In March 2008, then Deputy Attorney General Craig Morford issued a memorandum—also known as the “Morford Memo”—to help ensure th the monitor selection process is collaborative, results in the selection of a highly-qualified monitor suitable for the assignment, avoids potential conflicts of interest, and is carried out in a manner that instills public confidence. The Morford Memo requires USAOs and other DOJ litiga divisions to establish ad hoc or standing committees consisting of the office’s ethics advisor, criminal or section chief, and at least one other experienced prosecutor to consider the candidates—which may be proposed by either prosecutors, companies, or both—for each monitorship. DOJ components are also reminded to follow spec ified federal conflict of interest guidelines and to check monitor candidates for tion potential conflicts of interest relationships with the company. In addition, the names of all selected monitors for DPAs and NPAs must be submitted to ODAG for final approval. Following issuance of the Morford Memo, DOJ entered into 35 DPAs and NPAs, 6 of which required the company to hire an individual to oversee the company’s compliance with the terms of the DPA. As of November 2009, DOJ had selected monitors for 4 of the 6 agreements. Based on o discussions with prosecutors and documentation from DOJ, we determined that for these 4 agreements, DOJ made the selections accordance with Morford Memo guidelines. Further, while the Morfo Memo does not specify a selection process that must be used in all cases it suggests that in some cases it may be appropriate for the company to select the monitor or propose a pool of qualified candidates from which DOJ will select the monitor. In all 4 of these cases, the company either selected the monitor, subject to DOJ’s approval, or provided DOJ with proposed monitor candidates from among which DOJ selected the monitor. However, while we were able to determine that the prosec complied with the Morford Memo based on information obtained through our interviews, DOJ did not fully document the selection and approval process for 2 of the 4 monitor selections. The lack of such documentati will make it difficult for DOJ to validate to an independent third-party s reviewer, as well as to Congress and the public, that prosecutors acros DOJ offices followed Morford Memo guidelines and that monitors were selected in a way that was fair and merit based. For example, for 1 of these 2 agreements, DOJ did not document who in the U.S. Attorney’s Office was on involved in reviewing the monitor candidates, which is important becaus e the Morford Memo requires that certain individuals in the office be part of the committee to consider the selection or veto of monitor candidates in order to ensure monitors are not selected unilaterally. For the second agreement, the Deputy Attorney General’s approval of the selected monitor was relayed via telephone and not documented. As a result, in order to respond to our inquiries, DOJ officials had to reach out to individuals who were involved in the telephone call, one of whom w longer a DOJ employee, to obtain information regarding the monitor’s approval. Documenting the reasons for selecting a particular monitor helps avoid the appear and practices—which are intended to instill public confidence in the monitor selection process—were followed. Therefore, in our June 25, 2009, testimony, we recommended that the Deputy Attorney General ado or internal procedures to document both the process used and reasons f monitor selection decisions. DOJ agreed with our recommendation an in August 2009, instituted such procedures. Specifically, DOJ requires ODAG to complete a checklist confirming receipt of the monitor selectio submission—including the process used and reasons for selecting the monitor—from the DOJ component; ODAG’s review, recommendation,ance of favoritism and verifies that Morford Memo processes and decision to either approve or reject the proposed monitor; the DOJ component’s notification of ODAG’s decision; and ODAG’s documentat of these steps. For the two monitors selected during or after August 2009, DOJ provided us with completed checklists to confirm that ODAG had followed the new procedures. While DOJ selected monitors in accordance with the Morford Memo, monitor selections have been d after the Morford Memo was issued. The selection of one monitor took 15 months from the time the agreement was signed and selection of two monitors, as discussed above, has been delayed for more than 17 months elayed for three agreements entered into from the time the agreement was signed. According to DOJ, the delays in selecting these three monitors have been due to challenges in identifyi ng candidates with proper experience and resources who also do not have potential conflicts of interest with the company. Further, DOJ’s selection of monitors in these three cases took more time than its selection of monitors both prior to and since the issuance of the Morford Memo— which on average was about 2 months from the time the NPA or DPA was signed or filed. According to the Senior Counsel to the Assistant Attorney General for the Criminal Division, for these