJ views DPAs and NPAs as appropriate tools to use in cases where the
goals of punishing and deterring criminal behavior, providing
restitution to victims, and reforming otherwise law-abiding companies
can be achieved without criminal prosecution. The use of these tools,
however, is not without controversy. Some commentators view the use of
DPAs and NPAs as encouraging disrespect for the law and failing to
deter corporate crime. Others have suggested that the threat of an
indictment gives prosecutors excessive power by which they can force
companies to agree to highly unfavorable terms to avoid criminal
prosecution.
Considering the balance that DOJ must achieve when determining the most
appropriate way in which to address corporate misconduct, my testimony
today includes preliminary observations on (1) the factors DOJ
considers when deciding whether to enter into a DPA or NPA and setting
the terms of the agreements, (2) the methods DOJ uses to oversee
companies' compliance with DPAs and NPAs, (3) the process by which
independent monitors are selected, and (4) companies' perspectives
regarding the costs and responsibilities of the monitors. My comments
are based on our ongoing review of DPAs and NPAs requested by you as
well as the Chairman of the Senate Judiciary Committee, Patrick Leahy;
the Chairman of the House Judiciary Committee, John Conyers;
Congressman Frank Pallone, Jr.; Congressman Bill Pascrell, Jr.; and
Congresswoman Linda T. Sanchez. The final results of this review will
be issued later this year. My comments also include the results of our
recently completed work related to DOJ's efforts in documenting the
monitor selection process (which is discussed as part of objective
three above).
To address our objectives, we reviewed DOJ guidance regarding the
prosecution of business entities and the selection and use of
independent monitors. To date, we also reviewed the terms of 57 of the
140 agreements we have identified that were negotiated from 1993 (when
the first 2 were signed) through May 2009.[Footnote 3] The specific
terms we reviewed include the monetary penalty imposed, the duration of
the agreement, the compliance program required, and the reporting
requirements for the company, and, if applicable, the independent
monitor. We discussed these 57 agreements with DOJ, and compared the
processes that DOJ used when entering into and overseeing these
agreements with criteria in standards for internal control in the
federal government relating to appropriate documentation of
transactions[Footnote 4] and prior GAO work that suggests documenting
the reasons for selecting monitors avoids the appearance of
favoritism.[Footnote 5] We interviewed officials from 13 DOJ offices
that are responsible for prosecuting criminal cases, including DOJ's
Criminal Division and 12 U.S. Attorneys Offices. We selected the
Criminal Division because it had negotiated the vast majority of
agreements entered into by prosecutors at DOJ headquarters, and we
selected 12 specific U.S. Attorneys Offices because they were the only
ones that had negotiated at least 2 agreements, of which at least 1 had
been completed. To date, we have also interviewed representatives of 17
of the 25 companies that signed DPAs or NPAs that met the following
criteria: the agreement required the company to improve or institute an
ethics or compliance program; the agreement had been completed; and we
had discussed the agreement with DOJ.[Footnote 6] Fifteen of these 25
companies were also required to hire an independent monitor, and, to
date, we have interviewed 6 of these monitors. Since we determined
which DOJ officials, company representatives, and monitors to interview
based on a nonprobability sample, the information we obtained from
these interviews is not generalizable to all DOJ litigating units and
all companies and monitors involved in DPAs and NPAs. However, the
interviews provided insights into the negotiation and implementation of
DPAs and NPAs.
We conducted this performance audit from September 2008 to June 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our objectives.
In summary, DOJ prosecutors with whom we spoke have based their
decisions on whether to enter into a DPA or an NPA and setting the
terms of these agreements on the Principles of Federal Prosecution of
Business Organizations[Footnote 7]--which includes guidance, for
example, on factoring in a company's cooperation and collateral
consequences that may result from prosecution--as well as input from
companies and regulatory agencies and other factors. In addition, 10 of
the 13 DOJ offices we included in our review have made efforts to be
transparent in their decision making by issuing press releases that
explain the reasons why they entered into these agreements. However,
prosecutors differed in their willingness to use DPAs or NPAs. For
instance, 3 of the 13 DOJ offices exclusively entered into DPAs, and a
prosecutor from 1 of these offices asserted that entering into an NPA
would be too lenient on the company. In addition, different
perspectives among DOJ officials regarding the definition of DPAs and
NPAs has led to inconsistent labeling of the agreements. For example,
DOJ offices differ in whether they consistently file agreements they
refer to as DPAs and the associated criminal charges in court, a key
distinguishing factor that is of concern to companies which prefer to
enter into NPAs because formal charges are not filed with the court.
DOJ issued guidance in March 2008 that defined DPAs as agreements that
are filed in court and NPAs as agreements that are not. However, of the
27 DPAs and NPAs entered into since DOJ issued this guidance, 3 are not
labeled in accordance with the guidance and 7 are labeled as something
other than DPA or NPA; one reason for this is that not all DOJ offices
view this guidance as mandatory. DOJ plans to determine whether there
is a need to take additional steps to require consistency in the use of
labels across offices. We will continue to assess prosecutors'
willingness to use DPAs or NPAs as part of our ongoing work.
Furthermore, to help ensure that companies were complying with the
terms of the DPAs and NPAs, DOJ employed several oversight mechanisms,
including requiring companies to hire an independent monitor, who in
most cases would periodically report to DOJ on the company's progress;
or relying upon a monitor who was already hired by the company as part
of a civil or administrative agreement reached with a federal
regulatory agency. Although DOJ was not a party to the contracts
between companies and monitors, DOJ generally took the lead in
selecting and approving the monitors. DOJ's process for selecting
monitors typically involved collaboration among DOJ and company
officials, and monitor candidates were generally identified as a result
of these officials' personal knowledge of individuals whose reputations
suggested they would be effective monitors, or recommendations given to
these officials by colleagues and professional associates who were
familiar with monitorship requirements. DOJ issued guidance in March
2008 to help ensure that the monitor selection process is collaborative
and the selection is based on merit; this guidance also requires
prosecutors to obtain Deputy Attorney General approval for the monitor
selection. While the guidance established policies for the selection of
independent monitors, it does not require documentation of the process
used or the reasons for particular monitor selection decisions.
Internal control standards require that significant events, which could
include how and why monitors are selected, be clearly documented and
the documentation be readily available for examination. In addition,
our prior work suggests that documenting the reasons for selecting a
particular monitor avoids the appearance of favoritism.[Footnote 8]
Without requiring documentation, it will be difficult for DOJ to
validate whether its monitors have been selected in a manner that is
consistent with the guidance. Moreover, documenting its process and
reasons for selecting monitors could enhance DOJ's ability to instill
public confidence in the monitor selection process.
While most of the companies we interviewed were satisfied with the
monitor selections, officials from 6 of the 12 companies we have spoken
with thus far that were required to hire a monitor took issue with the
scope of the monitor's work, which seemed too expansive, thus making
the overall cost of the monitorship higher than the companies expected.
Four of these companies did not feel as if they had enough leverage to
address this issue with the monitors because, for example, the
companies felt that the monitors' roles and responsibilities were not
always clearly defined in the DPA or NPA, thus limiting the basis on
which companies could assert that the monitor had expanded the scope of
work. Some companies preferred that DOJ assist them in addressing any
concerns they had about monitors. We have not yet been able to obtain
the perspectives of DOJ and monitors regarding these concerns, but plan
to do so in our ongoing review.
To enhance DOJ's ability to ensure that monitors are selected according
to DOJ's guidelines, we recommend that the Deputy Attorney General
adopt internal procedures to document both the process used and reasons
for monitor selection decisions. We requested comments on a draft of
this statement from DOJ. DOJ did not provide official written comments
to include in the statement. However, in an email sent to us on June
18, 2009, DOJ stated that the department agreed with our
recommendation. DOJ also provided technical comments, which we
incorporated into the statement, as appropriate.
