The last several years have constituted something of a “perfect storm” in public contracting and oversight: decreasing public contract dollars, dramatic increases in contracting fraud at the federal, state, and municipal levels; declining public resources available for audit, investigation, oversight, and prosecution; and a rapidly diminishing public tolerance for the waste of limited taxpayer dollars and for “big government.” Calls for tougher sanctions against corporate fraud from the media, politicians, and the public are met with countervailing criticism that many law enforcement, regulatory, and prosecutorial agencies are perpetuating an “anti-business” environment that is not in the best interest of job creation and stimulating an economy. Consequently, every decision about how to handle a problem contractor has become a balancing act of protecting the public from harm; respecting the rights of contractors in a free market economy; trying not to drive good contractors out of business; and sending a message that fraud or regulatory violations will not be tolerated.
The enforcement options granted to most agencies to achieve these goals are often limited and basic: they can prosecute an individual or a company with the hope of seeking a conviction, fines, and/or penalties; or they can decline prosecution in lieu of agency suspension or debarment action. At the federal level the approach is designed to protect the public by ensuring a contractor’s “present responsibility.” Contractors facing the scrutiny of government customers or regulators are confronted with a daunting choice. Acknowledging deficiencies in their company can lead to the imposition of sanctions that can affect their ability to continue to compete for public contracts, and/or their favorable status with a regulatory agency, either of which can further impact their ability to continue at all. These opposing forces have in many ways forced costly, lengthy and divisive litigation between government agencies, the Department of Justice, and government contractors, often clogging up the justice system but doing little to help prevent fraud or improve the overall accountability and performance of public contractors or regulated industries.
Government regulators and federal and state prosecutors are searching for effective alternatives to prosecutions. They are increasingly using deferred prosecution agreements (DPAs) or non-prosecution agreements (NPAs), as well as civil settlement agreements, which include some form of independent oversight to improve the contractor’s internal controls, performance and transparency. Independent monitoring offers an approach that is also being used with even greater frequency in a variety of administrative settings across the country as a remedial, less punitive alternative to other forms of government action. For example, independent monitoring has been used as an alternative to resolve proposed suspension or debarment from government contracting; in lieu of license suspension or revocation for regulated professionals such as doctors, dentists, chiropractors or pharmacists; or in place of loss of network provider status, including closure, of much-needed hospitals, nursing homes, or other facilities. The inclusion of this remedial alternative in agreements as part of a comprehensive resolution can lead to quicker and more beneficial solutions for all sides. Using the independent monitoring approach fulfills the government’s responsibility to protect the taxpayer, and the regulatory agencies’ mission of protecting public health, safety and welfare. At the same time, this option allows businesses and professionals to continue to operate, implement improvement where deficiencies are noted, and demonstrate, over time, that they have indeed fixed the problem that resulted in government concerns and scrutiny.
Independent Monitoring: Not a New Concept
Although applied more often today, independent monitoring is not a new concept. It has roots in the monitoring programs created in the late 1960s to help rehabilitate juveniles and first offenders. Pilot programs in Washington, D.C. and New York City provided offenders with counseling, training, and job placement in lieu of prosecution, in the hope that such programs would reduce recidivism. Corporate monitoring was further inspired by the federal Inspector General Act of 1978, which created an inspector general to prevent and detect fraud, waste, and abuse for each of 12 major federal civilian agencies (now up to 73 federal agencies with the 2008 amendments).
Effective independent monitoring involves incorporation of oversight through auditing and investigative tools of a business or practice by a third party. One prominent model has been used for more than twenty five years in public school building projects in New York. Perhaps the most successful pioneering program for corporate monitoring is the Independent Private Sector Inspector General (IPSIG) program developed in New York in response to the 1989 report, Corruption and Racketeering in the New York City Construction Industry. In 1991, the Federal Sentencing Guidelines shifted policing responsibilities from the government to the defendant corporation, which had the effect of promoting independent monitoring and IPSIG models by offering less stringent penalties for companies that took steps to detect and prevent fraud, report misconduct promptly, and create a culture in which high-level officials did not participate in or condone criminal activity.
The IPSIG program, which was used to investigate the theft of scrap materials from The World Trade Center site after 9-11, created an ongoing monitoring program for construction companies with large state contracts. It requires the contractors to maintain a 24-hour hotline that employees and others can use to report any wrongdoing; it also provides monitors with ongoing access to financial reports and other records, as well as to employees. IPSIG monitors professionals in the healthcare, accounting, and insurance industries, and businesses and individuals that contract with the state government. The IPSIG model utilizes private sector resources and expertise as an independent, private sector firm (as opposed to a governmental agency) that possesses legal, auditing, investigative, and loss prevention skills, that is employed by an organization (1) to ensure that organization’s compliance with relevant laws and regulations, and (2) to deter, prevent, uncover, and report unethical and illegal conduct committed by the organization itself, occurring within the organization, or committed against the organization. Notably, an IPSIG may be hired voluntarily by an organization or it may be imposed upon an organization by compulsory process such as a licensing order issued by a governmental agency, by court order, or pursuant to the terms of a deferred prosecution agreement.
The independent monitoring model that has evolved in federal contracting, as well as with licensed and regulated industries around the country, differs somewhat from the IPSIG model, which has been criticized by some who feel that IPSIGs can be too intrusive into areas of a company that have nothing to do with the matter at hand.
The increased focus on corporate scrutiny resulting from the 2001 Enron scandal, and more recently a series of corporate frauds associated with both the financial services and automobile industries, have increased public attention to the challenges of addressing corporate business ethics in our country. Strengthening of the Civil False Claims Act legislation federally and in many states, and the increased use of DPAs, NPAs and Civil Settlement Agreements have furthered the impetus to use corporate monitors to help address the costs of litigation and reduce the backlog of corporate fraud prosecutions in a manner that protects the public.
In the past, “a prosecutor’s choices when faced with corporate wrongdoing, were essentially binary: he or she could either bring charges or decline prosecution, with no middle ground allowing for continued supervision or enforced remediation.” Because of the rigidity of existing standards, prosecutors sought “a way that would enable them to exercise their discretion not to charge a corporation in appropriate circumstances but that would, at the same time, give them sufficient leverage to require significant changes in corporate culture, compliance and controls and, as importantly, monitor those changes for a reasonable period of time. Thus was born the corporate deferred prosecution agreement (DPA) and its adjunct, the Independent Monitor.”
Monitors are commonly associated with DPAs and other pretrial agreements, which “have been used with more frequency recently to resolve a wide variety of criminal investigations, ranging from accounting fraud to tax fraud to violations of the Foreign Corrupt Practices Act (FCPA).  Monitors have been used in cases involving well-known companies such as Volkswagon, Teva, Odebrecht, Braskem, and Microsoft. The Securities and Exchange Commission (SEC) is also using them frequently in enforcement actions, such as in its action against WorldCom. The use of monitors is increasingly common in state courts as well, and they are sometimes used in cases when there is no prosecution involved. Monitors have been used in high-profile cases, such as the 2002 case against Arthur Andersen executives involved with Enron, and in the recent BP oil spill settlement.
Suspension and Debarment: The New Frontier of Monitoring
In the administrative arena, the use of independent monitors as an alternative or resolution to a proposed suspension or debarment of a contractor from government business is quickly gaining traction. An October 2011 report by the Government Accountability Office (GAO) found that too many federal agencies were insufficiently protecting against contractor fraud or incompetence by failing to aggressively use the suspension and debarment process. Acting under pressure from congressional committees to weed out government contractors for ethics violations and poor performance, the Obama Administration proposed to suspend or debar almost as many contractors in 2011 as the Bush Administration did during its entire second term. According to the General Services Administration, the proposed debarments (over 1,000 during 2011) are the most since 1997, the earliest year comparable data is available.
Since suspension and debarment are, by design and regulation, tools to protect the taxpayer rather than punitive measures, government suspension and debarment officials are finding creative and productive ways to utilize the leverage created by a potential loss of business to motivate companies. Their goal: to have companies strengthen their corporate ethics and compliance programs and ethical culture as a way to demonstrate their “present responsibility” as government contractors. Forward-leaning companies have been successful in proposing the use of independent monitors to assess the effectiveness of their ethics and compliance programs, and their ethical culture, in order to satisfy the government that they are serious about making substantive and fundamental changes that will prevent fraud and other employee misconduct. The independent monitor provides a report to the company and to the government with detailed recommendations, and subsequently monitors the company’s implementation of the recommendations over a period of several years. This beneficial approach is a “win-win”; the government has been able to save a good contractor (and employer) while protecting the taxpayer, and the contractor is permitted to fulfill its contractual obligations with better internal controls, improved business processes, and a stronger corporate ethical culture.
The Need for Monitoring Principles
Some early iterations of the monitoring model fostered cynicism, particularly with regard to the selection and objectivity of the monitor and the quality of the monitoring provided. For example, it was not uncommon for healthcare regulatory boards to use board members or staff investigators as monitors. Significant problems existed in using such an approach, including real or perceived conflicts of interest; refusal by licensed practitioners to agree to the investigator monitor; and exclusion of the board/staff members from further consideration of, or work on, the matters where they served as the monitor. In corporate settings, those subject to monitoring were permitted to select their own monitors, which is fraught with controversy. Even when selected fairly, well-intentioned monitors often lacked a framework for conducting and reporting their oversight activities, and many licensees asked best friends, classmates, even office mates to be their monitor. Not surprisingly, under these types of circumstances, quality of the monitoring has been suspect, insufficient to satisfy regulators, and unable to provide sufficient value to those subjected to the monitoring.
On the federal side, the evolution of the independent monitoring model has included loud criticism of the Department of Justice for designating former government officials to serve as monitors in high-profile cases, again leading to questioning of the independence and integrity of the monitoring process. In an effort to bring integrity into the monitor-selection process in corporate criminal matters, a March 2008 memorandum by then Acting Deputy Attorney General Craig S. Morford to U.S. Attorneys outlined “best practice” principles for choosing monitors.
While the Morford Memo spoke directly to DOJ attorneys for utilizing independent monitoring in DPAs and NPAs, the principles it addressed for selecting and using independent monitors have a much wider application and provide useful guidance for regulatory and even private oversight authorities, such as peer review and credentialing committees, Special Investigation Units for insurance networks, and other oversight authorities that may wish to add the use of monitors as a remedial enforcement tool.
Over the past 15 years, many state regulatory agencies, including boards of medicine, dentistry, pharmacy and others, have adopted a monitoring model to allow, in appropriate cases, those facing discipline an option to continue in practice and address the deficiencies which initiated the action. However, the challenges of finding monitors acceptable to both sides, of defining the role of the monitor, and of establishing the extent and limits of the oversight, have proven frustrating. To meet those challenges, the Morford Memo offers applicable principles for boards and defense attorneys to consider when incorporating independent monitoring in administrative settlements.
What Is a Monitor and How Are Monitors Used?
An independent monitor should possess in-depth knowledge and experience in a given field, as well as knowledge of pertinent regulatory obligations. Describing the monitor’s role, the Morford Memo notes that, once an agreement is reached as to how to prevent future misconduct, “A monitor’s primary responsibility is to assess and monitor a corporation’s compliance with the terms of the agreement specifically designed to address and reduce the risk of recurrence of the corporation’s misconduct, and not to further punitive goals.” More specifically, the memo says the monitor should “oversee a company’s commitment to overhaul deficient controls, procedures and culture.”1
The expertise of the monitor will vary depending on the nature of the issues or deficiencies in the underlying action. For example, in some public construction false claims cases, the deficiencies are in the accuracy of the contractor’s systems of accounting, billing, and controls; in procurement integrity cases, they involve company policies and controls over the use of competitor information, acquisition procedures, and the effectiveness of values-based ethics programs. Matters involving pharmaceutical manufacturers, durable equipment companies or laboratories might concern ethics and compliance programs, advertising, False Claims Act, or Stark violations. In any of these instances, the expertise and experience of the monitor must be sufficient to address the areas of concern to the regulatory authority.
The monitor’s role has several components. One aspect requires providing sufficient oversight to ensure that the party being monitored adheres to the obligations and restrictions of the settlement agreement. In addition, however, there is often a remedial aspect to a monitorship through which the entity being monitored can gain from the monitor’s knowledge and experience as applied to the specific situation. Ideally the entity being monitored is led to develop and implement internal controls to foster effective ethics and compliance-related programs, to correct the noted deficiencies, and to identify and address risk areas in which future problems could occur.
Is Monitoring Appropriate in Every Case?
Independent monitors are not right for every case; important factors include the severity of an infraction, whether the deficient activity was an aberration or part of a pattern of behavior, and whether the behavior seriously threatens the health, safety or welfare of the public. The Morford Memo identifies certain instructive principles for agencies and attorneys to consider when evaluating the monitoring option.
In establishing the calculus for determining whether a case is suitable for the use of a monitor, the Morford Memo states that, “In negotiating agreements with corporations, prosecutors should be mindful of both: (1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation.” Further, it advises that the decision-making process should only be used where appropriate given the facts and circumstances of a particular matter. However, for oversight agencies, other factors will come into play such as the severity of the action, the likelihood of it being repeated, the likelihood that remedial programs will be effective in addressing the deficiency, the willingness of the contractor or professional to enter into an agreement, and, the strength of the evidence.
For many government contractors or regulated professionals deciding whether to settle or defend a case, the costs and benefits of fighting the charges versus continuing in business under such an agreement are key determinants. A contractor or licensed professional open to the idea of monitoring, however, should understand that he or she can improve the chances of persuading the oversight agency to utilize a remedial approach by acknowledging and accepting responsibility for deficiencies, and taking steps to address identified problems. That is, the very “evidence” that a contractor or professional often fears will be incriminating in a hearing—testimony that the individual understands and is able to correct the identified problems, for example—is actually seen in the light of the Morford Memo as evidence that a contractor is a good candidate for a monitoring agreement.
The Morford Principles
When a cost-benefit analysis makes monitoring a viable option, the Morford Memo sets out nine principles covering the selection of monitors, scope of duties, communications, and duration of any agreement to retain monitors.
Selection of Monitors
Independence, experience, and integrity of the monitor are the key elements in the selection process, as monitoring has come under justified criticism in some cases where the independence of the monitor was in question. Some corporate defense attorneys have expressed concern over the appointment of monitors who may not be completely impartial, and have maintained that monitors who are put in place by government officials represent government agencies to the potential detriment of corporations. For example, the U.S. Attorney for the District of New Jersey, came under scrutiny for appointing a recently retired U.S. Attorney General as a monitor for Zimmer Holdings. In addition to the perceived conflict, critics cited the cost, which was estimated to range between $28 million and $52 million.
When the deal came to light, the chairs of the U.S. Senate and House Judiciary Committees requested an inquiry by the Government Accountability Office. Soon after, Representative Frank Pallone (D-NJ) introduced legislation that would require the Attorney General to issue guidelines to help determine when U.S. attorneys should enter into a DPA. The action may have influenced the decision by the Office of the Deputy Attorney General to issue the memo containing principles for appointing monitors. The Morford Memo focuses on the application of criteria for preventing such potential conflicts.
Given the monitor’s responsibilities, it is vital that monitors be impartial when performing their duties. Biases are typically the result of the unilateral selection of monitors, which would be avoided by following the DOJ’s principles. A monitor’s independence is, of course, as important as the independence of a judge or juror. Monitoring should be considered as a valid legal option only when a monitor can be appointed whose independence is established.
As such, the memo’s principles begin with the following:
Principle 1. “Before beginning the process of selecting a monitor in connection with deferred prosecution agreements and non-prosecution agreements, the corporation and the Government should discuss the necessary qualifications for a monitor based on the facts and circumstances of the case.”
While recognizing that flexibility is necessary, the DOJ memo also describes the necessity for the monitor to be truly independent. The principle annunciated requires that monitors be selected based on their merits, rather than being political appointments. The selection process must, “at a minimum, be designed to: (1) select a highly qualified and respected person or entity based on suitability for the assignment and all of the circumstances; (2) avoid potential and actual conflicts of interests, and (3) otherwise instill public confidence by implementing the steps set forth in this Principle.”
The memo requires a number of steps be taken during the selection process, including:
Attorneys selecting monitors must comply with the conflict-of-interest guidelines set forth inand .
U.S. Attorneys and Assistant Attorneys General cannot unilaterally select monitors, or accept or veto their selection.
No monitor will be appointed who has an interest in, or relationship with, the corporation or its employees, officers, or directors “that would cause a reasonable person to question the monitor’s impartiality.”
The corporation cannot employ or be affiliated with the monitor for at least a year after the monitoring relationship ends.
The memo notes that no one method of selection will cover every case, because a monitor’s role may vary. However, whatever method is used, the government should determine what selection process is most effective as early in the negotiations as possible, and “endeavor to ensure that the process is designed to produce a high-quality and conflict-free monitor and to instill public confidence.” The memo suggests that both sides in the matter discuss what role the monitor will play, and the skills and experience needed. The memo anticipates that, depending on the case, monitors may include former government attorneys, accountants, technical or scientific experts, and compliance experts. It recommends that at least three qualified candidates be considered in each case.
Scope of Duties
Critics of monitoring also express concern over the authority of the monitor. In some cases, monitors have been able to override the decision-making authority of the company CEO and the Board of Directors. In the WorldCom case, for example, the monitor participated in the company’s business operations and was described unofficially as a company executive. To address these concerns, the Morford Memo spells out the breadth of a monitor’s responsibilities to prevent the monitor from overstepping his or her authority, while also reinforcing the monitor’s independence.
Principle 2. “A monitor is an independent third-party, not an employee or agent of the corporation or of the Government.”
By definition, the independent monitor is distinct and independent from the directors, officers, employees, and other representatives of the corporation. The monitor is not the corporation’s attorney. Similarly, the monitor is not an arm of the government. While open dialogue with the monitor throughout the agreement is essential, all parties must understand the corporation cannot seek legal advice from the monitor, nor can the government direct the monitor.
Principle 3. “A monitor’s primary responsibility should be to assess and monitor a corporation’s compliance with those terms of the agreement that are specifically designed to address and reduce the risk of recurrence of the corporation’s misconduct, including, in most cases, evaluating (and where appropriate proposing) internal controls and corporate ethics and compliance programs.”
The type of misconduct being monitored and the skills required of the monitor will vary from one case to another, but a common thread in any case where the use of an independent monitor is under consideration includes the existence of an effective compliance program. As such, “A monitor’s primary role is to evaluate whether a corporation has both adopted and effectively implemented ethics and compliance programs to address and reduce the risk of recurrence of the corporation’s misconduct. A well-designed corporate code of ethics and compliance program that is not effectively implemented will fail to lower the risk of recidivism.”
The memo recommends that the corporation should design its own compliance program, but subject to the monitor’s “input, evaluation and recommendations.”
Principle 4. “In carrying out his or her duties, a monitor will often need to understand the full scope of the corporation’s misconduct covered by the agreement, but the monitor’s responsibilities should be no broader than necessary to address and reduce the risk of recurrence of the corporation’s misconduct.”
In other words, the role of the monitor should be clearly defined and focused on reducing the risk of recurring misconduct.
According to the memo, “Neither the corporation nor the public benefits from employing a monitor whose role is too narrowly defined (and, therefore, prevents the monitor from effectively evaluating the reforms intended by the parties) or too broadly defined (and, therefore, results in the monitor engaging in activities that fail to facilitate the corporation’s implementation of the reforms intended by the parties).”
Just as a business is more likely to succeed when it has a business plan with clearly defined goals, corporate monitors will be more likely to succeed if their duties and ultimate goals are clearly defined. The scope of the monitor’s duties should be fully described in the terms of the agreement. The memo points out that an understanding of historical misconduct may inform a monitor’s evaluation of the effectiveness of the corporation’s compliance with the agreement.
How and what a monitor communicates to the government agency prosecuting the case or the corporation being monitored can be challenging. The monitor must maintain impartiality, while keeping in mind the ultimate goal of helping the corporation achieve ongoing regulatory compliance. What happens, though, when the monitor discovers previously unknown misconduct? And what if the corporation is lax in following the monitor’s recommendations?
As outlined in the Morford Memo, communication on any wrongdoing is, of course, necessary, but so is communication of progress made by the corporation. Reporting is a key responsibility of the monitor.
Principle 5. “Communication among the Government, the corporation and the monitor is in the interest of all the parties. Depending on the facts and circumstances, it may be appropriate for the monitor to make periodic written reports to both the Government and the corporation.”
Among the issues to be addressed in a monitoring report about the party to be monitored will generally include:
The progress of the corporation;
The degree of cooperation provided;
Whether the corporation is complying with the terms of the agreement and its internal compliance program; and
Any recommended changes that would help achieve compliance.
Principle 6. “If the corporation chooses not to adopt recommendations made by the monitor within a reasonable time, either the monitor or the corporation, or both, should report that fact to the Government, along with the corporation’s reasons. The Government may consider this conduct when evaluating whether the corporation has fulfilled its obligations under the agreement.”
If the corporation declines to adopt a monitor’s recommendation, the government should consider both the monitor’s recommendation and the corporation’s reasons in determining whether the corporation is complying with the agreement. A flexible timetable should be established to ensure that both a monitor’s recommendations and the corporation’s decision to adopt or reject them are made well before the expiration of the agreement. Sometimes the implementation of a recommendation is cost prohibitive; other times, it may interfere with legitimate business purposes. The agreement must be flexible enough to address potential barriers to full implementation of the monitor’s recommendations.
Principle 7. “The agreement should clearly identify any types of previously undisclosed or new misconduct that the monitor will be required to report directly to the Government. The agreement should also provide that as to evidence of other such misconduct, the monitor will have the discretion to report this misconduct to the Government or the corporation or both.”
When the monitor discovers new misconduct, in many cases it should be reported directly to the government and not to the corporation, particularly if the behavior is substantive and poses a risk to public health or safety or the environment and:
Involves senior management of the corporation;
Involves obstruction of justice;
Involves criminal activity that the government has the opportunity to investigate proactively and/or covertly; or
Otherwise poses a substantial risk of harm.
However, the Morford Memo suggests that the monitor should use discretion in determining whether to report allegations that may not be credible or that involve actions outside the scope of the corporation’s business.
The memo notes that “any guidance regarding monitors must be practical and flexible.” That flexibility extends to the duration of the agreement. In some cases, extending the agreement may be warranted. Likewise, there may be circumstances in which the monitoring agreement should be terminated early or altered. The Morford Memo anticipates both circumstances.
Principle 8. “The duration of the agreement should be tailored to the problems that have been found to exist and the types of remedial measures needed for the monitor to satisfy his or her mandate.”
Criteria to consider when determining how long the agreement should last include:
The nature and seriousness of the misconduct;
The pervasiveness and duration of misconduct;
The involvement of senior management;
The corporation’s history of misconduct;
The corporate culture;
The scale and complexity of any remedial measures, factoring in the size of the business;
Any progress in implementing remedial measures before the monitoring agreement begins.
Principle 9. “In most cases, an agreement should provide for an extension of the monitor provision(s) at the discretion of the Government in the event that the corporation has not successfully satisfied its obligations under the agreement. Conversely, in most cases, an agreement should provide for early termination if the corporation can demonstrate to the Government that there exists a change in circumstances sufficient to eliminate the need for a monitor.”
A monitoring agreement may be extended if warranted by circumstances, such as when a compliance program has not yet been fully implemented. Conversely, the agreement may end early when warranted as well, such as when a business unit responsible for misconduct ceases operations.
Although some argue the new DOJ guidelines may not go far enough to ensure uniformity in DPAs themselves , taken as a whole, even critics of monitoring likely will see value in considering the principles for choosing an independent monitor as described in the Morford Memo. For example, some commentators who view monitoring as an intrusion on corporate board authority wrote that, “The Morford Memo does, at a minimum, provide counsel with some new arguments when negotiating with prosecutors over whether or not such a monitorship is appropriate in a particular case, and, if so, how such monitors should be selected, supervised and compensated, and what the scope and term of their monitoring activities should be.”
The Monitor’s Value in Ethics and Fraud Prevention
As described in the Morford Principles, the monitor’s task is driven by the agreement between the government and the company being monitored. Some such agreements call for purely objective assessments; others clearly describe the intention that the analysis is to be informed by the monitor’s unique insights based on knowledge and experience. In our view, the monitor should review the situation through independent eyes, without a “gotcha” mentality that often plagues various forms of government oversight. In fact, the value-added of the monitor’s activities to the monitored company or professional can be substantial, resulting in recommendations in areas such as ethics and compliance programs; internal controls; risk assessments; training requirements; auditing and oversight; contracting processes; third-party due diligence measures; and other critical business areas.
Increasing government emphasis on the value of corporate ethics and compliance programs, and recognition that ethical culture is one of the key factors influencing employee misconduct, has made the role of the independent monitor even more critical in the prevention of procurement fraud and other forms of corporate wrongdoing. The 1991 Federal Sentencing Guidelines, and the November 2010 amendments, clearly recognize the value and importance of a strong ethical culture and a bona-fide, effective ethics and compliance program. Prosecutors also use these guidelines, and the existence of a strong, values-based ethics program, in assessing whether to pursue litigation against a company for the acts of an errant employee, or to agree to a deferred or non-prosecution agreement. As noted earlier, government suspension and debarment officials are also beginning to “connect the dots” from a range of corporate contracting violations to underlying problems with a company’s ethical culture, and are turning to independent monitors to assess, and help the company remediate, elements of its ethics and compliance programs.
There is no single formula for creating a credible corporate ethics and compliance program that can clearly demonstrate a company’s due diligence to employees, board members, shareholders, customers, regulators, and law enforcement. Every company’s culture is different, as is the nature of its business, industry challenges and market situations. However, some of the areas examined by the independent monitor focus on industry “best practices” and provide a good start in assessing some of the basic elements of a company’s ethical culture and the effectiveness of its ethics and compliance activities:
The Chief Ethics and Compliance Officer (CECO): The CECO must have the authority, organizational placement, and independence to influence business decisions, review and investigate allegations of wrongdoing, and report problem areas to the CEO and Board of Directors. The seriousness with which a company takes its ethics and compliance responsibilities is widely viewed as a reflection of the value it places on the CECO function.
Leadership Commitment and Tone at the Top: The extent to which company leadership, particularly the CEO, is viewed as personally committed to a company’s ethical culture, and takes every opportunity to communicate a company’s ethical priorities, drives the actions of subordinate employees. This “tone at the top” flows down to all managers and supervisors, who influence the day-to-day activities and decisions of employees. In reality, “mood in the middle” and “buzz at the bottom” are equally important measures of ethical culture. Leadership commitment can also be measured in how ethics and integrity factors are used to assess executive performance and make compensation decisions.
Code of Conduct: A company’s Code of Conduct must be a useful, living document, rather than glossy “shelfware.” It must clearly spell out responsibilities of both the company and the employee, including an employee’s “duty to report” violations. It must also be written in plain business language (as opposed to hard to operationalize legalese). The code should focus on the unique vulnerabilities and most common ethical dilemmas faced within each business. To be useful, employees should be required to acknowledge receipt of the code and must be regularly trained on its content.
Ethics and Compliance Training: A comprehensive training program covers both compliance issues and values-based ethical decision-making, and is conducted using a variety of computer-based and live discussion techniques. Special training should be given to all company new-hires in order to clearly communicate company values and behavioral expectations. The use of real-life scenarios and vignettes has proven to help maximize the effectiveness of ethics and compliance training, and tests of employee comprehension are critical to training effectiveness.
Anonymous Reporting: Truly anonymous employee hotlines should be established, providing both phone and email opportunities for employees to report allegations or seek advice. Careful analysis of reporting trends is an important way for companies to re-calibrate the focus of their ethics and compliance programs, and can transform a reactive program into a proactive one.
Attention to Subcontractors and Vendors: Most companies extensively utilize the products or services of subcontractors and/or vendors. Ignoring the impact of these business dealings can put a company at great risk on the ethics front. Companies should require their subcontractors and vendors to adopt their own code of conduct and validate their ethics and compliance training, and other aspects of their program. When necessary, it might be cost effective to make a company’s ethics and compliance program resources available to subcontractors and vendors to ensure consistency in decisions and actions.
Other Considerations for Independent Monitoring
Attorneys who regularly handle administrative or contract law matters are often frustrated by the incongruity between a contractor’s behavior and the inflexibility of agencies related to the sanctions involved for even minor infractions. Increasing government attention to the ethical culture of its contractors can result in what appears to be a disproportional response (proposed debarment) for a violation of one of hundreds of arcane rules contained in the Federal Acquisition Regulations. Unfortunately, companies have little in their arsenal with which to negotiate given the power of the suspension and debarment process. Being pro-active and developing a plan that addresses the deficiencies noted by the agency and incorporates independent monitoring of those remedial efforts can be an effective and attractive approach. As agencies become more familiar with the benefits of independent monitoring, a resolution that benefits all sides can be achieved.
Applying the principles for choosing an independent monitor, as described in the Morford Memo, and establishing the role and reporting requirements for the monitor, can help bring clarity and mitigate the concerns about fairness in the selection and use of the monitors which has existed in the past. Success will ultimately depend on the company’s commitment to ethics, compliance with regulatory requirements and meeting the ultimate goal of transparent behavior in all relationships with government overseers. Effective independent monitoring can foster those activities to the benefit of the company and government regulators.