Loyola University Chicago School of Law, JD 2024
The Department of Justice (DOJ) recently took several steps to strengthen its fight against white-collar crime. In its attempt to promote corporate compliance, the DOJ announced last September that it would focus on two policies: (1) voluntary self-disclosure and (2) compensation incentives with the use of clawbacks. Since then, every U.S. Attorney’s Office has adopted the first policy, a voluntary self-disclosure program. For consistent application of the policy throughout the nation, all the voluntary self-disclosure programs have a common basis: where a company has voluntarily self-disclosed a violation, cooperated, and remediated the issue without other aggravating factors, the DOJ will not seek a guilty plea. Now, on March 2, 2023, U.S. Deputy Attorney General, Lisa Monaco, announced that the DOJ is ready to launch its second policy through a Compensation Incentives and Clawbacks Program (CICP). This pilot program shifts the responsibility of corporate violations from shareholders onto individual wrongdoers, but it is unclear how effective it will be at promoting compliance.
Components of the CICP
The DOJ envisioned the CICP as a way to fight corporate crime by preventing misconduct, holding individual wrongdoers responsible, and discouraging repeat violations. The program has two main components. First, any corporate resolution involving the DOJ’s Criminal Division will require the resolving company to implement compliance-promoting criteria in its compensation and bonus systems. This component was recently executed by Danske, Denmark’s largest bank, when it agreed to revise its compensation and bonus systems as part of a plea agreement. As a result of this agreement, any Danske executives that do not meet the compliance requirements will forfeit their chances of receiving a bonus.
The second component provides that any company which makes a good faith attempt to claw back compensation from individual wrongdoers will be eligible for a fine reduction. The resolving company will pay the relevant fine, minus any credit reserved for the amount of compensation that the company is trying to claw back from culpable individuals. If the company fully succeeds with the clawback, it will get to keep that money without paying any of it to the DOJ. If the company succeeds partially, it will have to pay the difference between the actual clawback received and the credit reserved for the amount it tried to receive. Due to the high costs associated with clawback attempts, a company that is unsuccessful but makes a good-faith effort will still be eligible for a fine reduction of up to 25% of the compensation it attempted to recover.
The program mirrors recent efforts by the Securities and Exchange Commission (SEC) to claw back compensation from executives when accounting statements have to be reissued due to misconduct. These efforts illustrate how multiple agencies are working to promote corporate compliance. However, unlike the SEC’s program, where executives can face repercussions regardless of whether they participated in or knew of the misconduct, the CICP places the burden of paying fines on the executives and employees who are actually culpable.
Will the CICP be effective at promoting corporate compliance?
Since the policy shifts the burden of paying fines away from shareholders onto those directly responsible, Monaco hopes it will encourage companies without compliance procedures to reevaluate their programs and implement such criteria. Nonetheless, there is no guarantee that the CICP will be as effective as the DOJ hopes for it to be. One concern is that clawing back compensation may require legal work with fees that far exceed the amount the company is trying to claw back. If that were to happen, it would take away the program’s appeal and one of its main incentives.
Additionally, as long as the company makes good faith efforts at clawing back compensation, it may receive a fine reduction regardless of whether it succeeds. This can become problematic because the CICP does not clearly outline what it means to make a good-faith attempt. Without a specific standard in place, companies can take advantage of such a provision and make minimal efforts to claw back compensation if they know they will still be eligible for fine reductions.
Lastly, there is always a possibility that compliance policies issued by different government agencies will clash. For example, the SEC policy places responsibility on executives regardless of whether they were involved in any of the misconduct. The CIPC on the other hand aims to shift responsibility onto individual wrongdoers. To avoid confusion and effectively promote corporate compliance, agencies will need to work together to reconcile their policies.