When do Enforcement Agencies Decide to Appoint a Monitor?

Understandably, there exists a fair amount of confusion among regulators, practitioners and the general public about monitors and their roles. For years, federal and state governments, regulatory agencies and quasi-governmental organisations have utilised independent, private individuals to assist in the monitoring of remediation efforts at entities (e.g., corporations, labour unions and non-profit organisations) found to have engaged in some form of misconduct. Broadly, these individuals may be referred to as monitors, although they are sometimes designated as independent consultants, compliance consultants, independent experts, independent reviewers or independent auditors. Regardless of the designation, the individual selected will be required to provide the regulator with an impartial evaluation of the monitored entity’s remediation efforts. The extent to which the monitor is obliged to report on or make recommendations regarding aspects of the entity’s activities and processes, organisational structure or culture will depend on the type of monitorship and its scope; not all monitorships are created equal.

Mechanisms for imposing monitors

Monitorships are generally the result of a legal settlement agreement reached between a government agency and an individual or organisation that is facing a criminal, civil or administrative investigation or prosecution. These agreements most often take the form of a non-prosecution agreement (NPA), a deferred prosecution agreement (DPA) or a consent order or decree. An NPA is an agreement between a government agency and an entity or individual facing a criminal or civil investigation, whereby the government agency foregoes commencing or filing a case against that person or company. With a DPA, the government agency will have already commenced a case against the defendant but asks the court to postpone the prosecution. A consent decree is an agreement or settlement in either a criminal or a civil matter that resolves a dispute between parties often without admission of guilt or assumption of liability. In other types of legal agreements, there may be no allegations of illegal conduct but rather a perceived need by the regulators for the independent monitoring of some aspect of the agreement and the conduct under review. For example, a proposed corporate merger that requires approval by both the Antitrust Division of the US Department of Justice (US DOJ), and ultimately a US federal court, may have requirements that necessitate the appointment of a monitor for independent confirmation.^[2]

The US DOJ entered into 28 NPAs and DPAs in 2021, a decrease from the 38 agreements entered into in 2020 and the 32 agreements entered into in 2019.^[3] In 2021, for the fifth year in a row, the US Securities and Exchange Commission (SEC) did not enter into any NPAs or DPAs.^[4] Although enforcement activity resulting in NPAs and DPAs was lower in 2021 than in recent years, the Biden administration’s stated focus on addressing corporate crime is expected to produce ‘continued aggressive corporate enforcement in 2022’.^[5]

NPAs and DPAs do not always include a monitorship provision. In 2021, only two of 28 resolutions imposed some form of independent compliance monitor, as compared with nine out of 40 agreements in 2016, for example.^[6] However, in October 2021, the US DOJ revised its policies to be more favourable to the imposition of monitorships. In her remarks to the American Bar Association’s White Collar Crime Institute, Deputy Attorney General Lisa Monaco announced:

To the extent that prior Justice Department guidance suggested that monitorships are disfavored or are the exception, I am rescinding that guidance. Instead, I am making clear that the department is free to require the imposition of independent monitors whenever it is appropriate to do so in order to satisfy our prosecutors that a company is living up to its compliance and disclosure obligations under the DPA or NPA.^[7]

This guidance, discussed below, may lead to increased numbers of government-imposed monitorships in the future.

Corporations and other entities sometimes choose to engage a monitor voluntarily. A corporation may do so as a proactive measure, to show law enforcement officials and regulators that the corporation is addressing potential misconduct without the need for legal action. The engagement of a monitor also can provide reassurance to a board of directors, employees, the public and other stakeholders that an independent entity is reviewing the alleged misconduct. In other words, ‘companies self-appoint “Voluntary Monitors” to avoid one imposed and selected by the government, reduce sanctions, escape prosecution, repair brand value and restore trust’.^[8]

