Surviving and Thriving Under an Independent Corporate Monitorship

Recently, an official with the US Department of Justice (DOJ) indicated that attorneys across its Fraud Section and Money Laundering and Asset Recovery Section are resolving approximately one corporate enforcement matter per month. It has become increasingly common for the DOJ to require the engagement of an independent compliance monitor as a part of its settlements with financial institutions and other firms alleged to have committed wrongdoings.

The job of the independent compliance monitor is typically to ensure the organization’s compliance with laws, regulations, codes of conduct, and/or any remedial measures that arise from the settlement with the government. Monitors are independent of both the government and the organization and have an obligation to report on the organization’s conduct and compliance activities to the court or government during course of the monitorship.

Companies frequently agree to a settlement that includes an independent monitor as it allows the company to avoid the risk and expense of indictment and prosecution while also allowing the company to continue operations. Prosecution of an organization could result in additional criminal and/or civil proceedings against the firm’s executives, the loss of licenses to operate, counter-party risk, reputational risk, etc. Courts may order a corporate monitorship as a condition of a firm’s probation or settlement as well.

Given the government’s recent enforcement activity, limited resources, and desire for corporate compliance enhancements, it appears independent compliance monitors are here to stay.

…independent compliance monitors are here to stay.

If your organization or client is in settlement negotiations with the government where a monitor is being considered, or if your organization is under an existing monitorship, I have outlined below important steps that you can take that should lead to a successful resolution of the matter at hand and which may lead to better outcomes for the organization in general.

Stay Positive and Embrace the Monitorship

An independent monitorship will mark a new chapter in an organization’s history, and this should be fully embraced by the entire firm. The organization that emerges from a monitorship will be a different organization from the one that entered it.

An independent monitorship will mark a new chapter in an organization’s history…

The tone starts at the top, and early acceptance of this fact and a mindset open to this change will be required of the firm’s leadership. The organization will not be able to simply run out the clock and return to its old ways. Acceptance of the firm’s new normal can be the first step to a successful monitorship.

Further, there may be many hidden opportunities for the firm to discover in this process, which can go far beyond resolving the matter between it and the government. The firm should be poised to seize these opportunities by looking upon the monitorship not as a burden or obligation but as an opportunity to learn things they didn’t know before about the business, its customers and even the competition. Knowledge is power and putting the knowledge gained during an independent monitorship to work for the firm and its customers is an opportunity that shouldn’t be overlooked.

Define Success Together

The most challenging aspect of a monitorship may be reaching a consensus between the government, monitor and organization on what a successful outcome will be.

The most challenging aspect of a monitorship may be reaching a consensus between the government, monitor and organization on what a successful outcome will be.

No organization or compliance program ever reaches perfection, there will always be room for improvement. Therefore, the end of a monitorship cannot be based on goals so lofty or so generalized that they might never be achieved.

It is incumbent upon the monitor to participate with the organization in determining achievable goals that will result in a resolution of the monitorship. Likewise, the firm needs to be acute and vocal in establishing what is achievable and measurable in terms of success. The opportunity for this sort of negotiation and determination is available to the monitor and the organization when devising the work plan.

Develop a Comprehensive Work Plan

A work plan is typically required by the court or the agreement establishing the monitorship and becomes the basis of a monitor’s work. The work plan should detail the approach the monitor will take to exercise authority and fulfill the responsibilities of the monitorship.

An essential part of a work plan is a testing plan. The monitor’s testing plan should be designed to test the company’s progress along the way and provide critical information to the company on where it is meeting the goals and intentions of the monitorship and where it is not. In short, it is a feedback loop.

When working on a testing plan, the monitor and organization must establish what the scope of the testing will encompass, what the testing approach will be, what the frequency of testing will be, and most importantly – what constitutes an acceptable result for each scope of review. In other words, the organization and the monitor should agree on grading criteria and standards to pass each scope being tested.

This may be a difficult exercise, especially early in a monitorship. But by the monitor and the organization coming to a consensus on scope, approach, frequency and success, it will set appropriate expectations between the parties. The grading criterion and standards will establish a critical path for the organization’s compliance team to demonstrate effective compliance as well.

A good testing plan eventually becomes a way for everyone to understand when the monitorship is in the beginning, middle and end phases. It keeps the scope defined, the parties focused, and the end in sight.