three agreements, the prosecutors overseeing the cases have communicated with the companies to ensure that they are complying with the agreements. Further, DOJ reported that the prosecutors are working with each of the companies to extend the duration of the DPAs to ensure that the duties and goals of each monitorship are fulfilled and, as of October 2009, an agreement to extend the monitorship had been signed for one of the DPAs. Such action by DOJ will better position it to ensure that the companies are in compliance with the agreements while awaiting the selections of the monitors. For the 48 DPAs and NPAs where DOJ required independent monitors, companies have hired a total of 42 different monitors, more than half of whom were former DOJ employees. Specifically, of these 42 monitors, 23 previously worked at DOJ, while 13 did not. The 23 monitors held various DOJ positions, including Assistant U.S. Attorney, Section Chief or Division Chief in a litigating component, U.S. Attorney, Assistant Attorney General, and Attorney General. The length of time between the monitor’s separation from DOJ and selection as monitor ranged from 1 year to more than 30 years, with an average of 13 years. Five individuals were selected to serve as monitors within 3 years or less of being employed at DOJ. In addition, 8 of these 23 monitors had previously worked in the USAO or DOJ litigating component that oversaw the DPA or NPA for which they were the monitor. In these 8 cases, the length of time between the monitor’s separation from DOJ and selection as monitor ranged from 3 years to 34 years, with an average of almost15 years. Of the remaining 13 monitors with no previous DOJ experience, 6 had previous experience at a state or local government agency, for example, as a prosecutor in a district attorney’s office; 3 had worked in federal agencies other than DOJ, including the Securities and Exchange Commission and the Office of Management and Budget; 2 were former judges; 2 were attorneys in the military; 3 had worked solely in private practice in a law firm; and 1 had worked as a full-time professor. Of the 13 company representatives with whom we spoke who were required to hire independent monitors, in providing perspectives on monitors’ previous experience, representatives from 5 of these companies stated that prior employment at DOJ or an association with a DOJ employee could impede the monitor’s independence and impartiality, whereas representatives from the other 8 companies disagreed. Specific concerns raised by the 5 companies—2 of which had monitors with prior DOJ experience—included the possibility that the monitor would favor DOJ and have a negative predisposition toward the company or, if the monitor recently left DOJ, the monitor may not be considered independent; however, none of the companies identified specific instances with their monitors where this had occurred. Of the remaining 8 company representatives who did not identify concerns, 6 of them worked with monitors who were former DOJ employees, and some of these officials commented on their monitors’ fairness and breadth of experience. In addition 5 company representatives we spoke with who were involved in the monitor selection process said that they were specifically looking for monitors with DOJ experience and knowledge of the specific area of law that the company violated. Officials from 8 of the 13 companies with whom we spoke raised concerns about their monitors, which were either related to how monitors were carrying out their responsibilities or issues regarding the overall cost of the monitorship. However, these companies said that it was unclear to what extent DOJ could help to address these concerns. Seven of the 13 companies identified concerns about the scope of the monitor’s responsibilities or the amount of work the monitor completed. For example, 1 company said that the monitor had a large number of staff assisting him on the engagement, and he and his staff attended more meetings than the company felt was necessary, some of which were unrelated to the monitor responsibilities delineated in the agreement, such as a community service organization meeting held at the company when the DPA was related to securities fraud. As a result, the company believes that the overall cost of the monitorship—with 20 to 30 lawyers billing the company each day—was higher than necessary. Another company stated that its monitor did not complete the work required in the agreement in the first phase of the monitorship—including failing to submit semi-annual reports on the company’s compliance with the agreement to DOJ during the first 2 years of the monitorship— resulting in the monitor having to complete more work than the company anticipated in the final phase of the monitorship. According to the company, this led to unexpectedly high costs in proportion to the company’s revenue in the final phase, which was significant because the company is small. Further, according to a company official, the monitor’s first report contained numerous errors that the company did not have sufficient time to correct before the report was submitted to DOJ and, thus, DOJ received a report containing