Managing Government-Imposed Monitors in Export Enforcement Actions

Following some reasonable ground rules when choosing a monitor, establishing the relationship, engaging with the government, and closing out the monitor’s term may be critical to achieving the best possible outcome under already difficult circumstances.

Companies settle export enforcement actions with US government agencies for a variety of reasons. In some cases, the company has disclosed violations voluntarily and seeks to resolve matters quickly so that it can expend its time and resources on other priorities. In other cases, the government presses a settlement to encourage compliance within the company—and across an industry—or to reinforce the interpretation of specific legal requirements. In either circumstance, the government may call upon a number of enforcement mechanisms to settle the case.

In addition to fines, audits, training, and new policies and procedures, government agencies may require that an external monitor oversee the company’s compliance with the settlement agreement. In fact, the US Departments of State (on the civil and administrative enforcement side) and Justice (on the criminal and civil enforcement side) have often included the appointment of monitors as a condition of settlement. At the State Department alone—the agency tasked with licensing and compliance of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR)—external compliance monitors have been included as a condition of settlement in over 20 of the last 30 enforcement actions settled by the department since 1999.

While potentially challenging and possibly unpleasant, monitors, if chosen wisely and managed well, can enhance a company’s compliance posture and its ability to engage effectively with the government. Chosen poorly, however, monitors may represent an expensive hemorrhage of time, resources, and funds that drain a company’s accounts and return little to either the company or the government. Identifying a competent and effective monitor takes time and requires establishing ground rules that delineate the monitor’s responsibilities while preserving the monitor’s objectivity. This article highlights key factors implicating the monitor’s and company’s roles and outlines strategies for managing the monitor-company-government relationship effectively to meet everyone’s objectives.

Why a Monitor?

In general, the Departments of State and Justice, as well as the Department of Commerce recently, may include a monitor as part of a settlement because the company has engaged in export violations that the agencies believe have not been handled adequately in the past or are unlikely to be resolved absent close oversight. In these circumstances, monitors fulfill a number of roles:

• They oversee compliance with the terms of a settlement agreement and the development of policies and procedures to effectuate a more robust compliance posture
• They provide objective interpretations of settlement terms and legal requirements
• They interface with the government agency – e.g., as the “eyes and ears” of the government agency to ensure ongoing compliance
• They audit or assess the compliance posture of the company

Fulfilling these roles requires certain baseline skills regardless of which export regime has been violated. Absent these skills, companies risk an expensive and ineffective engagement that can quickly spiral into an endless list of tasks with little enhancement of the company’s compliance program. Identifying the skill set needed requires the government to consider its objectives carefully and the company to choose wisely; neither party should act simply on the basis of qualifications that appear on resumes or because the individual has been a monitor in other matters. Below, we discuss important factors that should inform the choice of monitors and how one engages with government agencies to press for the right monitor.

Monitor Qualifications

What makes a good monitor varies based on the enforcement action’s circumstances. At a minimum, a monitor should possess at least the following skills:

1. Substantive and detailed knowledge of the laws and regulations at issue in the settlement agreement. The US has over 20 export-related regimes (including those that implement multilateral agreements). A monitor with expertise focused on white collar criminal matters, the export requirements of Part 800 of the US Department of Energy’s nuclear controls, or the Fish and Wildlife Regulations would perhaps understand the general contours of export control regulations but would be less well-suited to oversee a settlement agreement related to the ITAR —requiring depth and experience with those laws and regulations. A monitor needs to possess a higher degree of knowledge and competence in the regulatory regime than the company in order to advise on areas where the company can improve its compliance. That skill is equally important in order to engage substantively with the government agency that enforces the regulations. This level of knowledge can engender respect and confidence among the parties and assists in the cooperative and timely resolution of any issues.
   
   
2. Impartiality and integrity. The Departments of State and Justice may impose requirements on a monitor’s history with the company he/she is overseeing. In some instances, the monitor must not have represented the company in the past and agrees not to represent the company in the future. Sometimes the future prohibition is limited to a three- to five-year period. Other times it is not. Such a restriction is designed to foreclose the possibility of undue influence on the monitor. If the monitor has represented the company in the past, he/she may end up reviewing some of his/her own advice provided as part of the past representation. This review could place the monitor in the uncomfortable position of determining the legitimacy or accuracy of his/her own work.
   