A good testing plan eventually becomes a way for everyone to understand when the monitorship is in the beginning, middle and end phases.

The term of an independent corporate monitor is absolutely designed to be limited. Assistant Attorney General Brian A. Benczkowski recently said, “the scope of any monitorship should be appropriately tailored to address the specific issues and concerns that created the need for the monitor.”

Thereby, establishing a work plan and testing plan that the firm and monitor agree on at the outset is an important early step, which enables the successful conclusion of the monitorship.

Establish and Maintain Open Communication

It is critical that the company and the monitor build cooperation, transparency, and trust with each other through open and honest communication.

It is critical that the company and the monitor build cooperation, transparency, and trust with each other through open and honest communication.

The organization under a monitorship should proactively and promptly bring material and relevant compliance issues (that will inevitably arise) to the monitor’s attention. Likewise, the monitor should collaborate with the organization on any recommendations and provide it with critical feedback (e.g., an observation of a gap or compliance failure) and any indication that the company is on the wrong track as soon as possible and no later than a quarterly board meeting.

A breakdown or delay in communication can result in harm to customers and costly setbacks. Whereas, proactive communication will help the parties to maintain mutual trust and keep the monitorship on course.

Further, the monitor and the company should not be discouraged from communicating with the government when, for example, questions arise about the meaning or intent of a remedial measure. If issues arise between the monitor and the firm, the DOJ has indicated a willingness to act as a referee between the monitor and the organization. “If a company that is subject to a monitor encounters problems, they should feel comfortable approaching the Department. … [W]e absolutely want to know of any legitimate concerns regarding the authorized scope of the monitorship, cost or team size. If a company wants to raise its hand with an issue, we are here to listen,” remarked AAG Benczkowski.

Agree on a Budget and Billing Practices

Establishing a budget with the monitor is key to developing and maintaining trust between the parties. Given the nature of monitorships, organizations will understandably be concerned about the financial incentive a monitor has in overstaffing, scope creep, and/or in wanting the monitorship to continue as long as possible.

Establishing a budget with the monitor is key to developing and maintaining trust between the parties.

Monitors will be concerned that they will not be given a budget big enough to appropriately do their jobs. A monitor’s budget will likely need to provide for things such as independent testing, outside experts, travel, and of course appropriate staffing. Further, there should be a process to make changes to the budget to accommodate for future, unknown events.

Recent guidance from the American Bar Association (ABA) provides that (a) monitors should provide a reasonable estimate of fees and expenses, including the use of third-party resources and (b) the monitor should incur costs that are reasonably necessary for carrying out the scope of the monitorship. Further, the monitor should inform the organization (or the government) if fees and expenses are expected to materially exceed estimates before incurring those expenses. Finally, the guidance encourages monitors to utilize the organization’s resources to reduce costs when appropriate.

All aspects of the monitor’s budget should be provided to the organization from the estimated number of billers, the amount of travel and the types of accommodations required, to the hiring of experts and other consultants. It is also important to establish expectations around the monitor’s invoicing details.

The better these issues and details are worked out between the two parties, the smoother the monitorship will be for all involved.

Better Compliance for a Better Company and a Brighter Future

The result of a successful monitorship will be a better organization with a more sustainable compliance program that provides better services and products to its customers. Also, the organization will be on surer footing with regulatory risk greatly diminished.

The result of a successful monitorship will be a better organization with a more sustainable compliance program that provides better services and products to its customers.

Throughout the process of the monitorship, hard decisions will need to be made, lots of money will be spent, changes will need to take place – and we all know that change isn’t easy. Everyone in the organization will need to rise to the occasion.

By heeding the advice given here, and by the organization and it’s monitor closely abiding by the guidance provided by the DOJ and the ABA on this topic, there is a strong chance for a successful conclusion of the monitorship and a more successful business to emerge from the process.

There should be no doubt that like most success, this will require hard work, courageous leadership, adaptability, and shrewd counsel. These, however, are the factors that will determine if your organization will simply survive a monitorship – or thrive in it.

– John Tyson
JohnKnoxTyson.com


John Tyson is an attorney licensed to practice law in Texas and New York and Certified Regulatory Compliance Manager. John has over 15 years’ experience spearheading initiatives at major financial institutions to support multi-jurisdictional regulatory compliance.