errors. While 6 of the 13 companies we interviewed did not express concerns about the monitor’s rates, 3 companies expressed concern that the monitor’s rate (which ranged from $290 per hour to a rate of $695 to $895 per hour among the companies that responded to our survey) was high. Further, while 9 of the 13 companies that responded to our survey believed that the total compensation received by the monitor or monitoring firm was reasonable for the type and amount of work performed (which, according to the companies that responded to our survey, ranged from $8,000 to $2.1 million per month), 3 companies did not believe it was reasonable. When asked how they worked to resolve these issues with the monitor, companies reported that they were unaware of any mechanisms available to resolve the issues—including DOJ involvement—or if they were aware that DOJ could get involved they were reluctant to seek DOJ’s assistance. Specifically, three of the eight companies that identified concerns with their monitor were not aware of any mechanism in place to raise these concerns with DOJ. Four companies were aware that they could raise these concerns with DOJ, but three of these companies said that they would be reluctant to raise these issues with DOJ in fear of repercussions. Another company did not believe that DOJ had the authority to address their concerns because they were related to staffing costs, which were delineated in the contract negotiated between the company and the monitor, not the DPA. However, DOJ had a different perspective than the company officials on its involvement in resolving disputes between companies and monitors. According to the Senior Counsel to the ODAG, while DOJ has not established a mechanism through which companies can raise concerns with their monitors to DOJ and clearly communicated to companies how they should do so, companies are aware that they can raise monitor- related concerns to DOJ if needed. Further, it was the Senior Counsel’s understanding that companies frequently raise issues regarding DPAs and NPAs to DOJ without concerns about retribution, although to his knowledge, no companies had ever raised monitor-related concerns to ODAG. The Senior Counsel acknowledged, however, that even if companies did raise concerns to DOJ regarding their monitors, the point in the DPA process at which they did so may determine the extent of DOJ’s involvement. Specifically, according to this official, while he believed that DOJ may be able to help resolve a dispute after the company and monitor enter into a contract, he stated that, because DOJ is not a party to the contract, if a conflict were to arise over, for instance, the monitor’s failure to complete periodic reports, DOJ could not compel the monitor to complete the reports, even if the requirement to submit periodic reports was established in the DPA or NPA. In contrast, the Senior Counsel said that if the issues between monitors and companies arise prior to the two parties entering into a contract, such as during the fee negotiation phase, DOJ may be able to play a greater role in resolving the conflict. However, the mechanisms that DOJ could use to resolve such issues with the monitor are uncertain since while the monitor’s role is delineated in the DPA, there is no contractual agreement between DOJ and the monitor. DOJ is not a party to the monitoring contract signed by the company and the monitor, and the monitor is not a party to the DPA signed by DOJ and the company. We are aware of at least one case in which the company sought DOJ’s assistance in addressing a conflict with the monitor regarding fees, prior to the monitor and company signing their contract. Specifically, one company raised concerns about the monitor to the U.S. Attorney handling the case, stating that, among other things, the company believed the monitor’s fee arrangement was unreasonably high and the monitor’s proposed billing arrangements were not transparent. The U.S. Attorney declined to intervene in the dispute stating that it was still at a point at which the company and the monitor could resolve it. The U.S. Attorney instructed the company to quickly resolve the dispute directly with the monitor—noting that otherwise, the dispute might distract the company and the monitor from resolving the criminal matters that were the focus of the DPA. The U.S. Attorney also asked the company to provide an update on its progress in resolving the conflict the following week. A legal representative of the company stated that he did not believe he had any other avenue for addressing this dispute after the U.S. Attorney declined to intervene. As a result, although the company disagreed with the high fees, it signed the contract because it did not want to begin the monitorship with a poor relationship with the monitor resulting from a continued fee dispute. The Senior Counsel to the ODAG stated that because the company is signatory to both the DPA or NPA and the contract with the monitor, it is the company’s responsibility to ensure that the monitor is performing the duties described in the agreement. However, 5 of the 7 companies that had concerns about the scope of the monitor’s responsibilities