DOJ Based the Use and Terms of DPAs and NPAs on Principles of Federal
Prosecution and Other Factors, but Prosecutors' Different Perspectives
on DPAs and NPAs Led to Inconsistent Use and Labeling:
DOJ prosecutors cited the Principles of Federal Prosecution of Business
Organizations as a major factor in their decision on entering into a
DPA or an NPA, and considered other factors, such as the Federal
Sentencing Guidelines, in determining the terms of these agreements.
Prosecutors also said that they generally negotiated these decisions
with companies. However, in making these decisions, prosecutors
differed in their willingness to use DPAs or NPAs. In addition,
prosecutors' different perspectives on the definitions of DPAs and NPAs
led to inconsistencies in how they labeled the agreements. DOJ plans to
determine the need to require consistency in the use of the labels DPA
and NPA.
DOJ Prosecutors Cited Principles of Federal Prosecution as Influential
in Their Decision on Entering into a DPA or NPA but Were Inconsistent
in their Use and Labeling of Agreements:
Prosecutors in all 13 DOJ offices we included in our review
consistently said that they based their decision on whether to enter
into a DPA or NPA rather than prosecute the company or decline to do so
on the Principles of Federal Prosecution of Business Organizations.
First issued in 1999, these principles are DOJ's guidance to federal
prosecutors on investigating, charging, and negotiating a plea or other
agreement with respect to corporate crimes. The principles instruct
prosecutors to consider nine factors when determining how to treat a
corporation suspected of criminal misconduct and provide a number of
actions prosecutors may take, including declining to prosecute,
entering into a DPA or NPA, or criminally prosecuting, the corporation.
The principles also include guidance on when the nine factors most
appropriately apply. The factors, and examples of the manner in which
they influence prosecutors' choice of action, are shown in figure 1
below.[Footnote 9]
Figure 1: How the Principles of Federal Prosecution of Business
Organizations Influence Prosecutors' Decisions to Decline Prosecution,
Enter into a DPA or NPA, or Prosecute:
[Refer to PDF for image: illustration]
This figure depicts a continuum of prosecutorial decisions including:
declination; non-prosecutorial agreement; deferred prosecution
agreement; criminal prosecution.
The following principles are listed:
Nature and seriousness of the offense:
* Less serious: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* More serious: leads to: deferred prosecution agreement; criminal
prosecution.
Wrongdoing within corporation:
* Less pervasive: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* More pervasive: leads to: deferred prosecution agreement; criminal
prosecution.
Similar misconduct:
* Less history: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* More history: leads to: deferred prosecution agreement; criminal
prosecution.
Disclosure of wrong-doing and willingness to cooperate[A]:
* More cooperation: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* Less cooperation: leads to: deferred prosecution agreement; criminal
prosecution.
Pre-existing compliance program:
* More effective: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* Less effective: leads to: deferred prosecution agreement; criminal
prosecution.
Remedial actions[B]:
* More actions: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* Less actions: leads to: deferred prosecution agreement; criminal
prosecution.
Collateral consequences[C]:
* Greater consequences: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* Fewer consequences: leads to: deferred prosecution agreement;
criminal prosecution.
Prosecution of responsible individuals:
* More adequate: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* Less adequate: leads to: deferred prosecution agreement; criminal
prosecution.
Civil or regulatory enforcement actions:
* More adequate: leads to: non-prosecutorial agreement; deferred
prosecution agreement;
* Less adequate: leads to: deferred prosecution agreement; criminal
prosecution.
Source: GAO analysis of DOJ's Principles of Federal Prosecution of
Business Organizations.
[A] Willingness to cooperate includes cooperation in the government's
investigation of the company's agents.
[B] Remedial actions include efforts to implement or improve an
effective compliance program, pay restitution, or discipline
wrongdoers, among other things.
[C] Collateral consequences include disproportionate harm to
shareholders, pension holders, employees, and others not proven
personally culpable, and any impact on the public arising from
prosecution.
[End of figure]
While the prosecutors with whom we spoke said that many of these
factors may have influenced their decision on entering into a DPA or
NPA in each case, they most frequently cited the company's cooperation
with the investigation, the collateral consequences of a criminal
prosecution, and any remedial measures the company had taken or planned
to take as most important in their decision on entering into a DPA or
NPA. For instance, one prosecutor told us that the company's
cooperation is an important factor in cases involving violations of the
Foreign Corrupt Practices Act[Footnote 10] because obtaining the
evidence from foreign countries in these types of cases is a cumbersome
and lengthy process that could take up to 10 years. However, with the
company's cooperation, which may entail assisting DOJ in tracing bribe
payments through multiple overseas accounts, DOJ may be able to obtain
the evidence it needs in a matter of weeks. With regard to collateral
consequences, some DOJ prosecutors explained, for example, that the
potential harm that prosecution and conviction of health care companies
can have on innocent third parties may be a key factor in their
decision on entering into a DPA or NPA with these kinds of companies.
Federal law provides for health care companies convicted of certain
crimes to be debarred from--or no longer eligible to participate in--
federal health care programs.[Footnote 11] Prosecutors in one office
said that they chose to enter into DPAs and an NPA simultaneously with
five orthopedic device companies that provided kickbacks to physicians
because, combined, these companies comprised the vast majority of the
market for hip and knee replacements; therefore, conviction and
debarment of these companies would have severely limited doctor and
patient access to replacement hips and knees. In terms of remedial
measures, prosecutors cited enhancements companies made to their
compliance programs, the termination of employees responsible for the
wrongdoing, and the company's willingness to make payments to the
victims of the crime as influential in their decision on entering into
a DPA or NPA, rather than prosecute.
Our preliminary analysis suggests that officials from many of the DOJ
offices we met with have made efforts to be transparent about the basis
for their decisions on entering into DPAs or NPAs. For example, 10 of
the 13 DOJ offices issued press releases explaining how they applied
the Principles of Federal Prosecution of Business Organizations when
deciding whether to enter into these agreements.[Footnote 12] According
to an official in the Criminal Division's Fraud section, its policy is
to issue press releases upon entering into DPAs and NPAs with companies
related to the Foreign Corrupt Practices Act, which helps to increase
transparency. As part of our ongoing review, we will determine the
extent to which DOJ offices have additional policies--including
supervisory review and documentation of the reasons for their decisions
to enter into a DPA or NPA--that promote transparency and
accountability regarding these agreements.
DOJ's reliance on the Principles of Federal Prosecution of Business
Organizations was also apparent to many of the companies involved in
the DPAs and NPAs. Ten of the 17 company officials with whom we spoke
as of June 5, 2009, said that they were aware that DOJ based its
decision on whether to enter into a DPA or NPA on the factors
articulated in the Principles of Federal Prosecution of Business
Organizations.[Footnote 13] Moreover, officials from 6 of these 10
companies reported making presentations to DOJ based on the nine
factors in order to influence prosecutors' decisions on using
agreements in their cases, although companies generally reported that
the prosecutors made the ultimate decision about whether to enter into
a DPA or an NPA.
DOJ prosecutors also made decisions about which of these agreements--
DPA versus NPA--the office would enter into. A commonly accepted
distinction between these two types of agreements is that a DPA
involves the filing of a charging document with the court, while, for
an NPA, charges are not filed with the court. Officials from 12 of the
17 companies with whom we spoke preferred an NPA, largely because they
viewed NPAs as more advantageous from a public relations perspective
for the company. Some of these officials explained that, because a
charge is not filed in court in association with an NPA, companies are
able to report that they were not charged or prosecuted in the case; a
DPA, on the other hand, involves the filing of charges in court, which
can result in greater negative publicity for the company.
