The US Department of Justice Criminal Division has been increasingly vocal about what makes organizations’ ethics and compliance programs effective. This input on program effectiveness takes the form of guidance to prosecutors about what questions to ask when companies negotiate to resolve DOJ investigations into corporate wrongdoing on favorable terms. What does this guidance on program effectiveness mean in practice for E&C professionals? In the season 10 premiere of LRN’s Principled Podcast, host Susan Divers speaks with John Michelich, who retired last November after 35 years as a federal prosecutor with the Department of Justice’s Criminal Division. Listen in as they explore how the DOJ evaluates E&C programs, as well as best practices for companies settling misconduct investigations.
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John Michelich is a retired career prosecutor, who has served at the state, federal, and international levels for 45 years. A native of Illinois, John received his undergraduate education at Illinois Wesleyan University and then attended Drake University Law School in Des Moines, Iowa. For 10 years, John served as Assistant State’s Attorney and First Assistant State’s Attorney in Springfield, Illinois, where he prosecuted all types of state criminal felony violations including armed robbery, aggravated sexual assault and capital murder.
In 1988, John moved to Washington, DC where he began his 35-year career as a prosecutor with the US Department of Justice, Criminal Division. As a federal prosecutor, John has handled a wide variety of cases including child pornography and obscenity, narcotics distribution and all types of white-collar criminal cases. John served for 30 years as a prosecutor with the Fraud Section of the Criminal Division where he handled numerous cases including health care fraud, bank fraud, telemarketing fraud, commodities and securities fraud and violations of the Foreign Corrupt Practices Act. Because Washington DOJ lawyers are traveling prosecutors, John has handled grand jury proceedings or jury trials in more than two dozen federal districts nationwide from Guam and Hawaii to Puerto Rico, and California to New York. Over his long career, John has tried dozens of jury trials to verdict.
In 1998, the Justice Department sent John on loan to the United Nations’ International Criminal Tribunal for the Former Yugoslavia, also known as the War Crimes Tribunal, in the Hague, Netherlands, where he handled investigations and Tribunal proceedings involving crimes against humanity and serious breaches of the Geneva Convention that occurred during the Yugoslavian civil war.
For over 40 years, John has been an active instructor of Trial Advocacy and has appeared regularly on the faculty of the NITA Trial Practice course offered at Georgetown University Law Center. In addition, John has served as an Adjunct Professor at Georgetown, teaching Trial Practice courses to third-year law students. In his retirement, John is available as a legal consultant to trial lawyers to advise them in preparation for jury trials and to consult with corporate counsel concerning internal investigations and to advise them on how to approach the government when there are allegations of wrongdoing, especially foreign bribery.
John is licensed to practice in the states of Illinois and Iowa, and several federal courts, and is a licensed Solicitor of the Senior Courts of England and Wales.
Susan Divers is a senior advisor with LRN Corporation. In that capacity, Ms. Divers brings her 30+ years’ accomplishments and experience in the ethics and compliance area to LRN partners and colleagues. This expertise includes building state-of-the-art compliance programs infused with values, designing user-friendly means of engaging and informing employees, fostering an embedded culture of compliance and substantial subject matter expertise in anti-corruption, export controls, sanctions, and other key areas of compliance.
Prior to joining LRN, Mrs. Divers served as AECOM’s Assistant General for Global Ethics & Compliance and Chief Ethics & Compliance Officer. Under her leadership, AECOM’s ethics and compliance program garnered six external awards in recognition of its effectiveness and Mrs. Divers’ thought leadership in the ethics field. In 2011, Mrs. Divers received the AECOM CEO Award of Excellence, which recognized her work in advancing the company’s ethics and compliance program.
Mrs. Divers’ background includes more than thirty years’ experience practicing law in these areas. Before joining AECOM, she worked at SAIC and Lockheed Martin in the international compliance area. Prior to that, she was a partner with the DC office of Sonnenschein, Nath & Rosenthal. She also spent four years in London and is qualified as a Solicitor to the High Court of England and Wales, practicing in the international arena with the law firms of Theodore Goddard & Co. and Herbert Smith & Co. She also served as an attorney in the Office of the Legal Advisor at the Department of State and was a member of the U.S. delegation to the UN working on the first anti-corruption multilateral treaty initiative.
Mrs. Divers is a member of the DC Bar and a graduate of Trinity College, Washington D.C. and of the National Law Center of George Washington University. In 2011, 2012, 2013 and 2014 Ethisphere Magazine listed her as one the “Attorneys Who Matter” in the ethics & compliance area. She is a member of the Advisory Boards of the Rutgers University Center for Ethical Behavior and served as a member of the Board of Directors for the Institute for Practical Training from 2005-2008.
