Fraud Section Report Helps Companies’ Counsel Navigating DOJ’s Seas

DOJ’s 2022 Year In Review Report released last month not only recounts its Fraud Section’s activity and “accomplishments” for the preceding year, but also allows practitioners and in-house counsel responsible for helping companies and their executives navigate the shoals of corporate compliance anticipate the government’s likely future focus. This year’s Report first suggests that in the upcoming years DOJ will continue to focus on individual accountability for corporate malfeasance particularly in the area of financial fraud and market manipulation. In fact, the Report was released at the same time that DOJ leadership was commending the Department’s convictions of individuals such as Elizabeth Holmes and Sunny Bulwani. Second, the Report also foreshadows an increase in independent compliance monitorships in corporate resolutions, a practice previously avoided under a Trump-era policy. Again, public comments, including updated guidance from Assistant Attorney General Kenneth A. Polite, Jr., show DOJ’s resolve to utilize monitorships particularly in the case of a compliance program that is “untested, ineffective, inadequately resourced, or not fully implemented.” A third area to watch is the modest increase in corporate declinations in 2022, suggesting that particularly in light of the recent news of an expanded Corporate Enforcement Policy, DOJ has an appetite for early resolutions for “cooperative” institutions, but whether companies will bite remains to be seen. In addition to these trends, recent events make clear that bank-related fraud will also work its way onto DOJ’s agenda in 2023.

Individual Wrongdoers Will Continue to Feel the Heat

A DOJ top priority has been and will remain prosecuting individuals who commit corporate malfeasance. The Report reveals that in 2022 the Fraud Section continued to secure an increased number of individual convictions (342) after convicting 329 individuals in 2021. From 2015-2020 – a period that includes the bulk of the Trump administration – the average was significantly lower. Approximately 230 individuals were convicted annually. Although the recent increase in individual convictions may be the result of a catchup of a backlog of cases left unresolved during the COVID-19 pandemic, the numbers pre-pandemic signal otherwise; in 2019, the Section secured 256 individual convictions and in 2018, 268 individual convictions.

One thing is for certain, though – the Fraud Section has reenergized its enforcement efforts under the current administration, and individuals perceived to be involved in corporate misconduct are not being spared. In line with this focus, the 2021 and 2022 Reports have begun to detail significant prosecutions that the Foreign Corrupt Practices Act (“FCPA”) Unit brought against individuals, including the guilty plea of former Bolivian Minister of Government, Arturo Carlos Murillo Prijic, and the indictment of former senior Venezuelan prosecutors. Despite DOJ’s general emphasis on individual accountability, the Report reveals the number of individual convictions in the FCPA space remained steady compared to past years – 22 individuals were charged and 18 were convicted in 2022.

On the other hand, the Fraud Section’s Market Integrity and Major Frauds Unit, which focuses on the prosecution of financial fraud and market manipulation cases, doubled its numbers from pre-pandemic years, securing 107 convictions in 2022. This rise in enforcement activity suggests that in the wake of recent events and DOJ’s interest in bank collapses, enforcement activity against financial fraud is only going to increase. The DOJ also has focused resources and attention on investigating digital assets, indicating that in addition to traditional financial fraud, investigations into cryptocurrency matters will also be on DOJ’s upcoming agenda.

This year’s Report reveals that the Fraud Section went to trial more in 2022 than ever before, trying 51 cases (75% of which involved charges brought by the Health Care Frauds Unit), which is double the number of cases tried in 2021 (23 trials), and secured more individual convictions at trial in 2022 than in any of the previous five years. Even pre-pandemic, the Section tried at its peak 37 trials in a single year. The DOJ’s heavy trial load may indicate that DOJ was unwilling to come to pre-trial resolutions with individual actors, individuals resisted pleading guilty, or the increase is just a function of clearing a backlog of trials delayed during the pandemic. The 2023 Report will provide additional insight into whether DOJ will focus its efforts on going to trial in the upcoming years.