In choosing between a DPA and an NPA, prosecutors most frequently
reported considering the same factors they did when deciding whether to
enter into an agreement at all--namely, cooperation, collateral
consequences, and the companies' remedial actions. For example,
prosecutors at 6 of the 13 DOJ offices said that they considered the
company's cooperation in their investigation when deciding between a
DPA and an NPA. Prosecutors from one DOJ office said that once the
company learned it was the target of the office's investigation, its
lawyers immediately called the office seeking to cooperate and
continued to cooperate extensively throughout the office's ensuing 3-
year investigation, remaining in daily contact with the office and
assisting in its investigation. As a result, the DOJ office chose to
enter into an NPA rather than a DPA with the company. Not all of the 13
DOJ offices we included in our review reported entering into both types
of agreements. For instance, 3 of the 13 DOJ offices we included in our
study, including one section of the Criminal Division, exclusively
entered into DPAs with companies. A prosecutor from one of these
offices said that he did not consider entering into NPAs in any of its
cases because he viewed NPAs as too lenient on the company. We will
continue to assess this issue as part of our ongoing work.
Officials from 11 of the 17 companies with whom we spoke said that the
decision between a DPA and an NPA was exclusively made by DOJ, and
officials from 4 of these companies reported that DOJ's reasons for
choosing between a DPA and an NPA were not made clear. On the other
hand, officials from 4 other companies said that the decision was a
result of negotiations between DOJ and the company.[Footnote 14]
Companies' opinions varied on whether guidelines for choosing between a
DPA and an NPA would be beneficial. Officials from 5 of the 17
companies we interviewed said that such guidelines would assist the
companies in negotiating between a DPA and an NPA with DOJ, whereas
officials from three companies believed that guidelines would make
DOJ's decision between a DPA and an NPA more transparent to the
company. Officials from 6 companies cited reasons why guidelines may
not be useful, such as concerns that such guidelines may not address
the unique circumstances of each case, would not be binding on DOJ
prosecutors, and were not necessary because DOJ's rationale for
choosing a DPA versus an NPA was made clear to the company.[Footnote
15] Prosecutors at 4 of the 13 offices we spoke with stated that these
guidelines would not be beneficial because they need the flexibility to
choose between a DPA and an NPA based on the unique circumstances of
each case.
In addition, prosecutors differ in whether they called their agreements
DPAs and NPAs. For example, prosecutors from 2 of the 13 offices with
whom we spoke told us that they are reluctant to file agreements in
court because of their understanding that some judges do not want the
case to be open on their dockets for the length of the deferral period.
[Footnote 16] While prosecutors from one of these offices called the
agreements it did not file in court NPAs, the other office still
labeled its agreements DPAs because it viewed DPAs as agreements in
which the company admits guilt, regardless of whether charges are filed
in court. Recognizing the inconsistent use of the labels DPA and NPA,
in March 2008, then Acting Deputy Attorney General Craig Morford issued
a memorandum--also known as the "Morford Memo"--which stated that a DPA
is typically predicated on the filing of both a formal charging
document and the agreement with the appropriate court, while an NPA is
an agreement maintained by the parties, rather than being filed with
the court. The Morford Memo also states that clear and consistent use
of these terms will help DOJ more effectively identify and share best
practices and track the use of DPAs and NPAs.[Footnote 17] However,
based on our analysis of the agreements entered into after DOJ issued
this guidance, not all the agreements were labeled in accordance with
the definitions provided. Of the 27 agreements entered into after DOJ
issued this guidance, 20 were labeled as DPAs or NPAs in the agreement
or the press release announcing the agreement. Of these 20 agreements,
3 were not labeled in accordance with the definitions in the guidance.
[Footnote 18] The remaining 7 agreements were labeled as agreement,
case disposition agreement, or pretrial diversion agreement. One reason
for the differences in the manner in which agreements are labeled is
that not all prosecutors believe that the use of the definitions of
DPAs and NPAs in the guidance is mandatory. For instance, a prosecutor
at one office told us that the office believed that the definitions
were provided only for the purposes of reading the Morford Memo and not
as guidance for labeling DPAs and NPAs going forward, while a
prosecutor at another office believed that the Morford Memo was
intended as mandatory guidance on the use of the definitions of DPAs
and NPAs in the future. According to the Office of the Deputy Attorney
General, DOJ intends for the definitions in the Morford Memo to be
mandatory and followed consistently by prosecutors for the purpose of
internal reporting and tracking of these agreements. However, DOJ does
not intend for the definitions to inhibit prosecutors' ability to
externally label these agreements in accordance with the unique
circumstances of a particular case or the practices and preferences of
a particular DOJ office, company, or judge. For instance, the company
may prefer that an agreement be labeled as "agreement" rather than
"deferred prosecution agreement" because companies believe this label
is less severe. Thus, the prosecutor may negotiate with the company
over the external label. Regardless of the external label on the
agreement, DOJ intends for prosecutors to track the agreement either as
a DPA or NPA in accordance with Morford Memo definitions. In addition,
DOJ is aware that there may be agreements that share some of the
elements of DPAs and NPAs but may not readily fit the Morford Memo
definitions--for instance, the Office of the Deputy Attorney General
explained that in one case the company had already been indicted on
some of the criminal charges associated with the agreement prior to the
agreement being reached, but had not been indicted on other charges
associated with the agreement, and therefore it was not clear whether
the agreement fit the definition of a DPA--in which charges are filed--
or an NPA--in which charges are not filed. Taking into account external
circumstances such as these, DOJ plans to determine whether there is a
need to take additional steps to require the use of the definitions, to
ensure consistency in the use of labels across offices.
DOJ Considers Input from Company Negotiations and Other Factors, such
as the Sentencing Guidelines, When Setting the Terms of DPAs and NPAs:
Prosecutors in 11 of the 13 offices and officials from 14 of the 17
companies with whom we spoke reported that they negotiated at least one
of the terms in their DPAs and NPAs, including monetary payments to
victims or the government, the duration of the agreement, or compliance
program requirements, as well as additional terms, such as monetary
donations to foundations or educational institutions.[Footnote 19]
Furthermore, according to prosecutors in all 13 DOJ offices, they
considered other factors, such as guidance provided in the Federal
Sentencing Guidelines[Footnote 20] or the terms included in other DPAs
or NPAs as examples, when determining the terms of their agreements.
Monetary payments: Of the 57 DPAs and NPAs we reviewed, 45 required
monetary payments--which may include restitution to victims of the
crime, forfeiture of the proceeds of the crime, and monetary penalties
imposed by DOJ--ranging from $30,000 to $615 million. While the
remaining 12 agreements did not require such payments, in 3 agreements
the companies were required to make payments to organizations or
individuals that were not directly affected by the crime;[Footnote 21]
for 7 agreements the company had already agreed to make payments as
part of a separate agreement with another agency or DOJ division, such
as the Securities and Exchange Commission or DOJ's Civil Division; and
for 1 agreement, two of the company's subsidiaries had already agreed
to make monetary payments as part of a plea agreement and a DPA. In the
remaining agreement, the company was not required to make a payment and
did not enter into a civil settlement in order to obtain release from
its civil liability in the case. In setting the payment amounts in DPAs
and NPAs, prosecutors reported that they considered the following: (1)
the section of the Federal Sentencing Guidelines on determining fines
for business organizations, which includes consideration of the
seriousness of the offense, culpability of the organization, and the
company's cooperation, among other factors; (2) monetary gains to the
company or losses to its victims as a result of its crime; and (3) the
company's ability to pay. Prosecutors in 6 of the 12 offices with whom
we spoke whose DPAs and NPAs included monetary payments reported that
they negotiated the monetary payments with the other party. [Footnote
22] While representatives of 7 of the 13 companies we interviewed that
were required to make monetary payments told us that they were able to
negotiate the monetary payment with DOJ, representatives of 4 companies
told us that they were not able to negotiate the payment.[Footnote 23]
Representatives from 2 of these companies did not express concern over
the lack of negotiation--1 said that DOJ's reasons for setting the
payment were made clear to the company, while the other said that the
company had no reason to question the payment figure DOJ set. One of
these companies reported that DOJ did not provide its rationale for the
monetary payment, and the remaining company did not provide opinions
about the process by which the payment was set.
