U.S. authorities target individuals for corporation wrongdoings

Internal investigations are likely going to be more costly and more difficult to conduct for Canadian companies with operations in the United States following a change of policy by the U.S. Department of Justice that will now prioritize the prosecution of individual employees for civil and criminal corporate wrongdoing, according to anti-corruption and white collar criminal defence lawyers.

The new policy is widely expected to compel companies being investigated by the DOJ for civil and criminal transgressions to undertake more timely, independent, thorough and well-documented internal investigations that will almost certainly drive a wedge between the organization and its senior executives and employees whose interests may be at odds with one another, added the legal experts.

“It’s no longer simply a matter of a corporation making a disclosure if they’ve done something wrong, pay a fine, and put it behind them and then try to ensure that it doesn’t happen again,” remarked Riyaz Dattu, a Toronto investment and international trade lawyer with Osler, Hoskin & Harcourt LLP. “It’s going to be much more than that. It’ll require corporations to go down a very difficult road which includes finger-pointing at potentially some of the most senior officers.”

Spurred by criticism that few executives involved in the 2008 financial meltdown, the U.S. housing crisis, and corporate scandals were punished even in the wake of securing record fines from major corporations, the new directives issued in a memo last fall to U.S. federal prosecutors by U.S. Deputy Attorney General Sally Yates outlines a series of measures that makes obtaining leniency conditional on what the corporation itself has done to uncover suspected misconduct of its executives and employees.

The so-called Yates memo clearly instructs DOJ attorneys to focus on individuals at the start of any investigation, and to avoid resolutions with corporations that shield individuals from liability. It also plainly states that corporations must provide all relevant facts about individuals “involved in corporate misconduct regardless of their position, status or seniority” in order to possibly obtain credit for cooperation, which may be a reduced sentence, a deferred prosecution agreement, or potentially non-prosecution. (Canada does not provide for deferred prosecution agreements).

More recently still, the DOJ announced in early April the implementation of a one-year pilot program under the U.S. Foreign Corrupt Practices Act (FCPA) that supplements the Yates memo. Besides increasing the Fraud Section’s FCPA prosecution unit by more than 50% and establishing three new FBI squads dedicated to FCPA enforcement, the pilot program spells out further guidance on what the DOJ will consider to be complete and voluntary self-disclosure. Under the pilot program a company must in order to qualify for credit for cooperation voluntarily self-report an FCPA violation in a timely manner, must fully and continuously cooperate by revealing all relevant facts – including evidence from overseas locations — above and beyond what may be requested by the DOJ, and must also remediate any deficiencies in its internal controls or compliance programs.

“What the Yates memo and the pilot program does is to change the landscape somewhat with respect to the considerations faced by companies who find themselves facing a white collar crime issue,” explained Mark Morrison, a Calgary lawyer with Blake, Cassels & Graydon LLP with an expertise in white-collar crime, anti-corruption, and competition litigation. “It places an increased emphasis on that initial (internal) investigation on not just identifying the underlying facts behind the conduct but also adds pressure to fully ferret out the knowledge and involvement of individuals.”

Canadian companies that either have a listing in the U.S. or operating south of the border should be concerned over the new direction Washington has taken as they are “likely within jurisdictional reach” of the DOJ, said Linda Fuerst, a senior partner with Norton Rose Fulbright Canada LLP. As of March 31, 2016, there were 506 New York Stock Exchange and the NYSE MKT-listed (for small cap companies) non-U.S. issuers from 46 countries, 137 of which are Canadian firms. Moreover, according to Dattu, eight of the 10 largest fines for corporate wrongdoing ever imposed by U.S. authorities have been against non-US companies. “So it’s just going to be a matter of time before we have a Canadian company that will be within sight of U.S. authorities,” added Dattu. On top of that, U.S. authorities are far more “active” conducting investigations into corporate transgressions than Canadian authorities, noted Alexander De Zordo, a Montreal lawyer with Borden Ladner Gervais LLP who has an expertise in fraud and corruption. “And the fines and sentences in the U.S. are much more severe than they are in Canada,” pointed out De Zordo.

But ironically the DOJ’s efforts to hold individuals accountable for organizational misdeeds may backfire. Its all-or-nothing prerequisite of divulging all relevant facts to be “eligible for any cooperation credit” may discourage companies from coming forward. “One concern that has been expressed is whether corporations will get credit for cooperation and whether credit for cooperation is really illusory,” remarked Fuerst, who formerly was a senior investigation counsel with the enforcement branch of the Ontario Securities Commission. Corporations may well end up deciding to not self-report and deal with the issue internally or force DOJ’s hand to prove their case.

The expectation by U.S. authorities to self-identify, investigate and self-report wrongdoing involving individual officers and employees may also lead to a chilling effect on company personnel. Individuals may be reluctant to come forward or decide not to fully share information during the course of an internal investigation for fear that their employer may hand over information to U.S. authorities which in turn “may expose them to criminal jeopardy,” noted Fuerst. “That may make it more difficult for corporations, even those that want to cooperate and try to get the benefit of credit for cooperation, to be actually be able to deliver because their employees may be less willing to provide that cooperation,” added Fuerst.

The situation for Canadian operations with a presence in the U.S. is more complicated by the fact that Canadian personnel may “depending on the nature of the issue” also be exposed to Canadian criminal liability, said Morrison. “Another challenge in this cross-border scenario is that the use of the information in the two jurisdictions can be different, and the consequences can be different,” added Morrison.

In light of the Jane memo, Dattu says that it will be not only prudent but necessary for corporations to advise their potentially implicated employees to retain independent counsel early during the internal investigative process. The same holds true for the board of directors or the audit committee. The General Counsel’s office would be put in a tight spot if he was conducting an internal investigation against an officer of the company and the next day having a meeting with the same person discussing business matters. “It would make more sense for the board of directors to appoint an external counsel for the sake of independence but also the separation from the emotional consequences of doing an internal investigation,” said Dattu.

The Yates memo also underscores the importance of robust governance and compliance programs, said De Zordo. “Exemplary conduct begins from the top and filters down, and to the same extent, illicit conduct that starts from the top permeates an entire organization,” said De Zordo. “If corporations put in more robust governance and compliance programs, and undertake themselves to investigate and weed out any issues, it may be more costly, so be it, but there will also less” corporate wrongdoing.