Independent monitors have become a common feature of settlement agreements when government enforcement authorities agree to defer or forgo the prosecution of a financial firm. The monitor provision brings government oversight into a company’s hallways and raises the stakes for any new lapses. The growing record of experience with independent monitors has given rise to a useful body of knowledge on the dos and don’ts for companies in managing of the relationships.
This final installment of a three-part series on deferred prosecution agreements and non-prosecution agreements (DPAs and NPAs) focuses on the monitor’s role and tips for compliance professionals in working with them. Housed within our Regulatory Intelligence solution, Part One of the series discussed how such agreements have been used and some recent examples of their imposition and extension in duration. Part Two focused on best practices for remediating compliance program gaps or other deficiencies outlined in the agreement.
Changing role for monitors
In 2014, the Department of Justice entered into 19 deferred prosecution agreements and 11 non-prosecution agreements.
The use of such deals by prosecutors for firms across U.S. industry has grown since the 2002 collapse of the Arthur Andersen accounting firm in an Enron-era criminal prosecution. The government has sought to provide an effective check on corporate wrongdoing without forcing firms out of business though criminal prosecution.
Since the financial crisis, banks and other financial services firms have been hit with multibillion dollar settlements in lieu of prosecution, and been forced to devote substantial added resources in compliance controls, often under the oversight of an independent monitor. Authorities using the agreements include the federal Justice Department and U.S. Securities and Exchange Commission.
“The role of the independent monitor has changed considerably since 2008,” said John Hanson, executive director and founder of Artifice Financial Services, LLC and an experienced corporate monitor and former FBI agent. “They figure prominently in deferred-prosecution agreements, and their judgments are taken quite seriously.”
Monitors with clout
State authorities also use monitors in settlement agreements, and the financial industry has learned they have clout.
Last August, Standard Chartered PLC was fined $300 million by Benjamin Lawsky, Superintendent of New York’s Department of Financial Services (DFS) after the independent monitor appointed by the state reported to the agency that the U.K.-based bank was still failing to adequately screen for the kind of transactions that got it in trouble with regulators in 2012.
In the 2012 case, Standard Chartered paid a $340 million fine for improperly handling transactions with customers from Iran, in breach of sanctions.
The monitor appointed to oversee the settlement, Ellen Zimiles, global head of investigations at Navigant Consulting Inc and a former prosecutor, started testing the software used by Standard Chartered and found that the bank’s process missed millions of possible violations.
Who often serves as a corporate monitor?
In choosing an independent monitor, the government or company — or both parties — suggest a slate of potential candidates, said Jacob Frenkel, partner and chair of the securities and white-collar practice at Shulman Rogers. It is typical for forensic accountants, lawyers, and experienced consultants to be deemed qualified to serve in this capacity, he said.
“There is no clearinghouse now that vets these professionals or keeps track of who is doing it as a part of their work or as a full-time job,” Frenkel said. He did not intimate which model was better, but stressed that monitor’s time should not be excessive.
“The best person for this role is an expert on corporate compliance and ethics programs. That can involve a lawyer or not, someone who has previously worked for the federal government or not. The trick is to find someone who can effectuate a plan that he or she had no input on developing,” Hanson said.
The monitor’s compensation is paid by the company, with the monitor charging a specific rate, which occasionally includes payments to a subcontractor working for the monitor.
The underlying agreement should be as specific as possible when it comes to the monitor’s remit.
“The scope of their authority extends only to the source document – the DPA or NPA – as agreed upon by the parties,” Hanson said. “The parties should reconvene if there are questions about aspects of the program the government wants developed.”
The monitor can point out where those questions lie, but the parties are the ones responsible for having the agreement be as clear as possible,” he said.
The monitor needs to make sure he or she has one point of contact at the host firm – which normally is the chief compliance officer or general counsel, since the monitor’s work will be to design or enhance an existing a compliance program that satisfies the mandates of the U.S. Sentencing Guidelines, Hanson said.