Duration: The durations of DPAs and NPAs have ranged from 3 months to 5
years.[Footnote 24] Prosecutors at 9 of the 13 DOJ offices with whom we
spoke based the duration of the agreement on the amount of time they
believed was necessary for the company to correct the problems
underlying the criminal conduct. For instance, one prosecutor said that
the company was replacing its old computer billing system, which had
overbilled a federal agency, resulting in the criminal conduct
underlying the DPA. The prosecutor set the duration at 27 months in
order to allow the company to install the new billing system and ensure
it was functioning appropriately, and not continuing to overbill the
agency. Prosecutors at 5 of the 13 offices we visited also reported
that they negotiated with companies over the duration of the agreement.
[Footnote 25] On the other hand, companies that had agreements with 5
other DOJ offices told us that they did not negotiate the duration,
although none of these companies expressed concern over the duration of
the agreement. For instance, an official from one of these companies
said that the company would have preferred a shorter duration, but was
satisfied with the duration DOJ set. Prosecutors in 3 DOJ offices also
told us that they considered the duration of other DPAs or NPAs as
examples when setting the duration of their agreements.
Compliance program requirements: Forty-five of the 57 DPAs and NPAs we
reviewed included requirements that the company improve or enhance its
compliance program, while 12 did not include this type of requirement.
According to prosecutors in 6 of the 13 DOJ offices we met with, they
required companies to enhance or implement a compliance program in
order to reform the company, prevent further misconduct, or help
establish and publicize a compliance program standard for the
industry.[Footnote 26] In deciding not to include compliance
requirements, prosecutors reported that they considered whether the
company that committed the wrongdoing could engage in such criminal
conduct again. For instance, one prosecutor said that a compliance
program was not required as part of an agreement because the company's
violations occurred during its participation in the United Nation's Oil-
for-Food Program, which was no longer in existence when the agreement
was signed. In addition, prosecutors were aware that 2 of the companies
involved in DPAs or NPAs that did not include compliance program
requirements had entered into agreements with other regulatory agencies
that did include such requirements. When developing compliance
requirements in DPAs and NPAs, prosecutors most commonly (8 of 13
offices) worked with regulatory agencies with relevant jurisdiction
over the companies--such as Immigration and Customs Enforcement for
issues related to the hiring of illegal immigrants, the Environmental
Protection Agency for environmental crimes, or the Securities and
Exchange Commission for issues involving accounting and financial
fraud--to develop the compliance requirements included in the
agreement. Several prosecutors and company officials also reported that
they negotiated over the compliance requirements in the DPA or NPA. For
instance, one company official said that DOJ initially developed the
compliance program requirements, but when the company raised concerns
about the practicality and effectiveness of the requirements, DOJ
worked with the company to revise them. In the end, the official felt
that the company's enhanced program was a best practice in the
industry.
Extraordinary restitution: DPAs and NPAs have also included additional
terms, such as payments or services to organizations or individuals not
directly affected by the crime; these payments are sometimes referred
to as extraordinary restitution. Of the 57 DPAs and NPAs we reviewed, 4
included such terms. Prosecutors and companies with whom we spoke about
these provisions generally reported that the provisions were determined
through negotiations between the two parties. In addition, these
prosecutors were supportive of including extraordinary restitution
provisions in DPAs and NPAs because, for example, they believe such
terms can help improve the availability of services in the community
and prevent similar misconduct from occurring in the future, not just
within the company, but in a larger context. For instance, 1 DPA
required the organization to provide uncompensated medical care to the
state's residents, while an NPA required the company to provide funding
for a not-for-profit organization to support projects designed to
improve the quality and affordability of health care services in the
state. Another DPA required a company that had not complied with water
treatment regulations to provide an endowment of $1 million to the U.S.
Coast Guard Academy for the purposes of enhancing the study of maritime
environmental enforcement, with an emphasis on compliance, enforcement,
and ethics issues. In May 2008, DOJ issued guidance prohibiting the use
of terms requiring payments to charitable, educational, community, or
other organizations or individuals that are not the victims of the
criminal activity or are not providing services to redress the harm
caused by the criminal conduct because the use of such terms could
create actual or perceived conflicts of interest or other ethical
issues. Based on our preliminary analysis, none of the 25 DPAs and NPAs
that were entered into since this guidance was issued required
companies to make payments or perform services for individuals or
organizations that were not directly harmed by the crime.[Footnote 27]
While most company officials stated that they had input into, or were
able to negotiate over, whether to enter into a DPA or NPA and the
terms of the agreements, officials from nine of these companies
reported that DOJ had greater power in the negotiations than the
company because, for instance, if the negotiations were not successful,
DOJ could have proceeded with prosecution. However, prosecutors at 4 of
the 13 offices with whom we spoke noted that if companies had concerns
about the terms of their DPAs or NPAs, they could express them to their
office, or appeal them to a higher level within DOJ. Representatives
from six companies expressed reluctance to appeal any concerns they had
with the terms of the agreement. Officials from two of these companies
explained that appealing to a higher level in DOJ could negatively
affect their interactions with the prosecutors involved in the case. On
the other hand, officials from four companies told us that they would
have been comfortable appealing the terms, if needed.[Footnote 28] As
part of our ongoing review, we will continue to assess the extent of
the companies' role in setting the terms of the agreements and obtain
DOJ's perspective on this issue.
DOJ Oversaw Companies' Compliance through the Use of Independent
Monitors, Coordination with Regulatory Agencies, and Other Means:
In 26 of the 57 DPAs or NPAs we have reviewed to date, prosecutors
required that the company hire, at its own expense, an independent
monitor to assist the company in establishing a compliance program,
review the effectiveness of a company's internal control measures, and
otherwise meet the terms of the agreements. In the remaining cases, DOJ
coordinated with the relevant regulatory agency already monitoring or
overseeing the company, or used other means, such as requiring
companies to certify their compliance, to ensure the terms were met.
[Footnote 29]
When deciding whether a monitor was needed to help oversee the
development or operations of a company's compliance program, DOJ
considered factors such as the availability of DOJ resources for this
oversight, the level of expertise among DOJ prosecutors to monitor
compliance in more technical or complex areas, and existing regulatory
oversight.[Footnote 30] Of the 13 DOJ offices we met with, 10 utilized
monitors. Prosecutors in four of these nine offices cited as a reason
for requiring an independent monitor the limited time and resources
their offices had to oversee a company's compliance program, make
appropriate recommendations, and reform the company's compliance
behavior, whereas monitors often have an entire staff available to them
to perform these activities. Prosecutors in five of the nine DOJ
offices we met with that had utilized monitors, cited as a reason for
requiring an independent monitor the limited expertise the office had
in overseeing company compliance in a particular area of misconduct.
