United States: DOJ Issues Guidance Regarding Business Entities' Inability To Pay Corporate Fines And Penalties: Key Takeaways

US Sentencing Guidelines and sentencing laws address the inability to pay fines and penalties in some respects, but do not provide prosecutors with specific guidance. To fill this gap, on October 8, 2019, Assistant Attorney General Brian Benczkowski issued a memorandum entitled "Evaluating a Business Organization's Inability to Pay a Criminal Fine or Criminal Monetary Penalty."

The Memo establishes a framework for prosecutors to use when (i) considering a corporate defendant's claim that it is unable to pay a mandated fine or penalty and (ii) reducing or providing extended payment terms for the otherwise required fine or penalty.¹ The Memo also states that other "severe" effects, aside from an inability to pay, may also warrant a discount. Under the guidance, prosecutors may adjust a fine "based on the existence of a significant adverse collateral consequence that, while severe, may not necessarily threaten the continued viability of the organization."

In a speech, Benczkowski stated that the Memo will "promote transparency" and "ensure that prosecutors stick to a more uniform set of considerations [so that] companies looking to resolve matters have greater insight into how prosecutors think."

Judicial considerations in imposing criminal fines and penalties

When issuing fines and penalties against corporate defendants, courts are permitted by statute and by Sentencing Guidelines to consider a criminal defendant's ability to pay prior to assessing a fine. Key statutory considerations include:

1. the company's income, earning capacity, and financial resources
2. the burden the fine will impose on the company or any others
3. whether the fine will impact the company's ability to pay restitution and
4. any remedial actions the company has taken against individuals in the organization responsible for the offense and to prevent its recurrence.

Similarly, the Sentencing Guidelines establish a detailed methodology for calculating fines and penalties, while providing judges with discretion to deviate from this methodology in appropriate circumstance, including the defendant's inability to pay. However, until the DOJ issued the Memo, prosecutors and defendants had little guidance on how such claims should be evaluated.

DOJ guidance provides prosecutors with discretion to adjust fines and penalties

In seeking a reduction of fines and penalties, the corporate defendant bears the burden of establishing that it is not able to pay an otherwise mandated fine or penalty. As a threshold matter, the DOJ will not consider an organization's inability-to-pay claim unless the DOJ and defendant agree to the form of criminal resolution (e.g., guilty plea, deferred prosecution agreement, etc.) and the appropriate fine level "based on the law and facts, irrespective to pay considerations." The organization must also provide the DOJ with a completed inability-to-pay questionnaire, along with the associated substantiating documents.

If those prerequisites are satisfied, the Memo instructs prosecutors to consider the following factors in determining whether the corporate defendant is truly unable to pay the calculated fine or penalty:

• The company's financial condition. The Memo directs prosecutors to assess what factors gave rise to the company's financial condition. For instance, is the company's inability to pay due to ownership's or management's payment of dividends, distributions, loans, or other compensation, investments in facilities expansion, capital improvements, or acquisitions, or related-party transactions?
• Alternative sources of capital. Prosecutors are required to determine whether the company has the ability to raise capital to pay for the fines or penalties through existing or new credit facilities or the sale of assets or equity. Prosecutors are also instructed to examine the availability of insurance or indemnification agreements, booked reserves, acquisition or divestment plans, and company projections.
• Collateral consequences. Prosecutors must also consider any significant adverse collateral consequences that are likely to occur due to the imposition of a fine or penalty exceeding the company's ability to pay. Specifically, the Memo instructs prosecutors to consider whether the proposed fine or penalty will negatively impact the organization's ability to fund its pension obligations or cause layoffs, product shortages, or disrupt competition in the market.However, the Memo also clearly states that certain collateral consequences, such as adverse impacts on growth, future opportunities, planned or future product lines, future dividends, unvested or future executive compensation, and planned or future hiring or retention are not appropriate to consider.
• Victim restitution. Finally, the Memo requires prosecutors to consider whether the imposition of a fine or penalty will impair the organization's ability to pay restitution to any victims.

If, after considering the organization's financial disclosures and all relevant factors, the prosecutor determines that the organization is truly unable to pay the otherwise appropriate criminal fine or penalty, the Memo permits a prosecutor to seek approval for an adjustment to the calculated fine or penalty to the extent necessary to avoid (1) threatening the organization's continued viability and/or (2) impairing the organization's ability to make restitution to victims. The adjustment may involve the reduction of the penalty or fine or the establishment of an installment schedule to facilitate payment over a reasonable period of time. The recommended adjustment is subject to approval by the prosecutor's supervisor, and if it is more than 25 percent from the otherwise agreed fine or penalty, the Assistant Attorney General for the Criminal Division must approve it.

Other severe consequences

The Memo also states that other "severe" effects, aside from an inability to pay, may also warrant a discount. Under the guidance, prosecutors may reduce a fine "based on the existence of a significant adverse collateral consequence that, while severe, may not necessarily threaten the continued viability of the organization." The adjustment should be no more than necessary to avoid causing the severe adverse collateral consequence.

Since the Memo does not flesh out what would constitute a "severe" consequence, room for advocacy exists and it is important to take a holistic view of how the fine or penalty may disrupt current operations or impact future growth plans.

Takeaways

The Memo is the latest guidance to be issued by the DOJ to incentivize companies to self-report their violations and cooperate with the DOJ's investigations and recommended remedial actions. Organizations that are seeking to resolve criminal charges and that cannot afford to pay otherwise mandated criminal fines and penalties now have a clearly defined framework for making an ability-to-pay argument. Permitting prosecutors to recommend lower fines or penalties in these circumstances creates greater latitude to balance the importance of deterring non-compliant organizations, providing restitution to victims, and avoiding unnecessary collateral consequences to the organization, its employees and shareholders, and the public.

The provision of such guidance is part of a growing practice by the DOJ to "demystify[] the considerations commonly confronted by white-collar prosecutors" and provide companies with "the information and security they need to invest fully in compliance on the front end, and to make good decisions in the face of misconduct on the back end." The Memo comes on the heels of the DOJ's April 2019 guidance on how to evaluate corporate compliance programs which DLA previously analyzed here. That guidance incentivizes companies to design and implement effective compliance programs so that companies avoid, identify, self-report, and remediate regulatory and statutory violations in exchange for leniency. As Benczkowski explained, these guiding principles "are all different threads of a singular collective push: to incentivize companies to prevent on the front end the very problems we would have to prosecute on the back end."

Organizations interested in learning more about this topic should contact any of the authors.

Footnotes