She resides in Northern Virginia and is a frequent speaker, writer and commentator on ethics and compliance topics. Mrs. Divers’ most recent publication is “Balancing Best Practices and Reality in Compliance,” published by Compliance Week in February 2015. In her spare time, she mentors veteran and university students and enjoys outdoor activities.
Intro: Welcome to the Principled Podcast brought to you by LRN. The Principled Podcast brings together the collective wisdom on ethics, business and compliance, transformative stories of leadership and inspiring workplace culture. Listen in to discover valuable strategies from our community of business leaders and workplace change makers.
Susan Divers: The Department of Justice Criminal Division has become increasingly vocal about what makes an organization's ethics and compliance program effective. This input on program effectiveness takes the form of guidance to prosecutors about what questions to ask when companies negotiate to resolve DOJ investigations into corporate wrongdoing on favorable terms.
So what is this guidance on program effectiveness mean in practice for E&C professionals? How is it taken into account by DOJ? Today we're very fortunate to have a former distinguished prosecutor who has sat across the table for many years through companies settling misconduct investigations.
Hello and welcome to another episode of LRN's Principled Podcast. I'm your host, Susan Frank Divers, and today I'm joined by John Michelich, who retired last November after 35 years as a federal prosecutor with the Department of Justice Criminal Division. During a 45-year career as a prosecutor, John had only two clients. One was the US Department of Justice, and the other was the people of the state of Illinois. John, thank you so much for your service and thank you for coming on Principled Podcast.
John Michelich: Hi Susan. Thanks very much for inviting me to your podcast. You're correct, I recently retired from the Department of Justice after 35 years with the fraud section of the criminal division in Washington. And I should note from the outset that I do not and cannot speak for the department or the fraud section. My views are entirely my own and my comments are based only on my experience in handling cases at the fraud section in the past. And certainly the department's policies and procedures may have changed since I left the department.
But by way of background, for 35 years, I prosecuted almost every type of federal criminal case that the fraud section handles, including violations of the Foreign Corrupt Practices Act. As a traveling prosecutor from Washington, I handled either grand jury proceedings or jury trials in about 24 separate federal districts across the country. Now, I've also been an active teacher of trial advocacy and worked as an adjunct professor of trial practice at Georgetown Law Center. Now I'm doing some legal consulting, advising lawyers in preparation for trial, proving their particular trial skills, reviewing the law of evidence, witness preparation, and designing demonstrative and pedagogical trial exhibits. I'm also available to consult with corporate counsel and advise them as to how to approach the government when there are allegations of wrongdoing, especially foreign bribery.
Anyway, again, it's a pleasure to be with you today.
Susan Divers: Great. John, let's start off with the basics. Even though our audience is largely from the E&C community, not all of us have had the experience of being at a company investigated by the government for potential criminal misconduct, fortunately. How does such an investigation start, what's the FBI's role and can whistleblowers play a role?
John Michelich: Well, investigations can start in a number of ways. First, I should point out that unlike other criminal offenses, the fraud section of the criminal division in Washington has exclusive jurisdiction over violations of the Foreign Corrupt Practices Act. Now, this is because the department decided that it is important to achieve uniformity of enforcement and outcomes in this area of the law throughout the country. Investigations of almost all other criminal in violations can originate in any of the 94 US attorney's offices nationwide, but not FCPA violations. So attorneys in the fraud section will be the first to learn about potential FCPA violations and will decide whether to open an investigation.
Now, you asked about whistleblowers. Yes, indeed. Many investigations do begin with information provided by a whistleblower. The SEC I know has a rather robust whistleblower program where persons with knowledge of potential violations can report what they know. The SEC keeps a record of all such contacts and whistleblowers can request anonymity. The SEC then may decide to send that information to the criminal prosecutors in the fraud section for consideration.
Sometimes a whistleblower will contact the FBI first. That's very rare, but not impossible for the whistleblower to contact the fraud section first. But yes, an investigation can begin based on a whistleblower complaint. And one advantage here is that investigators have a ready-made witness who can point them in the right direction. A whistleblower with intimate insider knowledge can provide information to move the investigation forward that otherwise might take months of work. Of course, if the whistleblower has requested anonymity, the investigators will not be able to sit down with that person and conduct a thorough interview. Instead, they would have to go out and take investigative steps to corroborate the information.