One example is Airbus, which was under investigation in 2017 for fraud and bribery in the sale of jetliners. Airbus voluntarily appointed an independent panel to examine its anti-corruption practices and recommend improvements. A subsequent 2020 DPA between the US DOJ and Airbus resolving that investigation did not impose a monitor.^[9]

Types of monitorships

Just as there are different terms to describe a monitor, there are different types of monitorships. Depending on the nature of the actual or alleged misconduct, or the perceived issues (e.g., how serious the behaviour, how widespread within the organisation, how long the duration and the remediation desired by the authorising agency), monitorships tend to focus either on enforcement or corporate compliance^[10] and, occasionally, a combination of the two. Some monitorships require reporting to the court, others do not. The US DOJ does not have a standard template that dictates the core terms required for every NPA or DPA; therefore, these may vary, and the role and responsibilities of a monitor, if one is required in the agreement, also vary.

Monitorships focused on enforcement

US government agencies, such as the SEC, the Drug Enforcement Administration, the Environmental Protection Agency (EPA), the Federal Highway Safety Administration and the Food and Drug Administration (FDA), to name a few, routinely use monitors as an enforcement tool or remedy. In the early years, the federal government used monitors in labour unions, such as the teamsters’ and carpenters’ unions, to deal with corruption. In these instances, the monitored organisation may have violated a law or industry regulation and its agreement with the government requires remediation of that specific violative behaviour. The government appoints a monitor, typically referred to as an independent consultant or expert, to ensure compliance. These monitorships tend to be prescriptive, with the government detailing what is to be assessed for reports to the government on the status of remediation. They are limited in scope and, generally, shorter in duration than a corporate compliance monitorship. They may be thought of as ‘pass/fail exercises’. For example, Chapter 6 of the FDA’s Regulatory Procedural Manual discusses judicial actions. Exhibit 6-18 shows how the FDA has created requirements for engaging independent experts depending on the subject of the violation that has resulted in the consent decree.^[11] Although these independent experts act like monitors in that they review, report and sometimes recommend, their roles are very circumscribed.

At the SEC, enforcement-type monitorships use independent compliance consultants to review, evaluate, remediate and oversee the specific controls in place to prevent a recurrence of the subject misconduct. The SEC also appoints independent compliance monitors, generally as part of parallel civil and criminal proceedings. Their role tends to be more expansive and may go ‘beyond assessment of the company’s remediation and extends more generally to compliance with applicable laws’.^[12] These monitorships, more like the corporate compliance variety, require the monitor to make recommendations for improvements to the design and efficiency of the organisation’s compliance programme.

Corporate compliance monitorships

In a corporate compliance monitorship, the monitor does not focus exclusively on the predetermined remediation of an internal control or other compliance failure. Instead, as a result of an agreement between the corporation and the government, an independent individual is selected to review the corporation’s compliance structure, its policies and procedures, internal controls and compliance culture to understand what happened to create the compliance failure, why it happened and what can be done to prevent it from happening again. This is widely referred to among compliance professionals as root cause analysis and it is key to the success of the monitorship.

The role of a corporate compliance monitor is also quite different from a monitor in a strictly enforcement situation, in which the monitor serves rather as an agent of the government, put in place to assess and confirm that the required remediation has occurred. A corporate compliance monitor must be the agent neither of the government nor the monitored company. The fact that an agreement has been reached that allows for a monitor indicates that the government has sufficient trust in the corporation’s commitment to an independent assessment of its compliance programme and any remediations effected to date, and that it will cooperate fully with the monitor and implement appropriate recommendations. The monitor must not be viewed or behave in a manner that is perceived as a punishment for wrongdoing, nor should the monitorship be thought of as just another investigation, following on from the internal and external investigations the company has already undergone. The monitor must be impartial and independent of all parties. The process of selecting a monitor for a corporate compliance monitorship is paramount; see the section titled ‘The selection of a monitor’, below, for issues surrounding monitor selection.