or the amount of work the monitor completed did not feel as if they could adequately address their issues by discussing them with the monitors. This is because two companies said that they lacked leverage to address issues with monitors and two companies feared repercussions if they raised issues with their monitors. The Senior Counsel stated that one way the company could hold the monitor accountable is by incorporating the monitor requirements listed in the DPA into the monitoring contract and additionally include a provision in the contract that the monitor can be terminated for not meeting these requirements. However, the companies that responded to our survey did not generally include monitor termination provisions in their contracts. Specifically, 7 of the 13 companies that responded to our survey reported that their monitoring contract contained no provisions regarding termination of the monitor, and another 3 companies reported that their contract contained a clause that actually prohibited the company from terminating the monitor. Only 1 company that responded to our survey reported that the contract allowed it to terminate the monitor with written notice at any time, once the company and DOJ agreed (and subject to the company’s obligation to pay the monitor). This contract also included a provision allowing for the use of arbitration to resolve disputes between the company and the monitor over, for instance, services rendered and fees. In order to more consistently include such termination clauses in the monitoring contracts, companies would need the monitor’s consent. Given that DOJ makes the final decision regarding the selection of a particular monitor—and that DOJ allows for, but does not require, company involvement in the monitor selection process—it is uncertain how much leverage the company would have to negotiate that such termination or dispute resolution terms be included in the contract with the monitor. Because monitors are one mechanism that DOJ uses to ensure that companies are reforming and meeting the goals of DPAs and NPAs, DOJ has an interest in monitors performing their duties properly. While over the course of our review, we discussed with DOJ officials various mechanisms by which conflicts between companies and monitors could be resolved, including when it would be appropriate for DOJ to be involved, DOJ officials acknowledged that prosecutors may not be having similar discussions with companies about resolving conflict. This could lead to differing perspectives between DOJ and companies on how such issues should be addressed. Internal control standards state that agency management should ensure that there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. According to DOJ officials, the Criminal Division Fraud Section has made some efforts to clarify what role it will play in resolving disputes between the company and the monitor. For example, 11 of 17 DPAs or NPAs entered into by the Fraud Section that required monitors allowed companies to bring to DOJ’s attention any disputes over implementing recommendations made by monitors during the course of their reviews of company compliance with DPAs and NPAs. In addition, 8 of these 11 agreements provide for DOJ to resolve disputes between the company and the monitor related to the work plan the monitor submitted to DOJ and the company before beginning its review of the company. Additionally, in 5 agreements entered into by one USAO, the agreement specified that the company could bring concerns about unreasonable costs of outside professionals—such as accountants or consultants—hired by the monitor to the USAO for dispute resolution. While the Criminal Division Fraud Section and one USAO have made efforts to articulate in the DPA or NPA the extent to which DOJ would be willing to be involved in resolving specific kinds of monitor issues for that particular case, other DOJ litigating divisions and USAOs that entered into DPAs and NPAs have not. Clearly communicating to companies and monitors in each DPA and NPA the role DOJ will play in addressing companies’ disputes with monitors would help better position DOJ to be notified of potential issues companies have identified related to monitor performance. According to DOJ, DPAs and NPAs can be invaluable tools for fighting corporate corruption and helping to rehabilitate a company, although use of these agreements has not been without controversy. DOJ has taken steps to address concerns that monitors are selected based on favoritism or bias by developing and subsequently adhering to the Morford Memo guidelines. However, once the monitors are selected and any issues—such as fee disputes or concerns with the amount of work the monitor is completing—arise between the monitor and the company, it is not always clear what role, if any, DOJ will play in helping to resolve these issues. Clearly communicating to companies and monitors the role DOJ will play in addressing companies’ disputes with monitors would help better position DOJ to be made aware of issues companies have identified related to monitor performance, which is of interest to DOJ since it relies on monitors to assess companies’ compliance with DPAs and NPAs. We are continuing to assess the potential need for additional guidance or other improvements in the use of DPAs and NPAs in our ongoing work. To provide clarity regarding DOJ’s role in resolving disputes between companies and monitors, the Attorney General should direct all litigating components and U.S. Attorneys Offices to explain in each corporate DPA or NPA what role DOJ could play in resolving such disputes, given the facts and circumstances of the case. We requested comments on a draft of this statement from DOJ. DOJ did not provide official written comments to include in the statement. However, in an email sent to us on November 17, 2009, DOJ provided technical comments, which we incorporated into the statement, as appropriate. For questions about this statement, please contact Eileen R. Larence at (202) 512-8777 or larencee@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Kristy N. Brown, Jill Evancho, Tom Jessor, Sarah Kaczmarek, Danielle Pakdaman, and Janet Temko, as well as Katherine Davis and Amanda Miller. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: Recent cases of corporate fraud and mismanagement heighten the Department of Justice's (DOJ) need to appropriately punish and deter corporate crime. Recently, DOJ has made more use of deferred prosecution and non-prosecution agreements (DPAs and NPAs), in which prosecutors may require company reform, among other things, in exchange for deferring prosecution, and may also require companies to hire an independent monitor to oversee compliance. This testimony addresses (1) the extent to which prosecutors adhered to DOJ's monitor selection guidelines, (2) the prior work experience of monitors and companies' opinions of this experience, and (3) the extent to which companies raised concerns about their monitors, and whether DOJ had defined its role in resolving these concerns. Among other steps, GAO reviewed DOJ guidance and examined the 152 agreements negotiated from 1993 (when the first 2 were signed) through September 2009. GAO also interviewed DOJ officials, obtained information on the prior work experience of monitors who had been selected, and interviewed representatives from 13 companies with agreements that required monitors. These results, while not generalizable, provide insights into monitor selection and oversight. Prosecutors adhered to DOJ guidance issued in March 2008 in selecting monitors required under agreements entered into since that time. Monitor selections in two cases have not yet been made due to challenges in identifying candidates with proper experience and resources and without potential conflicts of interests with the companies. DOJ issued guidance in March 2008 to help ensure that the monitor selection process is collaborative and based on merit; this guidance also requires prosecutors to obtain Deputy Attorney General approval for the monitor selection. For DPAs and NPAs requiring independent monitors, companies hired a total of 42 different individuals to oversee the agreements; 23 of the 42 monitors had previous experience working for DOJ--which some companies valued in a monitor choice--and those without prior DOJ experience had worked in other federal, state, or local government agencies, the private sector, or academia. The length of time between the monitor's leaving DOJ and selection as a monitor ranged from 1 year to over 30 years, with an average of 13 years. While most of the companies we interviewed did not express concerns about monitors having prior DOJ experience, some companies raised general concerns about potential impediments to independence or impartiality if the monitor had previously worked for DOJ or had associations with DOJ officials. Representatives for more than half of the 13 companies with whom GAO spoke raised concerns about the monitor's cost, scope, and amount of work completed--including the completion of compliance reports required in the DPA or NPA--and were unclear as to the extent DOJ could be involved in resolving such disputes, but DOJ has not clearly communicated to companies its role in resolving such concerns. Companies and DOJ have different perceptions about the extent to which DOJ can help to resolve monitor disputes. DOJ officials GAO interviewed said that companies should take responsibility for negotiating the monitor's contract and ensuring the monitor is performing its duties, but that DOJ is willing to become involved in monitor disputes. However, some company officials were unaware that they could raise monitor concerns to DOJ or were reluctant to do so. Internal control standards state that agency management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. While one of the DOJ litigating divisions and one U.S. Attorney's Office have made efforts to articulate in the DPAs and NPAs what role they could play in resolving monitor issues, other DOJ litigation divisions and U.S. Attorney's Offices have not done so. Clearly communicating to companies the role DOJ will play in addressing companies' disputes with monitors would help increase awareness among companies and better position DOJ to be notified of potential issues related to monitor performance.