Now, you asked about the role of the FBI. Well fraud section attorneys work with a special squad of FBI agents who is assigned to investigate FCPA violations. In practice, when the fraud section learns of a potential violation, either from an SEC whistleblower or from company counsel in a self-disclosure, for example, the DOJ attorney will ask for an FBI agent from that squad to be assigned to the case. Many times prosecutors will ask the FBI to take some preliminary investigative steps, such as witness interviews or a review of documents, before formally opening the investigation just to be sure that the investigation is properly predicated. That is that there is sufficient probable cause to proceed.
Now, once the criminal investigation is open, the FBI works closely with the assigned prosecutor to develop evidence in the case. Now, in my view, the two most important types of evidence are witness interviews and financial documents. But witnesses cannot be compelled to appear for interviews, of course, so the investigation depends on their voluntary cooperation where possible. But DOJ attorneys usually must obtain financial documents, such as bank records pursuant to a grand jury subpoena.
Susan Divers: John, that's very helpful and gives us very useful background. To help clarify further, can you explain what the criminal division of DOJ does compared to the SEC, the CFTC or other regulatory agencies, and are there joint investigations from time to time?
John Michelich: Sure. Well, in general, the criminal division prosecutes criminal cases, and as you indicated, the SEC is the regulatory agency with civil authority over corporations that issue securities. The SEC also investigates violations of the FCPA, of course, so many times the DOJ and SEC conduct what appears to be a joint investigation. The primary function of DOJ prosecutors is to prosecute criminal cases and obtain convictions. Now, this rarely happens in the FCPA arena, I mean criminal convictions, especially when only corporations are under investigation because the preferred resolution seems to be the deferred prosecution agreement or a DPA. This has caused some old school prosecutors sometimes to say that government lawyers have now become merely regulators of corporate conduct and not really prosecutors. But it really is a hybrid function in this area.
Now I understand your audience is made up primarily of corporate compliance officers, and this is where the DOJ guidance about evaluating corporate ethics programs comes in, as the DOJ, almost more than any other part of the government sees corporate compliance programs up close. This is where prosecutors are called upon to assess corporate compliance programs that were in place before the alleged offense conduct occurred. So company counsel should be prepared to make an initial presentation to department lawyers about the target company's existing compliance program very early in the process and before the government decides whether the company will be charged with a crime. Specifically, company lawyers should focus on first whether the compliance program was well-designed in the first place. Second, how and whether the program was being applied in practice and with adequate resources. And third, examples of how the program has worked in practice. That is, how did it detect and prevent ethical lapses in the company? These, quote, unquote, fundamental considerations are explained in detail in the department's March 2023 policy called Evaluation of Corporate Compliance Programs, that's set forth in the justice manual at section 9-28.800.
Now, it is just a fact that most FCPA cases result in a corporate plea or a deferred prosecution agreement in which the parties agree that the prosecution of the case is to be deferred while the company remediates its conduct and implements new compliance programs. CPA cases rarely go to trial except where an individual is charged. Now, obviously, you can't put a company in prison. This has led to criticism of the department that it just puts the company on probation for a while and any penalties are simply a cost of doing business, while the individuals who actually paid the bribes are never brought to justice. So this has led to changes in DOJ policy over time, specifically in memorandum from the Deputy Attorney's General, encouraging companies to disclose the individuals who are responsible for the crimes and directing prosecutors to charge the individuals with criminal offenses, whenever possible.
Susan Divers: That's very helpful too in understanding the process. So at what point does a prosecutor like yourself get involved, and at what point do discussions start with the company involved?
John Michelich: Well, if the matter begins with a whistleblower complaint, a DOJ prosecutor will be assigned to begin the investigation and lay the predicate for an investigation. Most often, however, investigations begin when a company makes a voluntary disclosure to the department. Usually prosecutors first learn of the matter when they get a letter or even a phone call from counsel for the corporation. Obviously before writing such a letter to the DOJ, company lawyers should have conducted their own internal investigation to some extent so they can be ready to speak to the DOJ attorneys from a position of knowledge.
However, I do recall one instance in which company counsel called to say that he thought bribes were paid. He didn't know who paid them or how much, but he wanted the department to know that he was now conducting an internal investigation, the results of which will soon be voluntarily given over to the department. Now, while this approach is unusual, at least counsel was on record with the department so the company could claim credit for being the first in the door in case some whistleblower decides to come forward in the meantime.
So the deputy chief of the fraud section in charge of the FCPA will assign a prosecutor to the matter, to begin consideration of the information from the company. And most of the time, DOJ attorneys will schedule a meeting with company counsel right away to discuss the matter and how the company plans to make a further disclosure to the government.