   

   But a lack of prior representation is not always a strong indicator of impartiality or integrity. Monitors that are chosen because they were former government employees in the agencies enforcing the terms of the settlement agreement may find themselves subject to other forms of influence. The same could hold true for monitors that make a cottage industry of acting as monitors for a host of companies. Both of these factors can affect a monitor’s judgment, create unnecessary friction, and result in cookie-cutter approaches to overseeing the company’s compliance with the terms of a settlement agreement. The need for impartiality and integrity, therefore, should be carefully assessed and weighed against other factors.
   
   

3. Temperament and practicality. Monitors are expected to act independently, responsibly, and professionally. Sometimes, however, a monitor can confuse his/her independence for the ability to act without limits. While the monitor must act in accordance with the terms of the settlement agreement, a failure to appreciate that the agreement resolves only specific export violations can result in a misapplication of his/her discretion. The monitor’s more expansive reading or misapplication of his/her discretion can be difficult to manage unless addressed at the outset of the monitorship.
   
   

   The terms of every settlement agreement will drive the monitor’s responsibilities. But these terms are not to be confused as “deputizing” the monitor as a replacement for a government authority. The monitor is not a government enforcer. His/her role generally is to assist the company to develop the necessary compliance program and resources through a mix of oversight, policy, and procedure review, compliance enhancements, assessments, and recommended procedural changes. The monitor also retains the ability to identify noncompliance and either disclose that noncompliance to the government agency directly or encourage the company to disclose the violations itself. But a monitor who seeks to “turn over every rock” or otherwise spend time primarily on investigations may lack the temperament and practicality needed in a monitor.



4. A deep understanding of compliance and compliance implementation. Monitors are assigned, in part, to help focus a company’s behavior—to change “past bad behavior” and/or encourage good behavior. This requires an understanding of compliance and compliance implementation. Monitors who focus on drafting procedures or policies without identifying the most effective way to ensure those procedures or policies are actually used by the company, fail both the government and the company. Well-written and detailed procedures that cannot be used because they do not take into account the manner in which the company’s business must operate may result in continuing violations and an inability to adjust behavior. Monitors need a keen understanding of how the business works, the manner in which employees and management engage, and an in-depth understanding of successful incentives that discourage past behaviors that resulted in the settlement agreement. Simply because a monitor has been a monitor for other companies does not mean that their skills translate from settlement to settlement.

Although other factors may be considered, the ones mentioned above provide a solid baseline for identifying a strong monitor.

Managing the Monitor Relationship

Once chosen, the monitor is functionally embedded within the company for the period specified in the settlement agreement. It is important, therefore, to begin the relationship with a candid discussion between the government, the company, and the monitor of the goals and requirements of the monitorship. Although potentially uncomfortable, a failure to discuss several key issues prior to the monitor’s selection and start date is likely to result in an expensive, contentious and unhelpful process. What issues should be discussed and on what timeline?

Because a monitor’s overall responsibilities are driven by the settlement agreement, managing the monitor relationship actually begins with the negotiation over the terms of the settlement agreement. The agreement needs to clarify the objectives of the monitor, the reporting and interpretive obligations, the manner in which communications should occur, and the process for legitimately and respectfully challenging a monitor’s interpretation or actions. This requires a company to be candid and honest throughout the settlement process—from the disclosure to the investigation to the negotiation of terms—so that the company can actively participate in framing the settlement (to the extent possible with the government). Treating the settlement as an adversarial process, or the monitor as an adversary, poisons the relationship from the start and enhances the likelihood of distrust throughout the oversight period. Careful attention to the details of the settlement agreement and open communication with the government agencies involved creates the opportunity for a meaningful and direct role in how the settlement agreement and the monitorship is directed.

