U.S. Department of Justice issues guidance on “inability-to-pay” assertions in criminal resolutions

October 15, 2019

Government Investigations & White Collar Defense Alert

Author(s): Christopher P. Hotaling, Adam R. Tarosky, Robert Fisher, Colin T. Missett

On October 8, 2019, Assistant Attorney General (AAG) Brian A. Benczkowski of the U.S. Department of Justice’s (the Department or DOJ) Criminal Division issued new guidance on how the Department will evaluate a company’s assertion that it is unable to pay a criminal fine.[1] The new guidance consists of a four-page memorandum and a two-page “Inability-to-Pay Questionnaire” designed to “provide an analytical framework for Criminal Division attorneys to assess assertions by a business organization that it is unable to pay an otherwise appropriate criminal fine or monetary penalty.” In a speech announcing the new guidance, AAG Benczkowski emphasized the Department’s goal to provide “[t]ransparancy about the types of corporate practices and programs that the Department of Justice values,” noting that “[w]e want you to know what we consider to be a legitimate inability-to-pay argument, but also the facts and arguments that won’t be given credence.”[2]

New guidance

The new guidance provides greater detail regarding the factors that are likely to persuade DOJ when company counsel asserts that a company is unable to pay a criminal fine. As a threshold matter, however, the new Inability-to-Pay Memo makes clear that its provisions regarding mitigation of a financial penalty are conditioned on the existence of an agreement between the government and company as to both the form of a corporate criminal resolution (e.g., non-prosecution agreement, deferred prosecution agreement, or guilty plea) and on an appropriate monetary penalty based on the law and the facts, “irrespective of inability[-]to[-]pay considerations.” The memorandum then provides that, in many circumstances, the ability-to-pay determination will be made based on an analysis of the company’s responses to the Inability-to-Pay Questionnaire, which provides insight into “the company’s current assets and liabilities” and compares “current and anticipated cash flows against working capital needs.” However, “[w]here legitimate questions exist regarding an organization’s inability to pay,” the new guidance directs prosecutors to analyze four factors:

  • background on the company’s financial condition, including whether the inability to pay results from a decision to take capital from the company (e.g., payment of dividends, distributions, or loans) or to expand operations (e.g., capital improvements);
  • whether the company has access to alternative sources of capital, including whether capital is available from insurance or indemnification;
  • whether “significant adverse collateral consequences are likely to result from the imposition of a criminal fine or monetary penalty exceeding an organization’s ability to pay;” and
  • whether the proposed fine or penalty “will impair an organization’s ability to make restitution to any victims.”

Information relevant to that analysis, and solicited by the Inability-to-Pay Questionnaire, includes, inter alia, five years of audited financial statements, five years of corporate income tax returns, current accounts receivable and accounts payable statements, all credit and loan agreements, and even “[i]nformation regarding the compensation plans for the ten most highly-compensated employees with the organization.”

Finally, the Inability-to-Pay Memo provides guidance regarding the amount and structure of a reduction DOJ is likely to find reasonable. The guidance explains, for example, that for any proposed reduction that exceeds 25% of the otherwise agreed upon criminal fine or monetary penalty, prosecutors will “be required to receive approval from the Assistant Attorney General for the Criminal Division or his/her designee,” suggesting that prosecutors are likely to consider 25% to be the maximum permissible reduction absent extraordinary circumstances. With respect to the structure of a criminal penalty, the memorandum provides that DOJ may allow a fine to be paid on “an installment schedule to facilitate the payment of the proposed fine or penalty amount over a reasonable period of time.”

Takeaways for company counsel negotiating criminal resolutions

The release of new guidance on this issue—which follows the release of other DOJ policies designed to enhance transparency and encourage disclosure, cooperation, and the development of robust and well-designed corporate compliance programs[3]—provides a helpful reference to companies and their counsel when negotiating a criminal resolution with the government. For example, the factors enumerated in the memorandum may be useful in discussing the appropriate form of a resolution within the framework of the Principles of Federal Prosecution of Business Organizations.[4] On this point, two specific factors are worthy of special consideration.

First, it is critical that the company be ready to explain the existence of specific collateral consequences that may justify a reduced fine or monetary penalty. Issues such as the impact of a fine on the ability to pay pension obligations or a legal or regulatory obligation to maintain certain capitalization levels are appropriate considerations for prosecutors to consider. Similarly, the likelihood that a penalty or fine will “cause layoffs, product shortages, or significantly disrupt competition in a market” are also fair game in DOJ’s calculus on this issue. What DOJ will not consider, however, are arguments that the proposed fine or penalty will have an adverse impact on “growth, future opportunities, planned or future product lines, future dividends, unvested or future executive compensation or bonuses, and planned or future hiring or retention.” It is critical then that, as part of a company’s mitigation presentation, corporate counsel marshal evidence of any and all collateral consequences that may be relevant to the ability-to-pay determination and provide that information to outside counsel so that a compelling and persuasive argument can be made to convince DOJ to reduce the pre-determined fine amount.

Second, it is equally important that company counsel understand that one of DOJ’s key considerations is whether the proposed penalty will “impair an organization’s ability to make restitution to any victims.” Reading the Inability-to-Pay Memo and AAG Benczkowski’s accompanying remarks, it is clear that DOJ takes a company’s obligation to pay restitution to impacted victims extremely seriously—so much so that a well thought out plan to make victims whole is a very strong basis upon which to seek a reduction of a fine and other monetary penalties.

Takeaways for company counsel negotiating civil resolutions

No parallel guidance has been issued by the Civil Division, but the Department employs a similar procedure when a company asserts its inability to pay restitution, civil penalties, or treble damages under the False Claims Act. After agreement on liability and total civil exposure, the Department requests standard financial information that overlaps but is usually not as extensive as the information sought by the new Inability-to-Pay Questionnaire. The information is then reviewed by a “qualified financial expert” as, unlike on the criminal side, the Civil Division will not approve ability-to-pay settlements unless such an expert “has determined that the offer in compromise is likely the maximum that the offeror has the ability to pay.”[5] The result may be a take-it-or-leave-it number, a recommendation of payment over time, or some combination of the two. Consistent with Civil Division practice, the new guidance allows for “the use of an installment schedule to facilitate the payment of the proposed fine or penalty amount over a reasonable period of time.” The only distinction is that the Civil Division usually caps that “reasonable period” at three years.

Company counsel asserting an inability to pay restitution, civil penalties, or treble damages should be familiar with the new guidance, and especially the Inability-to-Pay Questionnaire, which is likely to be adopted by the Civil Division as the standard information request made of companies requesting the ability-to-pay consideration. Counsel may also cite the memorandum when seeking to make settlement payments over time or to underscore concerns about collateral consequences of a large settlement. Especially in the health care space, the likelihood of “layoffs” and medical product and service “shortages” in underserved areas may convince the Department that an ability-to-pay resolution is appropriate.

  1. Brian A. Benczkowski, Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Policy, U.S. Dep’t of Justice (Oct. 8, 2019) (Inability-to-Pay Memo), quoted throughout the alert and available here.
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  2. Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the Global Investigations Review Live New York, U.S. Dep’t of Justice (Oct. 8, 2019) (Benczkowski Remarks), https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-remarks-global-investigations.
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  3. See generally Benczkowski Remarks.
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  4. See Justice Manual (“JM”) § 9-28.000, et seq.
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  5. 28 C.F.R. § 0.160(a)(2), cf. Inability to Pay Memo, at 1 (“In most cases, prosecutors also will need to consult an accounting expert to examine the financial condition of the business.”).
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