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Clifford Chance

Regulatory Investigations and Financial Crime Insights

Monitors in national security cases: What is trending for 2019?

Over the past 15 years monitors have been used in an increasing range and variety of national security cases, particularly violations of export controls and economic sanctions. Monitors provide an oversight function and are often imposed as a condition of a settlement agreement or a negotiated plea agreement.

In some national security cases monitors are used as a preventive measure without any alleged misconduct or criminal wrongdoing by the business entity. The Committee on Foreign Investments in the United States (CFIUS) imposes monitors in mitigation agreements when national security risks exist, but those risks can be managed by altering certain conditions of the investment, such as the degree of access non-US parties have to the US target's information.  

The motivation behind the trend of imposing monitors in an increasing number of cases can be tied to a number of factors:

  • The goal of national security settlements and agreements is to enhance future compliance and develop the regulators' trust in the corporate subject by identifying systemic compliance weaknesses rather than individual compliance failures, addressing those weaknesses through process improvement, and providing confidence-building insight to regulators on those improvements;
  • Prosecutors and courts do not have the resources to engage directly with companies to implement compliance improvements and mitigation measures;
  • While they may be experts in the relevant law and national security policies, regulators and prosecutors do not usually have expertise in translating legal imperatives into compliance processes within a corporate setting; and
  • Providing regulators and prosecutors with direct access to the day-to-day workings of corporate compliance would likely hinder the intent of compliance agreements to identify and address compliance process weaknesses. Prosecutors and regulators represent external enforcement, thus by definition could not foster the necessary collaborative internal environment for systemic improvement.

Only an external monitor has the essential detachment from the regulator and the subject knowledge to make judgements about appropriate systemic change, the insight into industry practices and regulatory expectations to guide that change, and the regulator-supported weight within the company to push when that change may be painful or costly.

However, concerns regarding conflicts of interest, transparency and cronyism led the US Department of Justice (DOJ) to issue several guidelines on when to impose and how to select a monitor, including most recently in October 2018, with the Memorandum from Brian A. Benczkowski, Assistant Attorney General, Selection of Monitors in Criminal Division Matters. Without certain constraints, monitorships can be inefficient and may even hinder compliance development in some cases as well as other concerns:

  • Informal selection processes can result in the appointment of less qualified monitors;
  • An unclear scope of work can lead monitors to expand their oversight role beyond what the regulatory agency intended or had authority to impose;
  • Incentives for monitors to devote more than reasonable effort to their oversight role or to extend it beyond the originally intended duration can force companies to divert scarce resources away from tangible compliance improvements in favor of managing the monitor; and
  • Placing too much authority in a monitor's hands can encourage the company to structure its efforts around satisfying the monitor rather than the broader objectives of sustainable improvement in corporate compliance.

So, what does this all mean for the use of monitors in national security cases in 2019 and going forward?

We believe that the use of monitors will continue to expand in national security cases, with some necessary but slight rationalization from the DOJ guidelines. Monitors simply provide too many advantages for prosecutors and regulators, not least of which is the appearance of ongoing oversight. We believe the growth will be particularly prominent in CFIUS cases, where increasing political scrutiny and caseloads will almost inevitably result in more mitigation agreements with more independent monitors. At the same time, we expect a less pronounced but still tangible move towards more constrained monitorships. Prosecutorial monitorships overseen by DOJ will likely adhere to the relevant guidelines and over time establish more formal selection boards and monitor review mechanisms.

At the same time, we would encourage companies to work with prosecutors/regulators to agree on the conditions we believe lead to a successful monitorship, including formal and transparent selection criteria that encourage selection of an informed monitor with appropriate expertise; a well-defined scope of work designed to maintain both the monitor's and the company's focus on the bigger compliance picture; and effective mechanisms for empowering the company to challenge monitor actions if they are truly detrimental to the broader purpose of compliance.