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Department of Justice Focuses Corporate Compliance Efforts on Executive Compensation

February 21, 2023

Department of Justice Focuses Corporate Compliance Efforts on Executive Compensation

February 21, 2023

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Corporate executives should be on notice that the DOJ is becoming increasingly aggressive in holding corporate executives personally accountable for compliance at their organizations.

The Department of Justice’s (DOJ) recent plea agreement with Danske Bank demonstrates increasingly aggressive efforts to incentivize corporate compliance and hold individual executives accountable for corporate misconduct. The DOJ charged Danske Bank, a global financial institution based in Denmark, with defrauding banks in the United States. The plea agreement contains a notable provision that ties executive compensation and bonuses for the bank’s executives to future compliance efforts. The agreement follows recent statements by DOJ officials that companies will be expected to claw back compensation from executives who engage in misconduct. Corporate executives should be on notice that the DOJ is becoming increasingly aggressive in holding corporate executives personally accountable for compliance at their organizations.

The Evolution of DOJ Policies on Individual Accountability

The DOJ’s focus on individual accountability for corporate misconduct is not new, but has gone through many iterations. The Justice Manual, the department’s internal guidance document, has contained language on the importance of individual accountability for many years. In September 2015, then-Deputy Attorney General Sally Yates signaled an increased focus on individual accountability by issuing a memo entitled “Individual Accountability for Corporate Wrongdoing,” known as the Yates Memo. The memo required companies to identify “all individuals involved in or responsible for the misconduct at issue, regardless of their position, status or seniority” and to provide “all facts relating to that misconduct” to qualify for any cooperation credit.

On November 29, 2018, Yates’ successor, Rod J. Rosenstein, changed the policy, limiting mandated disclosure to only those individuals “substantially involved in or responsible for” the misconduct, in order to qualify for cooperation credit.

The policy changed again several years later under a new administration.

Current Deputy Attorney General Lisa O. Monaco has issued two memos addressing individual accountability. In an October 2021 memo, Monaco essentially reinstated the Yates policy. Monaco wrote that companies seeking cooperation credit cannot limit disclosure of culpable individuals to those “substantially involved in or responsible for” the misconduct; they must identify “all individuals involved in or responsible for the misconduct.”

In a follow-up memo released in November 2022, Monaco emphasized that disclosing companies must make timely disclosures to receive credit. Specifically, the memo stated, “companies that identify significant facts but delay their disclosure will place in jeopardy their eligibility for cooperation credit.” With respect to individual accountability, the November 2022 memo goes beyond the Yates Memo. It encourages DOJ prosecutors to consider whether the company has implemented programs that incentivize compliance by executives when evaluating a company’s compliance program. Among the factors prosecutors are directed to consider in assessing corporate compliance programs are whether the corporate compensation system: (a) penalizes employees engaged in noncompliant behavior; (b) ties executive compensation to compliance through the use of compliance metrics and benchmarks in compensation calculations; and (c) includes provisions allowing the corporation to claw back compensation from current or former executives whose acts or omissions contributed to the criminal conduct.

Less than two months later, acting Principal Deputy Assistant Attorney General of the Criminal Division Nicole M. Argentieri announced that her division had begun including additional compliance provisions in plea agreements. Specifically, plea agreements now require CEOs and chief compliance officers to certify, at the conclusion of a resolution period, that the company’s compliance program is “reasonably designed to detect, and prevent, the type of criminal violation that gave rise to the resolution in the first place.” Argentieri also stated that the Criminal Division is working with other agencies, members of the defense bar, executive compensation experts and other regulators to help the division consider how prosecutors may reward companies that employ clawback policies and incentivize compliance through bonuses and other positive incentives.

The Danske Plea Agreement’s Compliance Provisions

On December 12, 2022, two weeks after Argentieri’s comments, Danske entered into a plea agreement with the DOJ resolving allegations that the bank’s Estonian unit misled U.S. banks about  its money-laundering controls for nonresident high-risk customers from 2007 through 2016. According to the statement of facts attached to the plea agreement, Danske became aware of suspicious transactions involving those customers as early as 2013, in part due to an internal whistleblower. Rather than report the transactions, Danske executives allegedly lied about the bank’s compliance and monitoring programs, conspired with customers by creating shell companies to hide the transactions, and processed $160 billion in nonresident customer transactions through U.S. banks.

The plea agreement requires Danske to incentivize compliance, discipline violations and implement a revamped compliance program including stringent anti-money-laundering controls. The agreement also contains the certification requirements for executives announced by Argentieri. It requires the bank to evaluate each Danske executive’s actions taken “to ensure that the executive’s business or department is in compliance with the Compliance Programs and applicable laws and regulations.” The agreement further requires that a failing score in compliance will make the executive ineligible for any bonus for that year. While the agreement does not explicitly require compensation clawbacks, it leaves room for disciplinary measures for executives determined to have contributed to future compliance failures.

On January 5, 2023, a judge approved the plea agreement, sentencing Danske to three years’ probation and forfeiture of $2.06 billion.

Implications of the Danske Compliance Provisions

The provisions in the Danske plea agreement directly tying future executive compensation to corporate compliance represent an escalation in the DOJ’s efforts to hold individuals accountable for corporate wrongdoing and to incentivize corporate compliance. By forcing executives to have a direct financial stake in the effectiveness of the company’s compliance program, the DOJ hopes to hold accountable those executives most responsible for compliance failures while at the same time incentivizing improved compliance across the company.

Such provisions are likely to be included in future corporate plea agreements. Thus, the effectiveness of a company’s compliance program could financially impact not only the company, but also the company’s executives. Following the Danske plea agreement, one thing is certain: Going forward, corporate executives will have a strong financial incentive to take their company’s compliance obligations seriously.

For More Information

If you have any questions about this Alert, please contact Christopher H. Casey, Melissa S. Geller, Brian H. Pandya, Angela J. Benoit, any of the attorneys in our White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.