SDNY announces new corporate enforcement and voluntary self-disclosure program

The Program – which SDNY reports was refined following engagement with corporations, attorneys, and investors – establishes guidelines and treatment for companies that voluntarily disclose certain classes of criminal activity to SDNY. SDNY has announced that, under the Program, eligible companies that self-report qualifying illegal activity, cooperate fully, commit to ongoing reporting of criminal conduct for three years, and remediate harm caused by misconduct “will have a clear, agreed path to a declination.” Within two to three weeks after receiving a self-report from a qualifying company, SDNY expects to issue a conditional declination letter. If SDNY assesses that a company has cooperated with its investigation, remediated harm, and provided restitution to victims, it will issue a final declination notice and conclude the matter without criminal charges. 

Under the terms of the Program, “companies that learn of illegal activity but choose not to self-report face significant risk, including the risks of placing individual interests over fiduciary obligations, the interests of victims, and the public interest generally,” and SDNY “will treat decisions not to self-report as weighing heavily against any future declination request.” 

SDNY’s announcement of the Program includes an affirmative statement that it “already has extended a conditional declination letter to a self-reporting company within a month of that company making a disclosure.” As announced, the Program builds on the broader Department of Justice (DOJ) framework for voluntary self-reporting articulated in its Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP). 

Eligibility Requirements

SDNY has announced that it will “decline to prosecute an eligible company for criminal conduct when: (i) the illegal activity is eligible to be self-reported under the program; (ii) the company timely and voluntarily self-discloses the illegal activity to the SDNY; (iii) the company commits to full cooperation and thereafter fully cooperates with SDNY’s investigation; and (iv) the company commits to remediating the illegal activity and thereafter fully remediates the illegal activity, including by making restitution to victims.” 

First, the conduct must fall into one of the following four categories of illegal activity: (1) fraud by a company or corporate entity, or an employee, officer, director, or agent of such an entity; (2) fraud in connection with a securities, commodities, or digital asset offering, or the trading or brokering of securities, commodities, or digital assets; (3) false statements or fraud upon an auditor or federal regulator of financial markets; or (4) other willful violations of the Securities Act of 1933, Securities Exchange Act of 1934, Commodity Exchange Act, Investment Advisers Act of 1940, and Investment Company Act of 1940 that undermine the integrity of financial markets or harm customers, competitors, or market participants.

Second, the company must provide timely and voluntary self-disclosure. Under the terms of the Program, the company must self-report before it learns of the existence of a government investigation and before it receives a grand jury subpoena or document request from a government agency. Furthermore, the self-report must be made independent of any pre-existing obligation to report to DOJ (for example, under a deferred prosecution agreement) and must be substantive and contain all known facts about the illegal activity, the individuals involved, and any affected parties. Any delay in disclosure, particularly when it is perceived to be strategic or self-serving, may result in disqualification under the Program. Notably, knowledge of a whistleblower complaint to a government agency, press reporting of the illegal activity (so long as such reporting does not document a government investigation into the illegal activity), and a prior self-report to another government agency will not disqualify a company from receiving a declination letter under the Program. 

Third, the company must engage in full cooperation with SDNY to obtain a final declination letter. The Program provides a non-exhaustive list of factors to assess full cooperation, including, among other things, timely and complete disclosure of all known, non-privileged information (including all documents under the company’s possession, custody, or control) regarding the illegal activity; identification of all individuals involved in the illegal activity and witnesses who may have material information regarding the matters under investigation; and preserving from all relevant custodians all records and communications, including those located in ephemeral messaging applications. Full cooperation also requires self-reporting companies to provide SDNY “all credible evidence or allegations of criminal conduct by the company or any of its employees that relates to violations of US laws” for a three-year period.

Fourth, the company must commit to remediate the harm caused by illegal activity committed by the company’s agents or for the company’s benefit. Remediation efforts may include, among other things, changing the company’s compliance program and disciplining any employee, officer, director, agent, customer, or investor knowingly and directly involved in the misconduct. 

Fifth, the company must commit to make restitution to all parties injured as a result of illegal activity committed by the company’s agents or for the company’s benefit. This restitution obligation extends to all those who qualify as a “victim” and who have suffered a loss as defined by federal law relating to restitution. SDNY will not require a company to pay restitution to individuals or entities that have committed misconduct, as determined to the satisfaction of SDNY by at least a preponderance of evidence. 

Sixth, the existence of aggravating circumstances will render a company ineligible for a declination under the Program. SDNY will treat the following as an aggravating circumstance: “any nexus to terrorism, sanctions evasion, foreign corruption, sex trafficking, human trafficking and smuggling, international drug cartels, slavery, forced labor, or physical violence, including the knowing or reckless financing of these activities or laundering of funds in support of these activities.” SDNY will not, however, “treat the seriousness of the offense, the pervasiveness of the misconduct within the company, the severity of harm caused by the misconduct, past criminal adjudications, or the involvement of senior leaders as an aggravating or disqualifying circumstance.”

Benefits of Self-Reporting 

Companies that self-report and are deemed eligible for a declination pursuant to the aforementioned criteria can, at the sole discretion of SDNY, expect to receive the following four benefits:

First, SDNY will decline to prosecute the company or any of its direct or indirect affiliates, subsidiaries, or joint ventures for acts or offenses the company committed in furtherance of the illegal activity. However, the declination letter will provide no prosecutorial protection for individuals, even those employed by or affiliated with the company. Additionally, while the declination letter does not bind other law enforcement agencies or government regulators, SDNY “will bring to the attention of those authorities the company’s self-reporting and the nature and quality of the company’s cooperation and remediation.”

Second, the company will face restitution obligations, not financial penalties. 

Third, there will be no required monitorship of the company. 

Fourth, SDNY will issue a prompt conditional declination to the company upon determining that the company is eligible for a declination under the Program. Qualifying companies that self-report can expect a conditional declination letter within two to three weeks of self-reporting. 

Consequences of Non-Reporting

A company that fails to self-report or attempt to do so faces “a presumption that a guilty plea, deferred prosecution with a monetary penalty, or non-prosecution with a statement of facts and monetary penalty would be appropriate to address the company’s conduct.” Furthermore, failure to self-report or attempt to do so creates “a strong presumption against the issuance of a declination.”

Takeaways

The Program should be considered by corporate entities when assessing the implications of voluntary self-disclosure. SDNY’s new policy incentivizes self-reporting, cooperation, and remediation. However, self-reporting under the Program carries risks, including a three-year reporting obligation, which could result in further legal exposure. Accordingly, companies should weigh their options carefully if they identify a potential issue, including by considering how the Program correlates with the CEP. 

Regardless of whether they decide to self-report under the Program, companies should consider reassessing their compliance programs to confirm that their internal controls, investigative procedures, and reporting hotlines are effective in detecting and promptly evaluating potential misconduct.

Negar Tekeei | Partner | +1 212 287 7085 | Email
Andrea L. Gordon | Partner | +1 202 383 0955 | Email
Ayyan Zubair | Associate | +1 212 389 5048 | Email
Jeffrey W. Cottle | Partner | +1 202 383 0247 | Email
Olga Greenberg | Partner | +1 404 853 8274 | Email
Blake Roberts | Partner | +1 202 383 0919 | Email
Brian L. Rubin | Partner | +1 202 383 0124 | Email

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.