The DOJ Updates Its Compliance Guidance: From Prisoner’s Dilemma To “Rat” Race

The updated version of the DOJ’s Guidance on Evaluation of Corporate Compliance Programs (”DOJ Guidance”) may turn prisoner’s dilemmas among corporations and their employees into races to rat on each other. How should we respond?

The Classic Prisoner’s Dilemma

In game theory, the classic prisoner’s dilemma posits that if two suspects to a joint crime refuse to confess, each suspect will do a short stretch behind bars.

So, interrogators separate the suspects and offer each a time-limited deal: confess and rat on the other suspect. If the other suspect remains silent, the one who confesses and rats will serve no time while the other does a long stretch. If both confess and rat, each will serve a moderate sentence.

The dilemma leads each suspect to confess and rat on the other suspect. That’s because no matter what one suspect does, the other is better off confessing and ratting.

As a result, the prisoners serve more time that if they had both kept quiet.

The DOJ’s Prisoner’s Dilemma for Corporate Wrongdoing

Over the last 25 years, the Department of Justice has refined its real-world prisoner’s dilemma for corporations and their employees.

Corporation Incentives To Blow The Whistle on Employees

The DOJ prisoner’s dilemma runs as follows. The DOJ has promised leniency towards corporations that voluntarily disclose wrongdoing, cooperate with investigators, and remediate root causes of misbehavior.

Part and parcel of cooperation means assisting the DOJ in going hard after individual employees.

To better prepare the ground for individual prosecutions, a recent SEC rule requires listed companies to place clawback provisions in high-level executive employment contracts.

The DOJ also strong-arms companies into promulgating and enforcing policies governing the use of personal devices and third-party messaging platforms by employees to ensure that business-related electronic data and communications will be preserved — and available for turnover to the DOJ.

Employee Incentives To Blow The Whistle on Colleagues and the Company

Federal incentives to corporations to turn on their employees give such employees countervailing incentives to rat on the corporation and their colleagues.

In addition, federal whistleblower statutes protect employees who rat on their colleagues and company.

Federal banking/securities and procurement laws, meanwhile, even reward whistleblowers with amounts as high as 10-30% of the fines and penalties resulting from the whistleblower’s information.

The DOJ’s Fine Print — Some Big “Ifs”

The DOJ’s September 2022 Monaco Memorandum signaled the DOJ’s increased willingness to cut very favorable deals with corporations that voluntarily disclose wrongdoing.

But, the DOJ’s willingness comes with some big “ifs”.

Big “Ifs” For Voluntary Disclosure By The Company

According to a DOJ policy released in February 2022, for disclosure to be considered “voluntary,” the disclosure must:

• Not already be required by a regulation, prior agreement with DOJ, or other obligation.
• Be timely, i.e., before the government knows about potential criminal wrongdoing or there is an imminent threat that the government will learn of it. In this regard, disclosure of alleged misconduct by corporate whistleblowers does not count as voluntary disclosure by the company. Disclosure must also occur within a reasonable time after the company becomes aware of the misconduct.
• Include all relevant facts relating to the wrongdoing, or the company can make clear that it is making a preliminary disclosure while it investigates further.

Big “Ifs” For Voluntary Disclosure By An Employee

Whistleblower rules contain their own fine print. For example, the information or analysis provided by the whistleblower must be voluntary and original.

“Voluntary” means, provided to federal authorities before a request, inquiry, or demand for such information.

“Original” means derived from the whistleblower’s independent knowledge (facts known to the whistleblower that are not derived from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information that is not generally known) that is not already known by federal authorities. However, “original information,” expressly excludes information subject to the attorney-client privilege or information learned because the whistleblower held certain titles at a company (such as an officer or director) and learned the information from another person or through the company’s internal reporting systems.

The Rat Race

The March 2023 version of the DOJ Compliance Guidance incorporates the above policies.

What results is more than a prisoner’s dilemma.

It is a “rat” race.