Susan Divers: So what happens during these discussions? Who's typically present and what's the department's goal, what's the company's goal, and how long does this process generally take?
John Michelich: It could take many months. Usually the deputy chief of the fraud section and the assigned DOJ attorney, we'll attend the meeting, maybe accompanied by an FBI agent and a paralegal. DOJ prosecutors will want to know how soon the company can begin to make disclosure and how soon key witnesses will be made available. The FBI will want to identify all the players, all potential witnesses, and to obtain copies of all relevant financial records.
The department's goal, however, is to resolve the matter as quickly as possible and to identify the individuals who were responsible for making the corrupt payments. Another goal is to assess the efficacy of the company's current compliance programs and to identify its weaknesses that may have led to the violations. Now, this analysis will follow the DOJ guidance on evaluating compliance programs that I mentioned earlier.
Now, as I indicated, company attorneys and compliance officers should be prepared to address the company's existing compliance program with reference to the three fundamental questions I outlined in the department's guidance. During discussions leading up to a resolution of criminal charges against the company, it's likely that the company will be required to adopt changes or to draft an entirely new compliance program to address those fundamental questions or to correct flaws in the program that were identified as the cause of the company's problems.
I think most companies also want to resolve the matter quickly so as to minimize the damage to its reputation and the financial consequences. By the way, sentencing guidelines that are applicable to business organizations takes a similar approach when calculating the guideline range for sentencing a convicted corporation. But the sentencing guidelines come into play only after the company has pleaded guilty to a criminal offense.
This is a complicated area, but in general, the guidelines provide some leniency for companies that, first, had an effective compliance program in place when the offense was committed. Second, they promptly reported the violation to the government. Third, they've fully cooperated with the investigation. And four, they demonstrated an acceptance of responsibility for the criminal conduct. So the guidelines give credit where a company has an effective compliance program, but the DOJ guidance defines what the effective program looks like. So if your company's compliance program meets the DOJ definition, then you're more likely to get leniency in the sentencing guidelines.
Susan Divers: That's very helpful, because as you note, that can be a very complicated area. But if I hear you correctly, the sentencing guidelines only kick in if the company actually pleads guilty and a very small percentage actually do. I think stats I've seen it's less than 5%. So let's go back to this process, which you're doing an excellent job of explaining. So how are these discussions between the Department of Justice and the company ultimately resolved?
John Michelich: Well, first, the discussions really are a one-way flow of information, from the company to the government. I always told company counsel that I'm here to listen, just to listen. Tell me everything you want me to know. If the company really wants credit for cooperating, it must disclose everything and not hold anything back. If government lawyers find the company withheld important information or minimized its wrongdoing or tried to protect somebody, the company will not get credit for cooperating. In other words, the company must be totally open and honest or all bets are off.
Let me use one example of a case I handled. The first case I handled, and certainly the largest one, was an investigation into the activities of one of the world's largest oil field services firms. Briefly, the case involved corrupt payments made by a company subsidiary totaling over $4 million in the form of so-called commissions to a well-connected consulting firm in order to secure a lucrative contract for oil field services in the Republic of Kazakhstan. Now, after a thorough internal investigation, outside company counsel met with me and other government lawyers numerous times over many months during which the company fully cooperated and voluntarily disclosed voluminous information in the form of witness statements and internal documents.
The department filed a criminal information in the Southern District of Texas charging the company with conspiracy and violations of the FCPA. But on the same day, we filed a deferred prosecution agreement with the parent company under which the company agreed to engage a corporate compliance monitor to review the company's compliance policies and procedures during the two years of the DPA. Now the subsidiary company that was primarily responsible for the corrupt payments pleaded guilty to a criminal information and agreed to pay a fine of $11 million. The subsidiary company also paid civil penalties of $10 million to the SEC and agreed to disgorge all profits from the contract in the amount of $24 million.
Now, from the company's standpoint, the resolution was an expensive lesson, but the successful result was due largely to the honest and complete cooperation by the company's outside counsel that engendered trust with the government. In any event, I think this case was one of the first cases where the government required a company to engage a monitor, and it was a very successful monitorship. And as a result, the company is a much healthier company today than it was in 2007.
Of course, I handled many other cases since then, but I just used this one as an illustration of successful voluntary disclosure, a deferred prosecution agreement, and a compliance monitor.
Susan Divers: Yeah, that's a very helpful example to see how things work in practice as allegations progress to a settlement. So roughly, in your experience, how many investigations are resolved by settlement and how many actually go to trial?