For example, prosecutors in one office stated that part of the
company's wrongdoing dealt with commodities trading, and while they did
not have this background, the monitor selected by the office had
commodities trading experts on his staff. Other prosecutors cited the
need for technical expertise regarding misconduct in a particular
geographic region to oversee company compliance effectively--resources
and skills which DOJ prosecutors did not have--as the reason to require
that a company hire a monitor.
In 22 of the 26 agreements requiring an independent monitor, the
monitor was required to file written reports with DOJ prosecutors.
[Footnote 31] The frequency of reporting to DOJ prosecutors varied by
agreement, with 13 monitors required to report every 3 or 4 months; 2
monitors required to file semiannual reports; 5 monitors required to
file annual reports or an initial report with annual or semiannual
follow-up reports; 1 monitor required to report within 120 days of
entering into the agreement; and 1 monitor required to report no later
than 45 days and 90 days after the commencement of the agreement, on or
before 90 prior to termination of the agreement and at such other times
as designated by DOJ.[Footnote 32] For two of the three agreements
overseen by an independent monitor where the agreement did not
specifically require written reports, the prosecutors we spoke with
said that they typically met frequently with the monitor themselves to
discuss the company's progress towards fulfilling the agreements.
[Footnote 33] We have not assessed whether the monitors' reports were
filed in a timely fashion or covered the elements required by the
agreements, but plan to obtain information on monitor reporting as part
of our ongoing review.
In one instance, the district court judge also received the reports
filed with federal prosecutors by the independent monitor because, in
that district, the office typically involved the court in the selection
of the independent monitor, and the judge had issued an order requiring
quarterly reporting to the court. We are in the process of collecting
information from federal judges who have been involved with DPAs to
determine the extent to which judges received monitor reports, or
assessments of these reports provided by DOJ, in their oversight of
DPAs.
In 18 of the 57 agreements we reviewed to date, there was a requirement
for companies to make improvements to existing ethics and compliance
programs or implement new programs, but there was no requirement for
companies to hire an independent monitor to review the effectiveness of
these programs or the companies' compliance with the terms of the
agreement. In 4 cases, the company had signed a civil or administrative
agreement with a federal regulatory agency as part of a settlement
related to the underlying criminal misconduct, which required the
company to hire an independent consultant, review organization or
compliance officer. In such cases, DOJ officials said that they
depended on the reports of these regulatory monitors or the regulatory
agency to assure themselves of companies' compliance in part to avoid
unnecessary duplication. In the other 14 cases, where the company had
not signed a settlement agreement with a regulatory agency requiring an
independent monitor, DOJ officials stated that they used other methods
to determine companies' compliance with the agreement. In 9 of the 14
cases, they stated that they depended on the regulatory agency to
inform them if, in the course of its regulatory oversight, the agency
discovered the company was violating any of the provisions of the
agreement. For example, in 2 DPAs we reviewed where financial
institutions failed to maintain effective anti-money laundering
programs, DOJ prosecutors said that they communicated frequently with
financial regulators, reviewed reports submitted to the regulators, and
spoke to the regulators before the agreements were completed. In the
remaining 5 cases, the prosecutors said they reviewed documents
submitted by the company or depended on the companies to self-certify
that they had complied with the provisions of the agreement.
For the remaining 12 of the 57 agreements that did not require
companies to improve or expand ethics and compliance programs, DOJ
offices conducted oversight through various mechanisms, including:
* Assuring that monetary penalties or restitution payments were paid in
full. For example, an accounting firm agreed to make restitution
payments to a fund established to repay wronged investors, and to pay
an administrator to administer the fund. The administrator provided
reports to the office on the names of victims that received payments
from the fund, and the amount received.
* Assuring that the company cooperated with DOJ in continuing
investigations, including responding to information requests from
federal prosecutors. For example, an energy trading company in a DPA
with one office agreed to continue to cooperate with federal
prosecutors by providing information relevant to ongoing investigations
in the natural gas industry.
* Requiring the company to certify that it had followed certain
requirements in the agreement. For example, one pharmaceutical company
was required to certify that it had not filled prescriptions for off-
label uses of one of its drugs. In that case, the prosecutors stated
that it would be easy to examine the company's prescription records at
the end of the agreement to determine if the certification was
accurate, and if not, the company would additionally be liable for
falsely certifying compliance.
Prosecutors We Contacted Varied in the Extent to which They Involved
Companies in the Monitor Selection Process, and DOJ Does Not Require
Documentation of the Process and Reasons for Selecting Monitors, Making
It Difficult to Determine whether Monitor Selection Guidance Is
Followed:
We reviewed 26 agreements that required the company to hire a monitor.
Although DOJ was not a party to the contracts between companies and
monitors, DOJ generally took the lead in approving the monitors.
Specifically, according to officials in the 10 DOJ offices we contacted
that entered into DPAs and NPAs that required monitors, DOJ had the
final say in selecting the monitor for all but one of these agreements.
However, according to these officials, the monitors were not selected
by any one individual; rather, the decision was made among several DOJ
officials and, in most instances, companies were able to provide input
to DOJ on who the monitor should be, although the extent of company
involvement varied.[Footnote 34]
* For 12 of the agreements we reviewed, DOJ prosecutors said that the
companies proposed a single monitor or a list of several monitors from
which DOJ could choose. In all of these cases, DOJ officials said they
were able to select an appropriate monitor for the DPA or NPA based on
the company's suggestions.[Footnote 35]
* For three of the agreements we reviewed, DOJ prosecutors said that
they and the company developed separate lists of monitor candidates,
shared their lists with one another, and worked together to choose the
monitor.
* For seven of these agreements, DOJ prosecutors said that they chose
the monitor. For five of the seven agreements, according to DOJ
officials, the prosecutors selected the monitors and later provided the
companies with the opportunity to meet with the selected individual.
According to the prosecutors, they gave companies the option to object
to DOJ's monitor selection, but none of the companies did so. However,
our preliminary work suggests that at least one company reported that
they did not have this opportunity. For one of these agreements, DOJ
officials said that they sought the companies' input on monitor
qualifications before making their selection. For another of these
agreements, it was unclear whether the company had any discussion with
DOJ regarding monitor qualifications before DOJ selected the monitor.
[Footnote 36]
For the agreements we reviewed where DOJ officials identified monitor
candidates, the selection processes employed across these offices were
similar. DOJ officials generally stated that in these instances, they
identified monitor candidates based on their personal knowledge of
individuals whose reputations suggest they would be effective monitors,
or through recommendations from colleagues or professional associates
who were familiar with requirements of a monitorship. After identifying
several candidates, the prosecutors established a committee, which
generally consisted of individuals such as the prosecutors involved in
the case, the DOJ office section chief, and sometimes the Chief
Assistant U.S. Attorney or a Deputy U.S. Attorney. The committees were
responsible for evaluating the candidates and selecting a monitor.
Prosecutors said they evaluated candidates based on whether they had
any conflicts of interest with the company and their qualifications and
expertise in a particular area.
Officials from the five companies we interviewed who identified monitor
candidates for DOJ approval used a similar process as DOJ. For example,
officials from one company reached out to their associates who they
believed could help them identify individuals who would be effective
monitors. Company officials said that they were looking for a monitor
with experience working with DOJ and knowledge of the specific area of
law that the company violated. From these suggestions, the company
developed a list of candidates to interview, and based on the results
of the interviews, generated a shorter list of candidates from which
DOJ would choose the monitor.
In selecting the monitors, DOJ sometimes sought input from federal
regulatory agencies. According to prosecutors in DOJ's Criminal
Division, it is not uncommon for the division to collaborate with
agencies such as the Securities and Exchange Commission to select a
monitor to serve under agreements both agencies have reached with a
company, particularly if the agreements contain similar requirements
for the company. The prosecutors said having two different monitors
could be cost-prohibitive and result in duplication of effort.
