ANALYSIS: Why Don’t More Companies Disclose Bad Behavior to DOJ?

As we emerge from the holiday season, when many children learned if they were naughty or nice, companies may similarly hope to find themselves on the “nice list” when it comes to their corporate misconduct.

These are the companies that voluntarily self-disclosed (VSD) corporate misconduct, fully cooperated with any government investigation into these actions, and remediated any discovered wrongdoing under the US Department of Justice’s Corporate Enforcement Policy (CEP).

The Justice Department has offered detailed guidance on the CEP to clarify how companies have been successful in “fully cooperating” or “remediating the misconduct.” This year, DOJ’s Criminal Division revised the policy to incentivize companies to proactively disclose any corporate misconduct by rewarding those who do with substantial reductions in penalties or fines—between 50% and 75%—and a possible deferred prosecution agreement or complete declination to pursue any form of criminal disposition.

But not surprisingly, companies are seemingly wary of being the first ones to proactively expose any wrongdoing. Based on my analysis of the DOJ’s publicly available enforcement agreements related to the CEP, it doesn’t appear that companies find it worthwhile to voluntarily self-disclose.

DOJ Awards Few Declinations, DPAs

My initial take-away from the analysis is that very few companies successfully cross the threshold to receive either a declination or a deferred prosecution agreement (DPA). To better understand the profile for a company that qualifies for the CEP, I analyzed all declination letters issued since 2016 and also reviewed the number of DPAs awarded to companies in the same time period.

Since the policy’s inception in 2016, only 19 companies that voluntarily self-disclosed, fully cooperated, and remediated the misconduct were rewarded with a not-guilty charge. During this time, there were over 60 criminal corporate enforcement actions.

Interestingly, DOJ established the CEP in April 2016 as a pilot program available to companies that voluntarily self-disclosed violations of the Foreign Corrupt Practices Act(FCPA). The DOJ had a strong start, with five declinations awarded to companies in 2016. However, in the subsequent years, the program didn’t gain much traction, with only two to four companies receiving declinations each year, and none in 2021 (possibly due to the Covid-19 pandemic).

The Justice Department in 2023 broadened the scope of the CEP to include any corporate misconduct—not solely FCPA violations. But the expanded definition had little effect, with only three companies receiving a declination for voluntarily self-disclosing their wrongdoing.

A similar result is evident for DPAs. Under the revised CEP, companies that don’t voluntarily self-disclose prior to the government investigation, but that fully cooperate and remediate the misconduct once an investigation is launched, may still avoid prosecution. However, according to my analysis of DPAs for FCPA enforcement actions, only three companies received a DPA in 2023 and eight in the last three years.

Companies With Large Profits Had Declinations

Is there a detail in the declinations or a provision in the policy to explain why so few companies benefit from voluntarily self-disclosing? I analyzed the declinations to identify the companies’ determined profits from their misconduct to potentially uncover a clue.

Under the CEP, companies that voluntarily self-disclose may not receive a declination if there are “aggravating” circumstances, such as criminal recidivism, egregious or pervasive misconduct, or “significant profit” from the misconduct. The CEP defines “significant profit” relative to a company’s overall profit.

This requirement could explain why the DOJ has awarded so few declinations in recent years. Companies may have feared that if they profited millions of dollars from the misconduct, they’d be ineligible for a declination. But my analysis of DOJ data shows that companies that profited in the millions from their misconduct were still awarded declinations.

Based on the data, over two-thirds of companies profited over $1 million, and over one-third profited over $5 million from their misconduct. And in 2023, a declination was awarded to the company with the highest-recorded such profit: $32.7 million. Therefore, the “significant profit” requirement wouldn’t likely eliminate companies’ chance of a declination.

But the answer may lie in the detail of the CEP. While it seems that companies are able to profit significantly from their misconduct and still see a reduction in punitive measures, the provision does require companies to pay all “disgorgement, forfeiture, and/or restitution” of these profits. A closer look at the declinations indicates that several companies had an exceedingly tight turnaround period of 10 business days to hand over the large profits to the DOJ, which may not be feasible for many companies.

CEP Is Slow Burn, But Model Spread to Agencies

While the data in my analysis demonstrate low CEP participation, the Justice Department continued to revise, broaden, and promote the policy in 2023. DOJ officials are still standing behind the notion that all parties will benefit if companies voluntarily self-disclose, fully cooperate, and remediate their corporate misconduct. And the model is spreading to other federal agencies.

For example, the EPA Audit Policy offers incentives to companies to voluntarily disclose and remediate violations of federal environmental laws and regulations. The SEC Enforcement Division Cooperation Program similarly provides incentives, such as reduced sentences and sanctions in enforcement actions. Time will tell how the self-reporting model—as well as the revamped CEP—will fare.

Bloomberg Law subscribers can find related content on our Corporate Governance Practice Page and our Corporate Compliance Practice Page.

If you’re reading this on the Bloomberg Terminal, please run BLAW OUT in order to access the hyperlinked content or click here to view the web version of this article.