3 ways the Yates memo on individual accountability affects corporate internal investigations and compliance programs

For several years, Foreign Corrupt Practices Act (FCPA) training courses and conferences have commonly included at least a bullet point on the trend of increasing individual, as opposed to only corporate, investigations and prosecutions. This arose, at least in part, from a now-infamous government hearing in 2010 when the late Pennsylvania Sen. Arlen Specter posed a question as to why the Siemens prosecution had generated $1.6 billion in fines and penalties, but nobody had gone to jail. He asked of the Department of Justice (DoJ), "When you see all the publicity on Siemens, a big fine and $100 billion in revenues, $8 billion in profits, and no jail sentence, what effect does that have? Is this not really a signal that you can violate the act and pay a fine?1" Along similar lines, and much more publicly, many have asked why Wall Street officials haven’t been prosecuted for the latest financial crisis.

It seems that, notwithstanding the increased individual prosecutions in FCPA cases since Specter’s hearing, the DoJ has upped the ante, enshrining a response to these questions as a matter of policy. Deputy Attorney General Sally Q. Yates last week issued a memorandum on "Individual Accountability for Corporate Wrongdoing.2" In that memorandum, among other things, Yates stated: "In order for a company to receive any consideration for cooperation under the Principles of Federal Prosecution of Business Organizations, the company must completely disclose to the department all relevant facts about individual misconduct.3" While there are a total of six "key steps" being taken with regard to individual prosecutions, the main ideas are that DoJ will now focus on identifying individuals from the beginning of investigations, and will not resolve cases with corporations without having considered, and pursued, culpable individuals.

Yates is also reportedly aiming high — a New York Times article noted that she said, "We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.4" So what does this mean for the private sector investigative community? First, in our opinion, senior executives will be more likely to "lawyer up" early on in investigations if they perceive a greater threat of prosecution. Investigative interviews performed by external counsel typically include the "Upjohn warning" at the beginning, where the lawyer states that he represents the company (or the board, or a board committee), rather than the individual. Company personnel usually cooperate in providing information, but it stands to reason that if a senior executive believes that her own individual liability is more than zero, she is much more likely to engage counsel and be more circumspect in giving evidence. This means that alternate sources of information, such as evidence in the company’s accounting books and records, or data stored electronically otherwise (such as on laptops, company phones and email servers), become much more important.

Second, senior executives are likely to become more involved and hands-on with the operation of their companies’ compliance programs. If it wasn’t already, it will now become more important that instances of fraud or other malfeasance be shown to be rogue employees circumventing controls, rather than a systemic problem arising from poor tone at the top. While senior executives’ skins were already in the game, the Yates memo underscores the need for them to insulate their scalps by supporting compliance measures to the fullest extent they can.

Third, corporations will need to be seen as taking action against culpable individuals proven to have participated in wrongdoing. While the U.S. Sentencing Guidelines chapter on compliance programs has long included reference to disciplinary measures, the prospect of individual prosecution for senior executives may result in an earlier, and more vigorous, search for culpability in corporate internal investigations.5 Where historically we might have been tasked primarily with finding and fixing weakened internal controls, we can now expect identification of culpable individuals to climb higher on the investigative priority list.

While the above is not an exhaustive list of all the possible impacts arising from the Yates memo, we think that these are relatively easily foreseeable effects. If senior executives believe that they will be targets of prosecution, it seems logical that they will (A) lawyer up, (B) put a bit more horsepower into true compliance measures, and (C) make sure that disciplinary actions are real, and based on thorough investigations into the culpability of individual employees.

1 See "Examining Enforcement of the Foreign Corrupt Practices Act," pp. 18-19, for more information.
2 See "Individual Accountability for Corporate Wrongdoing" for more information.
3 Ibid, p. 3
4 See "Justice Department Sets Sights on Wall Street Executives" for more information.
5 See the United States Sentencing Commission 2014 Guidelines Manual for more information.