The monitor’s tenure should also be carefully considered and adjusted if needed. It is not rare that a company and monitor discover that the monitor’s time period inside the firm as anticipated by the agreement and firm is too short, requiring the two parties to the agreement to revise the terms relating to the tenure.
“Twelve months is often not a realistic time period for a monitorship,” Hanson said. “A time period of 18 months to three years is often more suitable for a large corporation, although the monitor’s tenure can end early if the company is really taking the rein and both parties agree the company is ready to go it alone.”
Devising a process
That is what the monitor’s time in the firm is all about – helping to devise a process for the company to develop and test policies and procedures for effective compliance. The monitor provides a work plan that will be developed to suit the company’s evolving needs.
“The effective monitor is the one that does not take over for the compliance team and does it all. The monitor is the one who highlights areas of weakness and acts as a trainer in coming up with a plan to fix them,” he said.
The monitor must also be independent of both parties – hence the title – and not just the corporate party.
Potential conflicts could be that the monitor or monitor’s immediate family has stock ownership in the company, or that a monitor offers other advisory services to the company while monitoring them, both of which are strictly prohibited.
“There was an instance in which a monitor used the worldwide presence of a host firm to travel internationally,” Frenkel said.
Done correctly, the monitor’s time benefits both the business and the government. “The monitor must act with integrity at all times, since they owe a duty to both,” he said.
It is helpful for monitors to maintain a legal adviser, Frenkel said. If a monitor spots a conflict of interest or spies an illegal act committed at the firm, the monitor can get independent advice unconnected to the company or the government. The monitor must reveal who he or she is retaining as its counsel, and the costs of retaining such counsel could be built into the monitor’s rate for service.
Averting need for a monitor
Although independent monitors are a feature of some deferred-prosecution and non-prosecution agreements, they are not always necessary.
“A company can get out ahead and possibly avoid having one imposed,” said Frenkel. The company can tell the government that it knows it has compliance weaknesses, but it does not need a monitor. The company might state that it just needs a regular consultant that it will hire to help the business specifically meet the obligations spelled out in the agreement. If the company makes this argument early and persuasively enough, the government might go along with it.
The other side of the coin – that the company not only embraces the concept but wants the monitor’s time extended at the firm – is also possible.
“It could be in the best interest of both parties that the monitor’s tenure be extended. This could be because progress on the compliance program’s remediation was not sufficient enough to justify the government’s lack or deferred prosecution of the matter,” he said.
Other reasons for keeping on a monitor might be to maintain the momentum behind cultural transformations in the firm or to help in “polishing off” final aspects of a program, he added.
The interaction between a firm’s compliance team and the monitor should be extensive, but the monitor’s limited scope and role must inform this relationship at all times. With that in mind, compliance professionals should consider the following action items.
- The compliance team should thoroughly educate the rest of the business on the monitor’s duties and limitations, before the monitor arrives. There should be an emphasis on candor, avoiding conflicts of interest, and responding promptly to requests for information.
- The compliance team should not expect the monitor to evaluate any individual’s job performance. An agreement may call for a particular employee’s dismissal, but that should be spelled out. The monitor is not there to make employment-related judgment calls.
- The compliance team can ask the monitor to use some investigative techniques to remedy compliance deficiencies, but it is generally not the monitor’s job to do investigations. More akin to auditing, the monitor is there to examine the compliance program’s effectiveness.
- The job of the monitor is to observe, test and report, not to do the compliance team’s work. The monitor does not engage other employees as a compliance officers would, nor does it provide training. The compliance team should rely on their monitor primarily for guidance and feedback.
- The relationship between the monitor and the compliance department is supposed to be non-adversarial. The company has only to lose by keeping pertinent details from the monitor or creating an inhospitable atmosphere.
- The compliance team should review the monitor’s draft reports to the government and provide feedback, as DOJ routinely allows it. What is important is that the monitor not make any changes as a result that would improperly affect the findings.
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