John Michelich: Well, as I said before, allegations against a company almost never go to trial. When individuals are identified and charged, however, they may decide not to plead guilty since prison terms are a likely result and may decide to take their chances with a jury trial. But I think I could count the number of such trials on the fingers of one hand.
Susan Divers: We're getting closer to the end, but I just wanted to go back for a minute to the Department of Justice guidance on effective ethics and compliance programs because that is very important to ethics and compliance professionals. And the criminal division started issuing that guidance some years ago, starting with the Foreign Corrupt Practices Act guide that they published with the SEC and now continuing with a focus on effective ethics and compliance programs. Why did a government department, such as DOJ, that doesn't have regulatory authority take this approach?
John Michelich: Well, the practical answer is that the government always wants successful resolutions and finality without further litigation. But the public policy answer is that effective ethics and compliance programs help to achieve the worthy public policy goal of fair competition and market integrity, which is the whole purpose of the FCPA in the first place. Implementation of an effective compliance program is always a condition of probation or the deferred prosecution agreement. If the term of probation or the DPA is say, three years, the company must show that it has complied with all the terms and conditions of the sentence imposed by the court during that time.
Prosecutors always want to ensure that a defendant successfully completes the term of probation or a DPA so that the case doesn't come back before the judge. That is, they want finality. Hence, an effective corporate monitor will be able to certify that the company has adopted such a program and can show specifically what policies have been adopted to prevent future violations of the kind that got them into trouble in the first place. Obviously, this helps achieve the worthy goal of market integrity.
So in the case I just described, the general counsel approached me after the case was successfully completed and the DPA was dissolved and said that his company was a much healthier company as a result of that experience.
Susan Divers: So basically, the guidance helps determine what a healthy compliance program looks like and truly serves as guidance as in the example you just gave. How does it differ from policies, such as the one announced in September by the Deputy Attorney General, Lisa Monaco, about personal responsibility for misconduct?
John Michelich: Well, Deputies Attorneys General have issued new policies because the department's corporate prosecution policies have evolved over time. Some people say it's because the deputy wants his or her name on a new policy memorandum. But in any case, in my experience, the evolution of department policy includes, first the recognition that companies must come forward early, cooperate completely and honestly, and disclose their wrongdoing if they wish to receive a benefit for their cooperation. Then came the requirement that companies must demonstrate their good faith by agreeing to adopt new and more robust ethics and compliance programs that will withstand scrutiny by a monitor and the department. Then came the recognition that individuals pay the bribes and commit the crimes, and companies must disclose the names of those individuals and all evidence against them. The recent memorandum by Deputy Attorney General Monaco is just the latest in this policy evolution.
Susan Divers: That's very helpful, John. Again, as a former prosecutor, what are some of the dos and don'ts that companies should consider if there are misconduct investigations by the Department of Justice? What's your hard-earned advice to ethics and compliance professionals in this area?
John Michelich: Well, first, as a prosecutor, I was always impressed by a completely open and honest effort to disclose wrongdoing and to do so at the earliest possible time. I did have one case where company outside counsel attempted to split hairs by arguing that the indirect payments made to the foreign government really were not bribes at all under the law. Counsel's approach appeared to be entirely disingenuous. Of course, I don't know if counsel was following instructions from the company or not, but in any case, after several months of arguing back and forth, the company decided to retain new outside counsel and the case was successfully resolved.
Susan Divers: Well, that sounds like a good resolution. Can you give us one or two examples, sanitized of course, of companies that got credit for having solid ethics and compliance programs, and some that did not?
John Michelich: Well, there's some of both. In my experience, however, cases are resolved with deferred prosecution agreements and the companies are required to engage a compliance monitor. Because the monitor was involved in the adoption of a new compliance policy, to the extent the company agreed to adopt the recommendation of a monitor, then the company will get credit for adopting the new and more robust compliance program. In short, since the monitor is involved, the company will almost always successfully comply with the terms and conditions of the DPA. Now, that's the monitor's job after all. Obviously only the most recalcitrant and stubborn company officers would refuse to follow the recommendations of a monitor so they can successfully complete the conditions imposed by the judge.
Susan Divers: Well, that makes total sense. John, clearly this is a conversation we could be having all day, but we're out of time for now. Thank you so much for joining me on this episode.
John Michelich: Thanks, Susan. It was my pleasure.
Susan Divers: My name is Susan Divers and I want to thank you all for listening to the Principled Podcast by LRN.
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