Compliance Monitorships Return

As the prioritization of prosecuting individuals has taken precedence, the number of corporate resolutions has continued to decline, but the Report reveals that almost fifty percent of resolutions entered into in 2022 include a special condition that has made its return. In a decisive turn from the Trump-era policy that disfavored independent corporate monitors, three of the seven corporate resolutions in 2022 required the companies to retain independent compliance monitors. The increase in independent monitorships is consistent with internal DOJ guidance from 2021 that encourages prosecutors to consider a monitorship in cases of “untested, ineffective, inadequately resourced, or not fully implemented” compliance programs and controls.

Compared to 2015 through 2020, when the Fraud Section reported 10 to 15 corporate resolutions per year, the last two years have shown a marked decrease. 2021’s Report revealed eight corporate resolutions and 2022’s Report detailed seven. Consistent with prior years, approximately two-thirds of these resolutions arose from FCPA matters, such as the investigation into Glencore International A.G., a Swiss-based commodities trading and mining company, involved in a decade-long bribery scheme spanning seven countries, and Stericycle Inc., an international waste management company. Interestingly, despite only one fewer corporate resolution in 2022 than in 2021, DOJ imposed less than half of the criminal monetary penalties ($1.15 billion in fines, penalties, restitution, disgorgement, forfeiture, etc. compared to $2.9 billion). Since each resolution is unique, it is too soon to speculate whether this decrease in monetary penalties will persist in the coming years.

Glimmers of DOJ Rewarding Corporate Self-Disclosure

The 2022 Report demonstrates that DOJ took at least some steps towards rewarding corporations that self-disclosed misconduct, as the FCPA Unit entered into two public corporate declinations in 2022 after not entering into any in 2021 and one in 2020. This number, however, is the same or lower than the number of declinations entered into pre-pandemic. The Report notes that the two declinations “demonstrate[] the Unit’s analysis of voluntary self-disclosures, including in the context of corporate acquisitions.”

The 2022 declinations included an agreement with Jardine Lloyd Thompson Group Holdings Ltd. (“JLT”), a reinsurance broker and risk adviser based in the United Kingdom, investigated for bribes paid to Ecuadorian government officials, and an agreement with Safran S.A., a French multinational corporation, investigated for bribes paid to a Chinese government official by two Safran subsidiaries prior to Safran’s acquisition of these entities. The Safran matter serves as an example to other companies that criminal conduct identified during post-acquisition due diligence and brought to the attention of DOJ may be grounds for a declination agreement. Although the Report and the public declinations note that these companies voluntarily self-disclosed misconduct, details of the self-disclosure that would help create a roadmap for other companies considering whether to disclose misconduct in the future are absent.

What This All Means for 2023

The Fraud Section issued its 2022 Report amidst multiple public pronouncements by DOJ leadership indicating that the trends from the Report are likely to continue in the upcoming year. A common thread through these announcements is the DOJ’s continued focus on holding individuals accountable for corporate misconduct, and DOJ’s seriousness in taking individual wrongdoers to trial. This means that in 2023 white collar practitioners can anticipate investigations and charges that focus on individuals within the corporation, rather than the corporation itself. In addition to an increased focus on individual accountability, DOJ’s interest in imposing independent compliance monitorships as a condition of corporate resolutions is expected to continue under current policy, but corporations remain in the dark at this point as to when their compliance programs and controls will qualify as “untested, ineffective, inadequately resourced, or not fully implemented.” Uncertainty also exists around DOJ’s recently expanded Corporate Enforcement Policy, although recent guidance updates from AAG Polite and Deputy AG Monaco may encourage more corporations to voluntarily disclose misconduct. Additional public resolution and declination documents in the coming year could provide some more insight into the meaning and weight of ambiguous terms in DOJ guidance, since DOJ has “disavow[ed] any ‘box-checking’ exercise” in its guidance.

To read more from Robert Anello, Partner at Morvillo Abramowitz Grand Iason & Anello PC, please visit www.maglaw.com.

Emily Smit, an associate at the firm, assisted in the preparation of this blog.