To an even greater degree than for monitorships focused on enforcement, corporate compliance monitorships are not ‘gotchas’. Although it is essential to understand past bad behaviour to determine the root cause, the corporate compliance monitor must be forward-looking. To arrive at a successful conclusion of the monitorship, one that includes both remediation and sustainability, the monitor needs to understand and, if appropriate, use internal corporate resources, such as the company’s internal audit staff, while retaining his or her independence. The monitor’s recommendations must be rational and consistent with corporate culture to ensure their longevity. To be successful, the monitor must also strive to achieve changes in the corporate culture so that when the monitor departs, the changes remain. This requires corporate buy-in from the top down and the bottom up. Depending on the specifics of the agreement governing each particular monitorship, the process for review, acceptance and implementation of the monitor’s recommendations will vary. In some instances, the government agency imposing the monitorship will have ultimate approval of the recommendations, while in other agreements the government essentially defers to the monitor’s assessment regarding the nature and implementation of required remediation.

Which agencies impose monitors?

Because monitorships have been found to be useful in providing independent oversight and confirmation to government agencies, it is not surprising to find that they ‘have become a common judicial, regulatory, and conflict resolution tool’.^[13] In the United States, this is true not only at the federal level by various divisions and departments of the US DOJ, the EPA and the FDA, to name a few, but also at the state and, in some instances, local levels – and, as is discussed in detail elsewhere in this guide, by governments in the United Kingdom, France and other jurisdictions.

The New York State Department of Financial Services (NY DFS) has been particularly vigorous in appointing independent consultants to monitor settlements reached with large, multinational financial institutions. Notable examples are its 2014 agreement with BNP Paribas SA,^[14] which was an extension of a 2013 memorandum of understanding, and in the 2012 agreement that the NY DFS reached with Standard Chartered Bank regarding sanctions violations and inadequacies in its anti-money laundering compliance programme, which was extended multiple times before expiring on 31 December 2018.^[15]

The Port Authority of New York and New Jersey (PANYNJ) and the New York Metropolitan Transportation Authority (MTA), two public-benefit corporations engaged in the construction and maintenance of transport facilities, infrastructure and buildings, routinely use monitorship agreements. These frequently occur when a contractor, subcontractor or supplier, among others, has been involved in a city or state criminal investigation, or is the subject of a DPA, consent order or a debarment proceeding, but would like to bid on and work on PANYNJ or MTA projects. The agencies will appoint a monitor to verify any required remediations, assess internal controls, and review and report on the compliance programme. The company’s ability to work on agency projects is contingent upon a successful monitorship.

For several years, various agencies have been appointing individuals called integrity monitors: these agencies include the PANYNJ and the MTA, the New Jersey Department of the Treasury, and large financial institutions such as the World Bank, public-private partnerships or large financial institutions that develop major infrastructure projects or are rendering disaster relief. These integrity monitors, who serve as independent eyes and ears on a project, are named to a project proactively to deter fraud, waste and abuse, rather than in response to discovered ethical, legal or regulatory non-compliance.

The decision to use a monitor

The decision to require a monitor as part of the resolution of most regulatory enforcement agreements is a fairly routine one. The subject company needs to remediate and the agency needs to verify remediation. The agency may not have the resources or technical expertise in-house to do this so it turns to third parties for assistance. For example, the Federal Trade Commission’s Bureau of Competition often uses monitors to enforce compliance with a merger remedy, like those involving transfers of assets or intellectual property.^[16] However, the decision to require a compliance monitorship as a condition of resolving a corporate investigation or prosecution, usually as part of an NPA or DPA, is generally a more protracted process that has evolved over time.