Courts were rarely involved in monitor selection. Of the 26 agreements
we reviewed that had monitor requirements, 2 required court approval of
the selected monitor.[Footnote 37] One of the 13 DOJ offices included
in our review has a formal monitor selection policy. According to the
prosecutors in this office, court involvement in monitor selection
limits the possibility of favoritism in monitor selection by the
office. The policy requires prosecutors to compile a list of potential
monitor candidates and submit the list to the court, where a district
judge would then appoint a monitor from this list. We plan to solicit
input on court involvement from the judiciary as a part of our ongoing
review.
When we asked DOJ officials, company representatives, and monitors
about other methods to prevent the appearance of favoritism in monitor
selection, such as developing a national list of prescreened monitors
from which DOJ would make its selection, they identified both
advantages and disadvantages. Some of the advantages identified were
(1) assurance that the monitors have been prescreened and are
considered qualified by the government, (2) increased consistency in
the monitor selection process, and (3) the ability to expedite the
monitor selection process. The disadvantages they cited were (1) not
all of the monitors on the list would have the specific expertise
required for certain cases, such as commodities trading expertise; (2)
based on their own experiences searching for monitors, it is likely
that many of the monitors on a prescreened list will have conflicts of
interest with the companies--such as the monitor having previously
provided services for the company in an unrelated matter; (3) use of
the list would limit company input in monitor selection; and (4) use of
the list may actually increase the likelihood of favoritism because DOJ
officials could populate the list with their associates, and could
exclude other qualified monitor candidates. As a part of our ongoing
work, we will continue to identify other models that aim to reduce
favoritism in monitor selection. For example, one company official with
whom we spoke cited the International Association of Independent
Private Sector Inspectors General (IAIPSIG) as a possible model for
developing a national pool of monitors. Members of this association are
individuals or private sector firms with legal, auditing,
investigative, and management skills who are available to be employed
by an organization to ensure compliance with relevant laws and
regulations. According to IAIPSIG, members--who may be retained by the
government to prevent fraud in contracting and by private firms
conducting internal investigations--must also adhere to the principles
and standards in IAIPSIG's code of ethics which require, among other
things, that its members remain independent of both the monitored
entity and the entity to which it is reporting, and refrain from
accepting or performing work involving an actual or potential conflict
of interest.
In March 2008, the Acting Deputy Attorney General issued the Morford
Memo to help ensure that the monitor selection process is
collaborative, results in the selection of a highly qualified monitor
suitable for the assignment, avoids potential and actual conflicts of
interest, and is carried out in a manner that instills public
confidence.[Footnote 38] The guidance requires U.S. Attorneys Offices
and other DOJ litigation divisions to establish ad hoc or standing
committees, consisting of the office's ethics advisor, criminal or
section chief, and at least one other experienced prosecutor to
consider the candidates for each monitorship. DOJ components are also
reminded to follow federal conflict of interest guidelines[Footnote 39]
and to check monitor candidates for potential conflict of interest
relationships with the company. In addition, the names of all selected
monitors must be submitted to the Office of the Deputy Attorney General
for final approval. According to the Senior Counsel to the Deputy
Attorney General, this approval is required in order to ensure public
integrity in the monitor selection process.
While the Morford Memo established policies and guidance for the
selection of independent monitors, including that the Office of the
Deputy Attorney General approve the monitor selection, the memo does
not require documentation of the process used and the reasons for
selecting a specific monitor. Standards for internal control in the
federal government state that all transactions and significant events,
which could include the selection of monitors, should be clearly
documented and that the documentation be readily available for
examination. In addition, our prior work suggests that documenting the
reasons for selecting a particular monitor helps avoid the appearance
of favoritism and verify that selection processes and practices were
followed.[Footnote 40] Since the release of the Morford Memo, we have
identified two DPAs and NPAs that DOJ entered into for which monitors
have been selected.[Footnote 41] According to the Office of the Deputy
Attorney General, which is responsible for approving monitor
selections, the United States Attorneys Offices involved in these two
cases submitted e-mails to predecessors in the Office of the Deputy
Attorney General regarding their proposed monitor selections. DOJ
provided us with a summary of the correspondence from the prosecutors
seeking Deputy Attorney General approval. While the correspondence in
one case included information describing how prosecutors adhered to the
processes required by DOJ guidance, the correspondence in the other
case did not. For instance, the correspondence did not describe the
membership of the committee that considered the monitor candidate. In
addition, because the approval of one of the monitors was relayed via
telephone and no documentation was readily available at the Office of
the Deputy Attorney General, DOJ officials had to reach out to the
individuals who were involved in the telephone call to obtain
information regarding the monitor's approval. As this example
demonstrates, without requiring documentation of the process used and
the reasons for selecting a particular monitor, it may be difficult for
DOJ to validate whether its monitors have been selected and approved
across DOJ offices in a manner that is consistent with the Morford
Memo, which established monitor selection principles intended to
instill public confidence.
In commenting on a draft of this report in June 2009, the Office of the
Deputy Attorney General agreed that documenting the process used and
reasons for monitor selection would be beneficial. However, because the
office has not had to approve any monitor selections since the
presidential transition in January 2009, the office did not believe it
was in a position to determine exactly what internal procedures should
be adopted to document the monitor selection process until it had
reviewed more selection proposals. From January 2009 through May 2009,
DOJ had four ongoing agreements that required the appointment of a
monitor where, to date, the monitors have not yet been selected. We
expect that when the Office of the Deputy Attorney General reviews the
monitor proposals for these agreements, once they are submitted, the
office will be in a better position to establish procedures for
documenting monitor selection decisions.
Companies We Contacted Reported that Monitors Generally Charged Their
Customary Rates but Raised Concerns about Scope of Monitors' Work;
Companies Would Like DOJ to Help Them Address Issues with Monitors:
Of the 12 companies we have met with so far for which DOJ required a
monitor, 6 told us that they did not have any concerns about the rate
charged by the monitor, 3 expressed concern that the monitor's rate was
high, and the remaining 3 did not comment on the monitor's rate.
[Footnote 42] Officials from 6 of the 12 companies perceived that the
monitors were either charging their customary rates or, in two
additional cases, lower rates because the companies could not afford
the customary rates.[Footnote 43] While the companies we met with
generally did not express concern about the monitors' rates, they
reported concerns with other aspects of the monitorship that affected
the overall compensation to the monitor. Specifically, 6 of the 12
companies raised concerns about the scope of the monitor's
responsibilities or the amount of work completed by the monitor; and
four of the six companies reported that they did not feel they could
adequately address their concerns by discussing them with the monitors.
For instance, 1 company said that the monitor had a large number of
staff assisting him on the engagement, and he and his staff attended
more meetings than the company felt was necessary, some of which were
unrelated to the monitor responsibilities delineated in the agreement.
As a result, the company believes that the overall cost of the
monitorship was higher than it needed to be. While the company
reportedly tried to negotiate with the monitor over the scope of work
and number of staff involved, the company stated that the monitor was
generally unwilling to make changes. The company did not feel that
there was a mechanism at DOJ whereby it could raise concerns regarding
monitor costs because the costs were not delineated in the agreement.
Instead, the costs were identified in an agreement between the company
and the monitor and, therefore, DOJ was not responsible for overseeing
the costs of the monitorship. Another company reported that its monitor
did not complete the work required in the agreement in the first phase
of the monitorship, which necessitated the monitor completing more work
than the company anticipated in the final phase of the monitorship.
