Fraud

The DOJ Targets Fraud: 5 Things to Know

The Department of Justice is redoubling efforts to pursue corporate wrongdoing and prosecute high-level executives.
Russ BanhamFebruary 18, 2022
The DOJ Targets Fraud: 5 Things to Know

The costs to build and run a company compliance program can run into the millions or tens of millions of dollars. But the cost of non-compliance — in the form of fines, loss of customer trust, lost productivity, and operational expenses related to remediation — can be double or triple that.

On October 28, 2021, in an address to the American Bar Association’s National Institute on White Collar Crime, Deputy Attorney General Lisa Monaco laid out the Biden administration’s stance on white-collar crime. 

DAG Lisa Monaco

She was unequivocal — in particular, Monaco said the DOJ would  vigorously prosecute criminally culpable individuals within companies, particularly as “it relates to high-level corporate officers.”

Of all C-suite members, the CFO is at the highest risk of criminal prosecution, according to four of the top U.S. white-collar defense law firms.

“Deputy Attorney General Monaco’s statement on the need to turn over all information on individual accountability for corporate wrongdoing to the DOJ indicates that CFOs are in the crosshairs,” said Katie Matsoukas, a partner at Barnes & Thornburg.

CFOs control the allocation of money and sign off on the SEC (Securities and Exchange Commission) certifications, Matsoukas explained. “Prosecutors follow the money — from the perpetrator of a crime like a bribe in a foreign jurisdiction to the controller in that region to the CFO of that region, all the way to the corporate CFO. So, if the CFO says they know nothing (about the bribe), the argument will be made they were willfully ignorant or reckless.”

“Everything rolls up to the CFO,” said Joe Warin, a partner at Gibson Dunn. “A federal prosecutor will say to the CFO, ‘You set the strategic vision for the company, you accounted for every penny in the books and records, and you signed off on all of it. It looks to me you believed the company had sufficient internal controls.’”

Prosecutors don’t even have to prove the CFO affirmatively committed a wrongful act, Warin said. “They’ll argue the CFO had all the objective facts in front of them suggesting a fraud and went forward and signed the SEC certification anyway,” he said. 

Following are five points CFOs need to know about the wider net DOJ will be using to pursue misconduct.

To settle a case, companies will have to name all individuals involved. Companies under investigation seeking cooperation credit must identify and provide evidence on all individuals involved in any aspect of the alleged misconduct. That was a key provision in former DAG Sally Yates’ memo to department attorneys in September 2015.

Zane Memeger

President Trump’s DAG Rod Rosenstein softened this stance, permitting companies to disclose only the names of employees “substantially involved” in an alleged crime, said Zane Memeger, a former federal prosecutor and partner at Morgan Lewis. Now, the “substantially involved” condition no longer applies.

Prosecutors may be more aggressive. DOJ prosecutors should be bold, Monaco said in her speech, bringing cases against employees if the admissible evidence “will probably be sufficient” to obtain and sustain a conviction.

Essentially, what Monaco means is “if you can probably get a conviction, go after the person,” said Jeffrey Coopersmith, a partner at law firm Orrick, Herrington & Sutcliffe. “That’s a different standard than going after someone because you’re confident the case will result in a conviction.”

The DOJ is taking a firmer line on repeat company offenders. Companies that have previously entered into deferred prosecution (DPA) or non-prosecution (NPA) agreements and then committed other crimes “will not get another pass [the second] go-around,” said Memeger. “Monaco is going to hold [their] feet to the fire.”

The DOJ will have no tolerance for companies that perceive fines and penalties as “the cost of doing business,” said Monaco.

Indeed, CFOs should “avoid perpetuating the perception [to other members of the C-suite] that fines and penalties are a way to avoid investing money in a robust compliance program,” said Meena Sinfelt, a Barnes & Thornburg partner.

The DOJ will increase the use of independent monitors. Companies being investigated and headed toward a settlement should expect the DOJ will require some sort of court-appointed independent monitor, Matsoukas said.

Katie Matsoukas

The Trump administration told prosecutors to weigh the pros and cons of monitorships, suggesting they would be the exception rather than the rule. Only 4 out of 66 publicly available DOJ agreements in the last two years imposed a corporate monitor, according to Gibson Dunn. 

But “to the extent the prior administration disfavored monitorships Monaco has rescinded that guidance,” Matsoukas said. 

To preclude government involvement, companies could preemptively engage a monitor. The tactic may persuade the government that the company “can be trusted to fix its own problems,” said Matsoukas.

The DOJ is still gearing up. Regulators have gotten the message from the DOJ and are shifting their resources to focus more on white-collar crime, Memeger said. “Cases have yet to be filed, but they’re coming.”

A strong compliance program “is the best means of defending a lengthy and costly investigation,” Memeger said.

CFOs should strengthen their compliance programs and ensure adequate resourcing, auditing, and monitoring. Then, “if something goes wrong, the CFO can say, ‘we did all we could,’” said Matsoukas.

Smaller companies with fewer resources “need to think thoughtfully in committing their resources to target red flags,” said Matsoukas. (The DOJ recognizes that organizations have different risk profiles and capital constraints.)

Improving compliance also means investing in tools such as artificial intelligence technology to ferret out instances of embezzlement, bribery, and other crimes by insiders. “Find your Achilles heel before someone else does,” Warin said.

Finally, CFOs, in addressing employees about compliance’s importance, should stress the value of whistleblowers. Said Coopersmith: “Explicitly state that the company will treat all whistleblower claims seriously and look into each one as a matter of due diligence.”

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.