No Longer a Cost of Doing Business: The Yates Memo Signals DOJ Is Serious About Going After Individuals

As many observers have noted, penalties for Foreign Corrupt Practices Act (FCPA) violations tend to fall on corporations, rather than individual wrongdoers. The individual employees responsible for the unlawful conduct rarely pay fines or go to prison. The FCPA is not unique in this regard; many U.S. Department of Justice (DOJ) settlements with corporate defendants shield executives and employees from personal liability so long as the corporation accepts institutional responsibility. Yet this enforcement posture has been unsatisfying, and critics argue that many corporations simply treat the fines as an accepted cost of doing business. In response to this concern, and after much foreshadowing, the DOJ formally released a new policy on individual liability last week—a policy that applies to all corporate prosecutions and settlements, including those involving the FCPA. Known as the “Yates Memo” (it was announced by Deputy Attorney General Sally Quillian Yates in her remarks at NYU School of Law on September 9th), this new policy statement—the first major policy announcement from the DOJ under Attorney General Loretta Lynch—signals that the “cost of doing business” model of corporate compliance is coming to a definitive end.

The Yates Memo explicitly sets forth several important policies governing individual accountability for corporate wrongdoing:

  1. First, the Yates Memo makes clear to DOJ line prosecutors that investigations should focus on individuals from the inception of the investigation.
  2. Second, the Yates Memo emphasizes that, in order for corporations to be eligible to receive any cooperation credit, the corporation must provide the DOJ with relevant facts about all individuals involved in the corporate misconduct. (Previously, disclosing information on some individuals could buy credit for cooperation. Now, corporations will receive no credit unless the DOJ is satisfied that all involved individuals have been identified.) Plea or settlement agreements must now include a provision requiring the company to disclose information about all relevant individuals, at penalty of “specific consequences, such as stipulated penalties and/or a material breach.”
  3. Third, and perhaps most consequentially, the Yates Memo indicates that corporate resolutions shall not be a substitute for cases brought against individual wrongdoers. It does so, first, by stating that (absent extraordinary circumstances) no corporate resolution shall provide protection for individual wrongdoers from criminal or civil liability. DOJ attorneys are now prohibited from entering into corporate resolutions that “agree to dismiss charges against, or provide immunity for, individual officers or employees.” A corporate resolution may only include such immunity or dismissal of charges against individuals if personally approved, in writing, by an Assistant Attorney General. (It is not yet clear now exceptionally such permission will be granted, but the tone of the Memo suggests an intention that it will be rare.) Furthermore, not only does the Yates Memo preclude DOJ prosecutors from including protections for individuals in corporate settlement agreements, it also affirmatively declares that corporate cases should not be resolved without a clear plan to resolve related individual cases. DOJ attorneys must now have a justification for choosing not to bring civil claims or criminal charges against individuals.
  4. Fourth, with respect to remedies, the Yates Memo calls on criminal and civil attorneys to coordinate with one another and to consider “the full range” of possible remedies—including incarceration and fines for individuals—and further instructs prosecutors to seek civil penalties as a deterrent measure (rather than focusing exclusively on defendants’ ability to pay).

Although some argue that the Yates Memo is not really news – suggesting the Memo merely announces policies that the DOJ has applied informally for years – to my mind, the Memo serves at least two valuable functions in addition to the more robust enforcement procedures listed above.

  • First, the Yates Memo strengthens incentives for corporate due diligence by focusing attention on the individual acts that lead to corporate wrongs. Every member of a company who engages in wrongdoing may now potentially bear responsibility and legal liability. This is an important motivator for individuals at every level, from executive decision-makers to operational staff. And this is more than rhetoric because individual liability is now backed by formal procedures within the DOJ which, if followed, will increase the rate of individual charges and civil penalties. Of course, the increased legal exposure for individuals comes at a potential cost. As the New York Times has noted, corporations may have an incentive to throw employees “under the proverbial bus to secure lenient treatment.” This is a real risk. But the previous practice of limiting liability of individuals created a reverse incentive: companies could provide the smallest amount of information necessary to enable the DOJ to secure criminal charges or civil penalties, while maintaining a stance of maximum innocence for as many individuals as possible.
  • Second, enforcing liability for individuals also serves a broader expressive function for the DOJ as an institution. The DOJ’s legitimacy depends on public belief that the office genuinely advocates in the interest of the Untied States and its citizens. While past focus on corporate settlements may have been an important step in the development of the DOJ’s enforcement powers, some public commentators (see here and here) have suggested an “unholy alliance” between government prosecutors and white-collar defense lawyers, in which fines on corporate actors would replace genuine liability for culpable individuals. Enforcing individual liability reinforces public trust in enforcement authorities. With the Yates Memo, the DOJ is reminding the public that their concerns are heard, and makes the simple public statement that corporate liability will not substitute for individual liability where identifiable individuals have done wrong.

Undoubtedly there is no such thing as perfect enforcement, and every case brings its own set of challenges. Individual liability will not be the right solution for every investigation. But the Yates Memo signals that personal responsibility is an undeniable part of remedying and preventing corporate misconduct.