First past the post replaces simultaneous, time-limited offers

The classic prisoner’s dilemma involves simultaneous, time-limited offers. The DOJ Compliance Guidance, on the other hand, creates incentives for the corporation and its employees to beat each other to the punch. That’s because DOJ leniency (and rewards) go only to the first person to disclose.

If you are an employee who learns of wrongdoing, are you better off reporting through the company’s compliance channels, or going straight to the DOJ? Bear in mind that going through channels will likely blow your chances of a reward.

Moreover, to qualify for leniency, the corporation must inform the government of all persons involved in the wrongdoing. Your name may well end up on the list going to the DOJ for investigation. The company will have every incentive to throw you to the wolves. At a minimum, you will need to lawyer up. Can you even afford it?

The corporation, of course, has its own perspective — and its own challenges. That’s because if a whistleblower drops a dime before the corporation does, the entity no longer qualifies for voluntary disclosure.

“The current climate clearly favors early disclosure to DOJ when there is a suggestion of misconduct, even before every possible fact is known, and then convincing DOJ to permit the corporation to conduct its own robust internal investigation to get to the bottom of any potential wrongdoing,” according to Celeste Koeleveld, a partner with Clifford Chance and former Head of the Criminal and Appellate Divisions of the Office of the U.S. Attorney for the Southern District of New York.

Koeleveld adds, “Corporations which become aware of possible wrongdoing should therefore conduct a focused preliminary examination to put themselves in the best position to make the disclosure decision.”

Informational Asymmetry And Its Effect on Corporate Functioning

The classic prisoner’s dilemma assumes that both prisoners have equal information about both the crime and the offer. As Koeleveld’s advice shows, with real-world corporations, that is not the case.

The corporation, as an entity, must rely on observation by, and information from, the people who work for the corporation. What will rat-race incentives do to the loyalty, trust, and teamwork necessary for well-functioning organizations?

For what degree of marginal increase in voluntary self-disclosure will we accept what marginal decline in operational performance?

Practical Implications Of The Updated DOJ Compliance Guidance

So much for hypothetical questions. The Updated Guidance calls for action in the here and now.

These actions include:

• Fixing and enforcing communications discipline. Such discipline will maximize legal privilege while discouraging chatter or gossip. Employees must always assume that any communication that is not privileged will end up in the hands of an unfriendly party.
• Implementing effective case-management systems. DOJ policies pressure companies to seek, surface, and solve problems as quickly as possible. Company Board and management want to control the decision and timing of disclosures, not to have issues forced upon them by whistleblowers, media reporting, or regulators.
• Prospectively leveraging DOJ leniency. To some extent, the DOJ has put its cards on the table. In response, companies should periodically weigh their processes and programs against the DOJ Compliance Guidance. The Board and C-suite need to know both the As-Is and To-Be state of compliance. They must then allocate resources towards the To-Be state in accordance with chosen priorities. Needless to say, this assessment should take place in a manner than maximizes legal privilege.

A Modest Proposal: Make the DOJ Eat Its Own Cooking

The DOJ understandably seeks ways to improve private-sector compliance. DOJ policies over the last several years also appropriately focus on the rotten apples; it seems unfair to hit corporations (and by extension, shareholders) with enormous fines and other sanctions for the behavior of a few bad actors.

As the DOJ and SEC lay down ever more prescriptive, cumbersome, and costly rules, however, it would help to know that someone in the DOJ and SEC, somewhere, has first-hand experience running a large private-sector corporation that needs not just to comply with the law, but to make payroll and to turn a reasonable profit.

Perhaps some Congressional committee overseeing the DOJ should require the Attorney General — or his memorandum-crafting Deputy — to assess and report on the DOJ’s own compliance processes and performance in the manner required of private-sector organizations under the Updated Compliance Guidance.

Given the DOJ inspector general’s findings that several senior officials involved in the Russia investigation failed to properly preserve their work-related communications on official devices, such a report should make for interesting testimony.

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