This led to unexpectedly high costs in the final phase. The company
official believed it was DOJ's responsibility, not the company's, to
address this issue because the monitor had failed to complete the
requirements DOJ had delineated in the agreement. As part of our
ongoing review, we plan to obtain the perspectives of DOJ officials and
monitors, in addition to companies, regarding the amount and scope of
the monitors' work and the most appropriate mechanisms companies can
use to address any concerns they may have related to this issue.
Two company officials reported that they had little leverage to
negotiate fees, monitoring costs, or the monitor's roles and
responsibilities with the monitor because the monitor had the ability
to find that the company was not in compliance with the DPA or NPA.
Officials from three companies suggested that DOJ should play a larger
role in helping companies address concerns with their monitors. For
example, one company official said that DOJ may need to develop a
mechanism for companies to raise issues regarding their monitors
without fear of retribution, while another company official suggested
that DOJ meet routinely with the company to allow for a conversation
between the company and DOJ about the monitoring relationship. Two
companies felt that having a sense of the potential overall costs at
the beginning of the monitorship, such as developing a work plan and
estimated costs, would be beneficial for companies. For instance, one
of these officials said that this would help establish clear
expectations for the monitor and minimize unanticipated costs. DOJ has
taken some actions which may address these concerns. In 2 of the 26
DPAs or NPAs we discussed with DOJ that had monitoring requirements,
the monitor was required to submit a work plan prior to the monitor's
first review of the company. Additionally, an official in the Criminal
Division Fraud Section said that it is the section's general practice
to meet with the monitor to discuss the monitor's work plan. The
Morford Memo also instructs DOJ prosecutors to tailor the scope of the
monitor's duties to address the misconduct in each specific case, which
the memo indicates may align the expense of the monitorship with the
failure that led to the company's misconduct covered by the agreement.
However, we have not yet been able to evaluate how these actions may
address companies' concerns. We will continue to obtain information on
the ways in which company concerns regarding the monitors'
responsibilities and workload can be addressed.
We are conducting a survey of companies to solicit more comprehensive
information on monitors' fees, total compensation and roles and
responsibilities, as well as the companies' perceptions of the monitor
costs in relation to the work performed. We will integrate these survey
results into our final report. In addition, we are continuing to assess
the potential need for additional guidance or other improvements in the
use of DPAs and NPAs in our ongoing work.
Conclusions:
One of DOJ's chief missions is to ensure the integrity of the nation's
business organizations and protect the public from corporate
corruption. DOJ has increasingly employed the tools of DPAs and NPAs in
order to carry out this mission, and has recognized the potential long-
term benefits to the company and the public of assigning an independent
monitor to oversee implementation of a DPA or NPA. On the other hand,
DOJ has also acknowledged concerns about the cost to the company of
hiring a monitor and perceived favoritism in the selection of monitors,
and thus the resultant need to instill public confidence in the monitor
selection process. DOJ has made efforts to allay these concerns by
issuing guidance requiring prosecutors to create committees to consider
monitor candidates; evaluate potential conflicts of interest the
monitor may have with the government and the company; and obtain
approval of selected candidates from the Office of the Deputy Attorney
General. Nevertheless, more could be done to avoid the appearance of
favoritism. Requiring that the process and reasons for selecting a
specific monitor be documented would assist DOJ in validating that
monitors were chosen in accordance with DOJ's guidance that is intended
to help assure the public that monitors were chosen based on their
merits and through a collaborative process.
We are continuing to assess the potential need for additional guidance
or other improvements in the use of DPAs and NPAs in our ongoing work.
Recommendation for Executive Action:
To enhance DOJ's ability to ensure that monitors are selected according
to DOJ's guidelines, we recommend that the Deputy Attorney General
adopt internal procedures to document both the process used and reasons
for monitor selection decisions.
Agency Comments and Our Evaluation:
We requested comments on a draft of this statement from DOJ. DOJ did
not provide official written comments to include in the statement.
However, in an email sent to us on June 18, 2009, DOJ stated that the
department agreed with our recommendation. DOJ also provided technical
comments, which we incorporated into the statement, as appropriate.
GAO Contact and Staff Acknowledgments:
For questions about this statement, please contact Eileen R. Larence at
(202) 512-8777 or larencee@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this statement. Individuals making key contributions to this
statement include Kristy N. Brown, Jill Evancho, Tom Jessor, Danielle
Pakdaman, and Janet Temko as well as Katherine Davis, Sarah Kaczmarek,
Amanda Miller, Janay Sam, and Mandana Yousefi.
[End of section]
Footnotes:
[1] The conviction was ultimately overturned by the Supreme Court.
Arthur Andersen LLP v. United States, 544 U.S. 696 (2005). In a
unanimous decision, the Court held that the jury instructions used to
convict Arthur Andersen were impermissibly flawed. Id. at 705-07.
[2] The U.S. Sentencing Guidelines define a compliance and ethics
program as "a program designed to prevent and detect criminal conduct."
U.S. Sentencing Guidelines Manual § 8B2.1 cmt. n.1.
[3] For the purposes of this testimony, we decided to review the terms
of the 57 agreements we discussed with officials at the 13 DOJ offices
we selected for our site visits and interviews. The criteria we used to
select these offices, and thus the 57 agreements, are described later
in the statement.
[4] GAO, Internal Control: Standards for Internal Control in the
Federal Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.:
November 1999).
[5] GAO, Structured Settlements: The Department of Justice's Selection
and Use of Annuity Brokers, [hyperlink,
http://www.gao.gov/products/GAO/GGD-00-45] (Washington D.C.: Feb. 16,
2000).
[6] DOJ required 45 companies, as part of these agreements, to improve
or institute an ethics or compliance program. As part of our ongoing
review, we selected representatives from 25 of these companies to
interview because the DPAs or NPAs these companies were involved in
were completed, and these agreements were the same ones that were
entered into by the DOJ offices we visited or interviewed by phone.
[7] U.S. Department of Justice, United States Attorneys' Manual § 9-
28.000, Principles of Federal Prosecution of Business Organizations.
[8] [hyperlink, http://www.gao.gov/products/GAO/GGD-00-45].
[9] GAO analysis based on the Principles of Federal Prosecution of
Business Organizations. The examples given are illustrative of the
manner in which prosecutors consider each factor, and the circumstances
of each case will determine the relevance and weight placed on each
factor.
[10] 15 U.S.C. §§ 78m, 78dd-1 to -3, 78ff.
[11] The Medicare and Medicaid Patients and Program Protection Act
requires the Secretary of Health and Human Services (HHS) to exclude--
or debar--individuals or entities convicted of certain program-related
crimes or patient abuse, or convicted of certain felonies related to
health care fraud or a controlled substance, from participating in any
federal health care program. 42 U.S.C. § 1320a-7. The act also permits
the secretary to exclude, at the secretary's discretion, individuals or
entities convicted of other offenses, including those related to fraud,
obstruction of an investigation, or paying or receiving kick-backs,
among others. Id.
[12] Three additional DOJ offices issued press releases announcing that
they had entered into a DPA or NPA with a company, but the press
releases did not discuss DOJ's reasons for entering into the
agreements.
[13] Three of these 17 companies did not provide information about
their understanding of DOJ's consideration of the Principles of Federal
Prosecution of Business Organizations in its decision whether to enter
into a DPA or NPA or prosecute the company.
[14] Two of the 17 companies did not discuss DOJ's decision whether to
enter into a DPA versus an NPA.
[15] Officials from the remaining four companies did not provide
opinions on the usefulness of such guidelines. An official from one
company is counted in both the count of company officials who believed
that guidelines were useful and not useful because the official cited
both advantages and disadvantages to the guidelines.