Guidance concerning when to appoint a monitor and how to select one has been periodically published by the US DOJ in the form of memoranda. An early example is that issued on 7 March 2008 by the then Acting Deputy Attorney General Craig S Morford, ‘Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations’ (the Morford Memorandum),^[17] which outlined principals to consider when using and selecting a corporate monitor. Subsequent US DOJ memoranda have dealt with such topics as the resolution of disputes that may arise between a monitor and the monitored corporation (the Grindler Memorandum)^[18] and individual accountability in corporate wrongdoing (the Yates Memorandum),^[19] the latter having been substantially revised by Deputy Attorney General Rod Rosenstein in November 2018.^[20]

In October 2018, Assistant Attorney General Brian Benczkowski provided updated guidance specifically regarding monitorships (the Benczkowski Memorandum).^[21] After observing that corporate monitors ‘can be a helpful resource and beneficial means of assessing a business organisation’s compliance with the terms of a corporate criminal resolution’, Mr Benczkowski noted that ‘[d]espite these benefits, the imposition of a monitor will not be necessary in many criminal resolutions’.^[22] He reiterated two of the Morford Memorandum’s considerations that should guide prosecutors when deciding whether a monitor is appropriate: ‘(1) the potential benefits that employing a monitor may have for the corporation and the public; and (2) the cost of a monitor and its impact on the operations of a corporation’.^[23] He then elaborated on those considerations and added the following factors:

(a) whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems; (b) whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management; (c) whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems; and (d) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.^[24]

The Benczkowski Memorandum also addressed the selection process for corporate monitors, outlining a four-tier process that begins with the names of three candidates who are proposed by the monitored company. These candidates are then reviewed by the US DOJ attorneys handling the matter and one name is chosen and forwarded to a DOJ standing committee for review. If found acceptable, the name is sent to the Office of the Attorney General for final review and approval. All Criminal Division employees involved in any way in the process must comply with conflict-of-interest guidelines and provide written certification of same. In remarks Mr Benczkowski made at the New York University (NYU) School of Law Program on Corporate Compliance and Enforcement Conference on Achieving Effective Compliance, which was held on the day following the distribution of his memorandum, he referenced the selection process and stated that:

our goal here is to ensure that the process is fair, ensures the selection of the best candidate, and avoids even the perception of any conflicts of interest. For this reason, the Division’s monitor selection committee will continue to include an ethics official from the Criminal Division. We want to ensure that businesses and the public are confident in the selection process, avoiding any suggestion that monitors are chosen for inappropriate reasons, including personal relationships or past employment in the Department.^[25]

The Benczkowski Memorandum also states that any agreement that requires a monitor should specify the terms of retention, including the monitor’s qualifications, the selection process, the process for removing a monitor if necessary, the timeline for monitor selection, an explanation of the monitor’s responsibilities, and the scope and length of the monitorship.^[26]

Three years after the Benczkowski Memorandum, the US DOJ again shifted its stance on monitorships. In October 2021, Deputy Attorney General Lisa Monaco issued new guidance that explicitly ‘revises, supplements, and in part, supersedes’ Part A of the Benczkowski Memorandum, ‘Principles for Determining Whether a Monitor is Needed in Individual Cases’.^[27] Parts B to G of the Benczkowski Memorandum remain in full force and effect.^[28]

In her speech to the ABA’s White Collar Crime Institute, Ms Monaco clarified that she was ‘rescinding’ prior guidance suggesting that monitorships are disfavoured; instead, prosecutors are ‘free to require the imposition of independent monitors whenever it is appropriate’ to ensure compliance with a DPA or NPA.^[29]

The Monaco Memorandum instructs that ‘[i]n general, the Department should favor the imposition of a monitor where there is a demonstrated need for, and clear benefit to be derived from, a monitorship’. The guidance further provides that prosecutors ‘should consider’ imposing a monitorship where ‘a corporation’s compliance program and controls are untested, ineffective, inadequately resourced, or not fully implemented at the time of a resolution’. The Monaco Memorandum reiterates the cost-benefit considerations laid out in the Morford Memorandum as the appropriate touchstones for prosecutors, but makes no mention of the additional considerations set forth in the Benczkowski Memorandum. In addition, although the Benczkowski Memorandum indicated that a monitor ‘will likely not’ be necessary for corporations with effective compliance programmes and controls, the Monaco Memorandum says only that a monitor ‘may not’ be necessary.^[30]