If the settlement agreement is drafted effectively, then several issues should be discussed in advance with both the government and the monitor:

1. Establish a “responsibilities” (or statement of work) document that articulates the monitor’s obligations. This document benefits all parties involved, limits disagreements, and focuses the monitor on the performance of his/her role effectively. While not an attempt to micromanage or otherwise dictate the manner in which the monitor performs his/her tasks, it is designed to keep the monitor and the government focused on the purpose of the monitor’s appointment under the settlement agreement. A monitorship is not an open-ended excuse for the government to continue fishing or for the monitor to exceed his/her mandate. This document should identify the monitor’s tasks as well as a defined end to those tasks. Close-out procedures and milestones, as well as metrics to identify when tasks have been completed successfully, will help limit arguments over the scope of tasks. This document should be drafted by all three parties and each should agree to the terms prior to the commencement of any monitorship.


2. Develop budgets and participate in choosing who the monitor retains to support his/her oversight. Companies should focus on adequate fund allocation from the beginning of any negotiation with the government or engagement with the monitor. For public companies, the manner in which the company identifies its monetary expenditures under a settlement agreement can affect its disclosures in SEC filings or with other government agencies, as well as potentially impact the company’s stock price or implicate the possibility of shareholder suits. Monitors are paid, often handsomely, and those payments are generally commensurate with the egregiousness of the violations and the skill of the monitor. But monitors should be subject to budget limitations and should not view their role as one designed to spend the company’s money on products or resources that do not directly improve the company’s compliance posture. A monitor’s accountability for expenditures and justification for costs should be embedded into the “responsibilities” document.
   
   

   In addition, the company should be apprised of the monitor’s choice of resource support and should be able to object to the government agency if the chosen resource does not meet established and reasonable criteria. Expenditures for supporting consultants or other counsel should be assessed carefully to ensure that the resource can add value to the company and the government. Past experience, relationships between the monitor and the chosen resource, and the resources’ reputation before the government agencies can individually and collectively affect the success of the monitorship.

   
   

   Further, products or software recommendations should be broached at the outset of the monitorship. While the monitor should be free to recommend (and sometimes require) specific changes or purchases, those recommendations should be reasonably and rationally supported. In most settlement agreements with the State Department, for example, the department will suspend a portion of the payment of certain fines to allow the company to fund its future compliance improvements. These funds may or may not be tied to actual or anticipated expenditures. For example, a company may believe that certain software to track technical data exports would be useful and plan for a $5 million expenditure. Once the company begins to research the software, and the monitor adds new requirements for the software, the company may find that the expenditure now exceeds $10 million: an unexpected and unpleasant surprise. An agreement on what may or may not be charged by the monitor for this type of expenditure is essential to management of the compliance program improvements.



3. Establish a communications plan. Candid, direct, and substantive communication is the hallmark of a successful monitor-company-government relationship. Avoidance of accusatory tones, honesty regarding noncompliance, and management buy-in concerning changes that will be needed may help limit expensive and negative outcomes, including an extended period of oversight. Written communications should follow agreed-upon protocols and points of contact should be assigned to ensure consistency. Since most monitors will charge (often high) hourly rates, ensuring that the monitor does not needlessly generate written products to “create a superfluous record” is essential to managing costs.


4. Identify a process to responsibly and respectfully challenge a monitor’s decision or request. Even with the most effective agreement delineating the monitor’s responsibilities, the objectives of the monitorship, and the terms of the settlement, disagreements can arise. Although the monitor may directly address his/her concerns with the government, so too should the company. Understanding how the process works, and under what circumstances disagreements can be raised and resolved, will assist in maintaining a balanced relationship among the parties. But each party must be responsible for doing its job: the monitor must oversee implementation of the settlement agreement; the company must implement the necessary changes to its program; and the government must “monitor the monitor” to avoid excesses or abuses. A failure by a party to fulfill its obligations can exacerbate an already challenging situation.

Following some reasonable ground rules when choosing a monitor, establishing the relationship, engaging with the Government, and closing out the monitor’s term, may be critical to achieving the best possible outcome under already difficult circumstances.

Contacts

If you have any questions or would like more information on the issues discussed in this Insight, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp