Clawbacks are contractual provisions that restore or recoup disbursed monies inappropriately awarded. In the anticorruption compliance world, they mostly mean “disgorging” compensation derived from improper or illegal behavior. (If, for example, you receive a performance bonus based on sales that you obtained through illegal bribes…perhaps you should return that bonus.)
You, dear Reader, may remember the post from September outlining the Dramatically new Department of Justice expectations for compliance and specifically, the call for clawbacks for guilty executives and other parties. You may also remember a (slightly) more recent blog discussing trendlines in the FCPA 2022 statistics. The bottom line is that the DOJ is clearly focused on individual accountability for corporate crimes.
Earlier this month the DOJ doubled down and transformed these ideas into something more concrete. Deputy Attorney General Lisa Monaco announced the launch of a 3-year pilot program, the Pilot Program Regarding Compensation Incentives and Clawbacks. This Pilot Program would allow a company engaged in corporate resolution to get dollar-for-dollar credit against monetary penalties if the company (1) has clawback policies in place and (2) recoups the money back from the individual(s) engaged in the wrongdoing that led to the penalty.
Of course, there would be caveats: Assistant Attorney General Kenneth Polite specified that:
- these clawback policies must be in place at the time of the resolution, and
- the company must actually get the money back within the term of the resolution (typically, 3 years).
So, what happens if the company, despite best efforts, is unable to recover the money from the rogue wrongdoer in the allotted time frame? Subject to prosecutorial discretion, the company may receive a maximum of 25% of the total amount credited towards the monetary penalty.
At least a couple of concerns here:
A. How far up the corporate ladder will civil and criminal responsibility be assumed? When does supervisory authority translate into negligence or complicit liability? You may remember our recent blog on a WhatsApp recordkeeping debacle where the SEC penalized sixteen financial institutions for recordkeeping violations, many of them for using WhatsApp and other messaging platforms without keeping record of the original communications. Is the absence of effective internal policies and controls the same as the “willful blindness” or “gross negligence” of supervisors and even senior executives?
B. Will attempting clawback litigation be financially worth it? In many instances, corporations may simply pay the penalty instead of initiating costly litigation that may easily out-cost the DOJ’s offer of dollar-for-dollar credit. AAG Polite seemed to hint at this in his speech when he said that the goal was not to incentivize waste and that companies will have to make assessments about potential shareholder costs and possibility of clawback litigation success and weigh that against the value of recoupment.
Despite the concerns, there really is no good reason for a company to do the good work to:
- Draft and implement policies on incentives and clawbacks;
- Review executive contracts and compensation offers (including stock option grants and performance-based bonus plans) for appropriate clawback language; and
- Postpone any disbursement of bonus compensation if related to a whistleblower report or internal investigation until allegations are cleared.
We are subject matter experts in this area and would be pleased to assist you in these efforts. For further information and to further discuss, call or write us today!