The Monaco Memorandum announced the creation of a Corporate Crime Advisory Group within the US DOJ, tasked with reviewing the Department’s approach to prosecuting corporate misconduct. The Advisory Group is empowered to consider and, where necessary, recommend additional guidance concerning the Monaco Memorandum’s revisions, including those on monitorships.^[31] In her speech, Ms Monaco explicitly noted that the Advisory Group would consider the issue of monitorship selection.^[32] It remains to be seen whether the Advisory Group will promulgate new or revised selection criteria.

In addition to these memoranda, the Fraud Section of the US DOJ produced a guidance document intended to assist individuals appointed as corporate monitors in evaluating the adequacy of a corporate compliance programme.^[33] The evaluation guidance was significant because, in addition to assisting the monitor, it provided a benchmark for companies to use in assessing their own internal compliance programmes and shed light on the type of review the Fraud Section would undertake when negotiating a plea or other agreement. The US DOJ Criminal Division subsequently updated the Fraud Section’s guidance, making it applicable to all white-collar prosecutors.^[34]

The selection of a monitor

In US DOJ memoranda issued over the years, and various regulatory agency manuals and guidance documents, the factors to be considered when selecting a monitor are generally clearly articulated. All regulators appear to be in agreement on the essentials: the monitor must be a highly qualified and respected person, should not present any conflict of interest or appearance thereof, and should instil public confidence.

Under both the Benczkowski Memorandum concerning criminal matters and a 13 April 2016 memorandum from the Acting Attorney General Stuart F Delery, ‘Statement of Principles for Selection of Corporate Monitors in Civil Settlements and Resolutions’ (the Delery Memorandum),^[35] the selection process begins with the opposing party identifying three candidates for the position and providing detailed information about each candidate. This information is then reviewed by a screening or standing committee and the candidates undergo a conflict-of-interest clearance process. Both the Criminal Division and Civil Division of the US DOJ interview their prospective candidates and make a recommendation, which is then reviewed and approved by senior DOJ personnel.

The Delery Memorandum was supplemented in 2021 after Attorney General Merrick Garland ordered a review of the Department’s use of monitors in consent decrees and settlements with state and local governments.^[36] Associate Attorney General Vanita Gupta conducted the assessment and provided a memorandum with key principles pertaining to such monitorships.^[37] Among other things, the Gupta Memorandum calls for cost minimisation, public input into monitor selection, term limits and greater monitor involvement with the community. Although the Gupta Memorandum was crafted to address the US DOJ’s law enforcement consent decrees, it instructs that Department lawyers should consider whether these recommendations might be useful in monitorships of non-law enforcement entities as well.^[38]

On occasion, individual US attorneys’ offices, in connection with their criminal and civil enforcement efforts, may select, or participate in the selection of, monitors, receivers, special masters, claims administrators and similar appointments. In some instances, depending on the circumstances and exigencies of the case, the attorney’s office will solicit applications for these positions.^[39]

Regulatory agencies, the bulk of whose monitorships are of the enforcement variety and usually require specific or technical expertise, may issue a request for proposals (RFP) to solicit qualified candidates. The RFP will request information similar to that required by the US DOJ (e.g., credentials, experience, references and fee structure). The agency will then review submissions, winnow the field, interview those on the shortlist and make a selection.

In some instances, individual agencies, for example the PANYNJ or the MTA, may establish a pre-qualified pool of candidates whose capabilities and reputation have been determined to be appropriate for the type of monitorship under consideration. While subject entities may be offered an opportunity to object to the selection of a particular monitor, unlike with corporate compliance monitorships, regulatory agencies do not typically solicit the names of candidates from the monitored entity.

Footnotes