The Department of Justice (DOJ) hopes to incentivize timely disclosure of misconduct uncovered during the mergers and acquisitions process with the October 2023 announcement of a department-wide safe harbor policy. The policy, which applies across the entire department, shields companies from criminal prosecution for misconduct they discover in companies they are acquiring or have recently acquired.
The policy states that acquiring companies that promptly and voluntarily disclose criminal misconduct within the safe harbor period, cooperate during the investigation and engage in timely and appropriate remediation will receive the presumption of a declination. In DOJ criminal prosecution parlance, “declination” means the exercise of the government’s discretion not to bring charges.
Financial institutions of all sizes and types provide the capital — and the means to deploy it — to individuals, companies, non-governmental organizations and governments throughout the U.S. and around the world. While the vast majority of financial institutions act within the confines of the myriad laws where violations carry criminal penalties (e.g., BSA/AML, OFAC-related laws, anti-briery laws), we know from past experience that some do not.
The scofflaws may be adept at concealing their illegal activity from internal compliance teams, external auditors and bank regulators. They are equally adept at concealing the activity from unsuspecting acquirers, which leaves the acquirer in the unenviable position of buying the criminal violation and related penalty. With its new policy, the DOJ is providing the acquirer with a “stay out of jail free card” of sorts.
Qualifications, Limitations of the Presumption of Declination
To qualify for the presumption of declination, a buyer must make a disclosure of discovered misconduct at the acquired entity within six months from the date of closing, whether the misconduct was discovered pre- or post-acquisition. Post-closing review and testing of the acquired bank’s BSA/AML, OFAC and other financial crime control systems is something all acquirers should already have on their post-closing integration checklists. Acquirers should also screen and assess the newly acquired accounts and relationships for “risky” activity in order to identify any potential prior misconduct.
The acquirer will have a baseline deadline of one year from the date of closing to remediate any discovered misconduct. However, depending on the facts and circumstances of the underlying illegal transaction, the baseline deadlines can change. For example, in situations involving national security, the acquirer should not delay disclosure or remedies. The appropriate remedial action will be determined in consultation with the DOJ after disclosure. Additionally, in order to qualify for declination, a buyer’s disclosure and remediation must be paired with cooperation in any investigation.
Acquirers should be aware that the presumption only applies to criminal conduct discovered by the acquirer and not to information that was already known to the DOJ or publicly known. Critical components in the deal process that are not to be overlooked or given short shrift include conducting detailed and effective diligence, following up with direct diligence questions relating to governmental investigations and including robust representations and warranties regarding legal compliance in definitive agreements.
Key Considerations for Acquirers
- Incentive to self-disclose. Deputy Attorney General Lisa O. Monaco reiterated during the announcement of the safe harbor policy that an acquirer will be subject to full successor liability for concealing misconduct.
- Invest in compliance and due diligence. A strong and effective corporate compliance program, combined with a robust due diligence process during the acquisition, can help flag misconduct that should be disclosed.
- Assess potential fallout. Taking advantage of this safe harbor policy results in non-prosecution by the DOJ, but other financial consequences could arise due to the disclosure. Acquirers should continue to include, as applicable, financial protections in purchase agreements to cover the costs of investigations or other financial penalties that could arise.
- Move fast: For surprises that come from the acquired financial institution post-closing, acquirers should move quickly and increase the speed of investigations to ensure they meet the baseline time periods.
- Enlist experts: Acquirers should enlist the advice of counsel and other experts promptly upon discovering prior misconduct at the acquired bank.
With its new safe harbor policy, the DOJ has given acquirers who are willing to do the hard work a second chance at maintaining a clean record, despite the prior sins of their acquisition targets. Acquirers will be wise to take advantage of the safe harbor period if/when the need arises.