David Rybicki and Neil Smith of the law firm K&L Gates came on the Vcheck podcast to discuss the new Department of Justice Safe Harbor Policy for voluntary self-disclosure made in connection with M&A that was announced by Deputy Attorney General Lisa Monaco on October 4, 2023. The new M&A Safe Harbor Policy is designed to encourage companies to voluntarily self-disclose criminal misconduct they uncover during their pre-acquisition due diligence or post acquisition during the integration phase. Under the new policy, the Department of Justice (DOJ) will not prosecute companies that voluntarily disclose criminal misconduct within the Safe Harbor period and undertake remediation on the DOJ’s terms. While the new policy has ‘carrots’ designed to incentivize companies to come forward, it also presents challenges, such as only affording six months for companies to self-disclose misconduct and one-year from the date of closing to fully remediate the misconduct. Additionally, the policy does not apply to misconduct that is required to be disclosed by law, such as issues affecting national security. The incentives offered and the challenges presented by the new policy have several implications for companies seeking to be eligible for its benefits and may change how acquiring companies approach pre- and post-deal due diligence going forward. Below are summaries of the key takeaways from the podcast. You can find links to David and Neil’s contact information here (David) and here (Neil) as well as the US Policy and Regulatory Alert on the Safe Harbor Policy that the firm published on their website.
01:36 – How the new policy differs from what came before.
To receive any benefit from the incentives offered as part of the policy, companies must disclose all relevant and non-privileged information about misconduct. The new policy is considered more stringent than what was applied during the Trump administration in terms of how it restricts the circumstances under which companies can obtain cooperation credit, essentially ruling out partial credit. The announcement of the new policy also appears to strongly emphasize the issue of recidivism and a holistic view of a company’s entire track record. As noted in K&L Gates’ alert, misconduct at the target company disclosed under the policy will not factor into the DOJ’s recidivism analysis for the acquiring company. However, this does not apply to misconduct that is already public or required to be disclosed.
03:56 – The trend towards incentivizing self-disclosure goes hand-in-hand with the growing difficulty of uncovering misconduct.
Domestic and international fraud has become more difficult to uncover and investigate. The new Safe Harbor Policy and its considerable incentives for self-disclosure reflect today’s reality that the government is leaning on acquiring companies to assist them in uncovering misconduct.
11:58 & 14:24 – Conducting comprehensive and risk-based due diligence.
While the new policy incentivizes companies to come forward and self-disclose misconduct, companies are not going to get a free pass. There is an expectation that acquiring companies conduct comprehensive but risk-based due diligence to try and mitigate some issues before a deal is completed. Risk-based due diligence should be focused on high-risk jurisdictions and industries as well as potential sanctions issues, among others. However, in many instances misconduct can only be uncovered in the post-acquisition phase, and companies need to move fast to remediate in order to qualify for the new policy’s incentives. To quickly identify misconduct post deal, companies will need to have robust compliance policies and post-deal due diligence processes in place.
15:46 – Companies may start conducting deeper dive diligence as a result of the policy
While some forms of misconduct cannot be identified until the integration phase, companies can still get ahead of potential issues by conducting comprehensive pre-deal due diligence. A likely result of the policy and the timing as well as resourcing issues that it entails may be that companies start approaching pre-deal due diligence through a deeper-dive lens and take a more robust pre-acquisition posture than what they have done in the past.
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