[16] Under 18 U.S.C. § 3161(h)(2), courts have the authority to approve
the deferral of a prosecution pursuant to a written agreement between
the government and the defendant. The court's approval of such an
agreement tolls the period during which an indictment must be filed or
a trial must commence, and the criminal charges remain on the court's
docket for the deferral period.
[17] Selection and Use of Monitors in Deferred Prosecution Agreements
and Non-Prosecution Agreements with Corporations, (March 7, 2008).
[18] In addition, for 2 of the remaining 17 agreements, it is not clear
how DOJ intends for the agreements to be labeled. In these cases, the
companies were indicted and the charges were dismissed pursuant to the
agreements; however, the agreements were not filed with the court. As
the Morford Memo defines DPAs and NPAs based on two elements: (1) the
filing of a formal charging document, which was done in these cases,
and (2) the filing of the agreement with the court, which was not done
in these cases, it is unclear whether these agreements should be
labeled as DPAs or NPAs. In other cases where agreements were executed
after an indictment was filed and the charges were dismissed,
prosecutors have filed the agreements with the court. According to the
Office of the Deputy Attorney General, DOJ has not yet assessed how it
intends for such agreements to be labeled.
[19] We conducted content analysis of our interviews to identify the
factors considered in setting the terms and whether negotiations
occurred. In both DOJ and company interviews, some officials were not
able to discuss the process for setting each specific term, or did not
provide responses. The numbers presented represent those officials who
specifically reported information on the process they used in setting
the terms of the DPA or NPA.
[20] Pursuant to the Sentencing Reform Act of 1984, the United States
Sentencing Guidelines Manual ("Sentencing Guidelines") was developed by
the United States Sentencing Commission, an independent body within the
judicial branch of the federal government charged with promulgating
guidelines for federal sentencing. 28 U.S.C. § 994. In 2005, the
Supreme Court found the Sentencing Guidelines, which had previously
been binding for federal judges to follow in sentencing criminal
defendants, to be advisory in nature. See United States v. Booker, 543
U.S. 220 (2005). Regardless of their advisory nature, judges are still
required to calculate properly and consider the Sentencing Guidelines
and other sentencing goals, and sentences properly calculated within
the guidelines range are entitled to a presumption of reasonableness
upon appellate review. See 18 U.S.C. § 3553(a); United States v. Rita,
551 347-48 (2007); Booker, 543 U.S. at 264: see also Gall v. United
States, 552 U.S. 38, 128 S. Ct. 586, 596 (2007) (stating that "the
Guidelines should be the starting point and the initial benchmark").
The Sentencing Guidelines contain promulgated sentencing guidelines,
policy statements, and commentary applicable to business organizations,
such as ranges and considerations for applying fines and requirements
for an effective compliance and ethics program. See U.S. Sentencing
Guidelines Manual §§ 8B21, 8C1.1-4.11.
[21] Payments or donations required to be paid to charitable,
educational, community, or other organizations or individuals that were
not victims of the crime or do not provide services to redress the harm
caused by the crime are classified and discussed in this report as
extraordinary restitution and, although they involve monetary payments,
are not included in the count of agreements with monetary payments
reported here.
[22] None of the DPAs or NPAs entered into by one office with which we
spoke included monetary payments.
[23] Officials from the two remaining companies did not discuss DOJ's
process for setting monetary payments in the DPA or NPA. Four of the
companies we interviewed were not required to make payments to the
government, to compensate victims of the crime, or to forfeit ill-
gotten gains as a result of the crime, and therefore did not discuss
DOJ's process for setting monetary payments in the DPA or NPA.
[24] One of the 57 agreements we reviewed did not specify the duration.
[25] Prosecutors at the remaining eight DOJ offices told us that they
could not recall the process by which the duration of the agreement was
determined or we did not obtain a response from them on this issue.
[26] Prosecutors in the remaining seven DOJ offices did not comment
specifically on why they included compliance program requirements in
DPAs or NPAs.
[27] Although three agreements included payments to third parties to
fund environmental projects, enforcement efforts, and initiatives, they
appear to be encompassed by the exception for the use of community
service as a condition of probation for environmental prosecutions,
pursuant to guidance from DOJ's Environmental and Natural Resources
Division. See U.S. Department of Justice, United States Attorneys'
Manual § 9-16.325, Plea Agreements, Deferred Prosecution Agreements,
Non-Prosecution Agreements, and "Extraordinary Restitution." We will
review this guidance to understand the nature of these payments. DPAs
and NPAs have also included additional terms other than the ones
discussed in this testimony, such as the provision that if the company
complies with the agreement, not only would the specific DOJ office
that entered into the agreement not prosecute the company, but the
company would not be prosecuted by any DOJ office; or a provision that
the company would conduct public training workshops throughout the
state.
[28] Three additional companies did not believe an appeals process was
available to them. We did not discuss the option of appealing the terms
of the agreement with the remaining five companies. One company is
counted twice because the official would have been comfortable
appealing to the U.S. Attorney, but expressed reluctance to appeal
concerns with the agreement to DOJ.
[29] One agreement required the company to retain the services of its
outside counsel as a non-independent compliance consultant for the
duration of the agreement. The responsibilities of the consultant were
similar to those of the independent monitors required in other
agreements, and the consultant reported directly to DOJ, but we did not
include this agreement in our count of agreements with independent
monitors.
[30] The Morford Memo states that monitors should only be used where
appropriate given the facts and circumstances of a particular matter--
for example, it may be appropriate to use a monitor where a company
does not have an effective internal compliance program, or where it
needs to establish necessary internal controls. In addition, the
guidance requires that--prior to executing an agreement that includes a
monitor--prosecutors must, at a minimum, notify the appropriate U.S.
Attorney or Department Component Head.
[31] The Morford Memo advises U.S. Attorneys Offices and other DOJ
litigation divisions that it may be appropriate for the monitor to
report in writing periodically to the government and the company
regarding the monitor's activities and the company's compliance with
the agreement, but does not require written reports nor does it specify
the frequency of reporting. The Morford Memo requires, however, that
the monitor have discretion to communicate with the government as he or
she deems appropriate.
[32] For three of the agreements, the agreement did not clearly state
whether the monitor was required to file written reports with DOJ
prosecutors. An additional agreement required reporting to another
federal agency and not specifically to DOJ.
[33] Prosecutors involved in one of these two agreements said that they
also received written reports from the monitor. Prosecutors involved in
the remaining agreement did not provide information on whether the
monitor had submitted reports or the extent of DOJ communication with
the monitor.
[34] Representatives from 7 of the 12 companies we interviewed that had
monitors confirmed that they had some input in monitor selection and 5
companies said they were not involved in monitor selection.
[35] In two cases, the monitor has not yet been selected.
[36] In one agreement, the company selected the monitor with no
involvement from DOJ. Prosecutors involved in the three remaining
agreements did not provide information on the extent of company
involvement in the monitor selection process.
[37] Of these 26 agreements, 7 were not filed in court.
[38] The Morford Memo was released after most of the agreements we
reviewed were entered into.
[39] See 18 U.S.C. § 208 and 5 C.F.R. pt. 2635.
[40] [hyperlink, http://www.gao.gov/products/GAO/GGD-00-45].
[41] At the time of our review, we identified an additional four DPAs
and NPAs that were entered into since the Morford Memo and required the
selection of a monitor. According to DOJ, monitors have not yet been
selected for these agreements. For one additional DPA, the department
has determined that the agreement, which requires an external auditor,
is not subject to Morford Memo guidelines regarding monitor selection.
[42] An official from one of these companies did not comment on the
monitor's rate specifically because this individual was not involved in
early negotiations with the monitor.
[43] The companies we spoke with did not always have precise
information on the monitor's customary rates.
[End of section]
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