7 thoughts on “No Longer a Cost of Doing Business: The Yates Memo Signals DOJ Is Serious About Going After Individuals

  1. Thank you for this post Danielle. I am looking forward to see how the DoJ will apply the Yates Memo.

    The point you are making about prosecuting individuals being an incentive for executives not to engage in bribery is particularly interesting.

    Individual liability appears to be sometimes more adapted than corporate liability when the misconduct is the result of actions coordinated by a group of individuals, who are not high level executives of the corporation – which according to OECD Foreign Bribery Report 2014 represent over 20% of foreign bribery cases.

    On the other hand, prosecuting individuals might increase FCPA implementation costs. It can be more difficult and longer to identify every individuals who took part in a bribery scheme, especially if the level of responsibility for foreign bribery is envisaged broadly (aiding and abetting actively or passively by simply failing to prevent…). Furthermore, individual cases are more likely to go to trial, which would cause addition costs.

    • Danielle, thanks for this timely post! Like Sarah, I also wondered about the practical implications of the Yates memo, but I am slightly more optimistic about what, if any, additional hurdles it’ll impose on FCPA investigations.

      While it may be harder to identify all the individuals involved in a large corporate corruption scheme, I am inclined to believe that part of the DOJ’s requirement that companies establish and maintain robust FCPA compliance programs includes the ability to use the program to identify all implicated individuals. Indeed, we have seen examples in the past where the DOJ declined to prosecute a multinational company after a FCPA investigation, largely because the company maintained a strong compliance program. See: http://www.fcpaprofessor.com/morgan-stanleys-so-called-declination

      To Sarah’s second point: I agree that the Yates memo may usher in an era of more FCPA trial and the accompanying costs, but in the grander scheme of things this may strengthen, rather than weaken the FCPA regime. Because corporations are composed of individuals, more publicity and recognition that the DOJ will and does prosecute individuals who were previously able to hide behind a “corporate veil,” so to speak, may likely deter future individuals from participating in corrupt schemes.

  2. Thanks for this post outlining the substance and potential impacts of the Yates memo, Dani! I have been following this story with a lot of interest, but little background knowledge. I am inclined to agree with your take that this pronouncement marks a step toward increased enforcement which will probably improve corporate behavior because of the altered incentives for cooperation and consequences for a failure to cooperate.

    With that in mind, I would be interested to get your take on this counterargument from a post on the HLS Forum on Corporate Governance and Financial Regulation: http://corpgov.law.harvard.edu/2015/09/21/individual-accountability-for-corporate-wrongdoing/. Specifically, the author suggests that the Yates Memo may have a chilling effect on corporate cooperation, in part because it may be difficult for a firm to determine all of the individual culpability behind a systemic problem, and the consequences of that failure might be dire for the corporation.

    I wonder if you agree with the author’s suggestion that there are potential unintended consequences of the high bar for cooperation credits, and if there are other aspects of the regime that you think might make it less likely that a corporation will cooperate with a government investigation.

    • I too wondered about the potential unintended consequences of this development, and thanks for sharing that article, Nathan. It seems quite intuitive to me that focussing the DOJ’s efforts on individuals in addition to the corporation will lead to longer investigations and more resources sunk into the same instance of corruption. These drawn out investigations, coupled with the high bar of identifying all individuals involved with the corruption scheme seem to certainly reduce the incentive for a corporation to self-report.

      However, it may well be the case that the DOJ views incentivizing firms to self-report as less important than the emphasis on going after individuals within these corporations. Assuming that the DOJ has limited resources and a steady influx of cases to investigate, I am inclined to agree, and support this development.

  3. My initial reaction was also to wonder what effect this measure would have on incentives of companies to self-report. However, FCPA-related use of the Dodd-Frank Whistleblower Program, which allows the SEC to award whistleblowers percentage of penalties from resulting actions, may mitigate that concern. Law firms have taken note of increased awareness of the program, including in foreign countries. Moreover, FCPA-related tips have been increasing throughout the years. Sources writing about the potential effects of the Yates memo have raised the possibility that pursuit of low-level employees may make them more willing to exchange information about executives for lesser sentences. Similarly, the threat of increased prosecution of individuals might make employees more willing to become whistleblowers. On that view, the Yates memo might add to existing incentives for whistleblowers. Thus, even if companies were disincentivized in some ways from self-reporting because of the reasons mentioned in previous comments, companies would still face risk that someone inside would bring corruption to the government’s attention. With that might come similar concerns as were raised when the SEC’s whistleblower initiative first introduced, such as that the initiative might undermine companies’ own compliance programs. But paired with the continuing incentive to self-report, and the potential credit benefit of implementing rigorous compliance programs and monitorships, it may be that anticorruption efforts are overall strengthened, without significant costs to the likelihood that companies will voluntarily disclose potential wrongdoing.

  4. Pingback: Judge Sullivan Calls Out the DOJ: What Corporate Settlements Reflect About The Broader Criminal Justice System | Anti Corruption Digest

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