DOJ Lifts the Curtain on Evaluating Claims of “Inability to Pay”

Last week, the Department of Justice announced its latest installment of expanded policies meant to provide more transparency in how the Criminal Division will evaluate corporate compliance and culpability. This New Guidance, entitled “Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty” (the “Guidance”), specifically addresses the Criminal Division’s approach to criminal fines and monetary penalties and follows DOJ’s May guidance on the “Evaluation of Corporate Compliance Programs” and its October 2018 guidance on “Selection of Monitors in Criminal Division Matters.”¹ Taken together, these announcements reflect a deliberate attempt to reassure companies that the Criminal Division will treat them fairly on issues ranging from the size of any penalty to whether a monitor is imposed and represent a trend toward a more balanced message on corporate enforcement generally.

Speaking on October 8, Assistant Attorney General Brian A. Benczkowski explained that the Guidance is meant to empower companies to “make wise decisions about how to approach us when things [] go wrong.” He made clear that “[a]ll of these initiatives – on inability to pay, compliance, and monitorships – are part and parcel of our broader mission at the Criminal Division to establish more predictable guideposts by which companies can gauge expectations, conform their conduct, and act as responsible corporate citizens.”²

For the first time, the Guidance describes in detail the Criminal Division’s process for reviewing and approving fine and penalty reductions for inability to pay. If the DOJ attorneys working on a case believe that a reduction is warranted to avoid jeopardizing the continued viability of a business and/or to pay restitution to victims, the proposed reduction will be submitted to their Section Chief. Reductions of 25% or greater must obtain approval from the Assistant Attorney General for the Criminal Division.

The Guidance sheds light on the breadth of corporate information that the Criminal Division should consider when making its determinations of inability to pay, which can help companies plan for settlement negotiations. The Guidance puts companies on notice of (and requires prosecutors to look at) a wide variety of types of assets and income that they should expect the government to review. The Guidance also emphasizes that the “inability to pay” determination is not the threshold question, but comes only after other aspects have been agreed to. “[T]he parties must first reach an agreement as to both the form of a corporate criminal resolution (e.g., non-prosecution agreement, deferred prosecution agreement, or corporate guilty plea) and the monetary penalty that is appropriate based on the law and facts” before DOJ will consider any arguments regarding the company’s inability to pay. The Guidance includes as an appendix an Inability-to-Pay Questionnaire, which broadly outlines the categories of information that will form the basis for the determination, including cash flow projections, future profitability, insurance agreements, and liens or encumbered assets. The Guidance recognizes that the government will typically consult with an accounting expert in order to understand the business’s viability. The burden of demonstrating inability to pay remains on the company throughout the process.

The Guidance next lists the statutory factors that courts consider when determining whether to impose a criminal fine when a case does not reach settlement. The Guidance also notes that US Sentencing Guidelines inform courts’ assessments of criminal fines and authorize courts to reduce a fine against a company where “the organization is not able and, even with the use of a reasonable installment schedule, is not likely to become able to pay the minimum fine required.” The reductions imposed by courts “shall not be more than necessary to avoid substantially jeopardizing the continued viability of the organization.”

In addition to considering information submitted in the Company’s Inability to Pay Questionnaire, DOJ will consider the following additional factors:

• Background on Current Financial Condition: DOJ will consider the circumstances that gave rise to the company’s current financial condition, such as investments in improvements, acquisitions, or significant third-party transactions. Whether leadership has recently removed capital from the company in the form of dividends, distributions, loans, or other compensation is also relevant.
• Alternative Sources of Capital: DOJ will consider the company’s ability to raise capital, as well as the existence of insurance or indemnification agreements.
• Collateral Consequences: DOJ will consider a variety of “collateral consequences” that may arise from the imposition of a significant criminal penalty. Examples include “impacts on an organization’s ability to fund pension obligations or provide the amount of capital, maintenance, or equipment required by law or regulation” and “whether the proposed monetary penalty is likely to cause layoffs, product shortages, or significantly disrupt competition in a market.” Certain collateral consequences are typically not considered, such as the effect on dividends, executive compensation, and hiring and retention.
• Victim Restitution Considerations: DOJ “must” consider how the imposition of a penalty will affect the company’s ability to pay restitution to any identified victims.

The Guidance reflects the more pragmatic approach the Criminal Division had already taken in recent resolutions in which it had reduced penalties to accommodate companies’ inability to pay. For example, in December 2018, a plea agreement between IAV GmbH and DOJ resulting from the Volkswagen-emissions matter resulted in a reduced penalty based upon the company’s “inability to pay a higher fine amount without jeopardizing its continued viability.” Similarly, a March 2018 plea agreement between Transport Logistics International and DOJ explained that a penalty exceeding $2 million dollars “would substantially jeopardize the continued viability of the Company.” DOJ’s consideration of inability to pay is not limited to voluntary disclosures. In the largest bribery case prosecuted by the DOJ to date, DOJ agreed to conduct an inability to pay analysis after the announcement of a $4.5 billion penalty assessed against Odebrecht S.A.

¹ See DOJ Issues Expanded Guidance for Prosecutors in Evaluating Corporate Compliance Programs.

² The new initiative builds upon existing guidance that informs DOJ’s corporate prosecutions, such as Justice Manual 9-28.300(A)(8), 9-28.1000, 9-28.1100.