Avoiding the Hidden Price of Non-Compliance: Monitorships

The recent communication recordkeeping civil monetary penalties (CMPs) have understandably been grabbing the headlines. Record fine amounts tend to have that effect, and it is the exact intention of the regulator to send that message to the market. However, it can often be forgotten that the CMP is just one part of the overall regulatory censure. 

It has become more and more common to see regulators mandate the appointment of an independent monitor or compliance consultant. It is therefore imperative that company executives consider the potential costs associated with regulatory breaches holistically, focusing not only on fine amounts, but also on the remediation costs under the scrutiny of a monitor or compliance consultant. Some of these direct and indirect costs can include:

• Fees paid to external monitors/consultants
• Additional staff needed to engage with the monitor/consultant teams
• Business disruption
• Possible extensions of the monitorships or additional enforcement action through identification of new misconduct by the monitorship team

Perhaps most importantly, monitors/consultants are not incentivized to take risk based decisions, and they may therefore target the gold plated compliance solution, which is expensive to implement and to operate on an ongoing basis, both from a technology and headcount perspective. 

The SEC’s monitorship agreement for Apex Fund Services stated “[if] Apex and the Consultant are unable to agree on an alternative proposal, Apex will abide by the recommendations of the Consultant” ¹. This means that the monitor/consultant has the final say. The WorldCom monitor once said “It’s an unusual role where you have veto power over the audit committee chairman and over the CEO” ². At times this can mean adopting and implementing recommendations that the firm does not agree with or which are overly risk averse, which increases the cost of doing business and can impact competitiveness in extreme cases.

Example direct and indirect costs

The costs associated with the appointment of a monitor or compliance consultant can sometimes dwarf the CMP amount, particularly for smaller firms who may not receive the same level of CMP that gets the attention in the news. 

According to Crowell and Moring, a Washington DC based international law firm, the cost of monitorships are often now well north of $30m – $50m over a 3 year term, while a company reportedly spent $130m on monitorship related costs linked to an enforcement action by a NY state regulator ³.

The monitorship costs are also not restricted to the direct costs paid to the entities appointed. A Gibson Dunn webcast ⁴ provides some interesting insights into the level of internal resource required to engage with monitors, based on the Siemens 4 year monitorship for Foreign Corrupt Practices Act (FCPA) violations:

• ~ 51,000 documents collected and reviewed by the Monitorship Team
• 1,527 informational meetings conducted
• 168 roundtable meetings conducted
• 190 process, tool, and project walkthroughs conducted 
• 2,344 individual employees with whom the Monitorship Team met 
• 20 countries in which the Monitorship Team conducted standard on-site or remote reviews
• 19 countries in which the Monitorship Team conducted targeted or limited issue specific reviews
• 3,135 auditor days spent by 35-40 CFA auditors, working on behalf of the Monitor

Each of these activities requires extensive preparation and effort: 

• Oversight teams are needed to plan visits and meetings
• Employees need training to ensure they interact in the right way with the monitor 
• Employees need to study up on their processes and controls so that they are able to communicate confidently and effectively with the monitor
• Responsive documents need to be reviewed by employees, and in some cases manually redacted (e.g. due to data privacy constraints), prior to submission to the monitor
• Employee morale and stress is impacted due to extensive scrutiny of every piece of their work and the high stakes involved
• Monitor requests become top priority resulting in delays to other important business activities

In addition to the effort involved, the risk of monitors finding new misconduct with this level of scrutiny is high, which can result in even higher costs than originally anticipated if it results in an extension to the monitorship or new enforcement action being brought.

Increasing use of monitorships

On 17 October 2023, the Commodities Futures Trading Commission (CFTC) released an Enforcement Advisory ⁵ on Penalties, Monitorships and Admissions. In the press release, they highlight that “Going forward, the Division anticipates recommending to the Commission that a Monitor be imposed in cases involving the most significant and/or pervasive compliance and control failures reflecting a lack of sufficient commitment to effective compliance, and a Consultant will be recommended in serious but less severe cases”. In a speech on the same day, CFTC enforcement director Ian McGinley reinforced this message by saying:

“Entities engaged in significant misconduct or recidivism should expect Monitors and Consultants.”

It should be anticipated therefore that monitors or compliance consultants will be utilized more frequently by the CFTC. This is aligned to recent DoJ guidance around the increased use of monitors. Deputy Attorney General Lisa Monaco noted in a speech ⁶ in October 2021: 

“In recent years, some have suggested that monitors would be the exception and not the rule. To the extent that prior Justice Department guidance suggested that monitorships are disfavored or are the exception, I am rescinding that guidance. Instead, I am making clear that the department is free to require the imposition of independent monitors whenever it is appropriate to do so…”.

The CFTC and DoJ are also not the only agencies that impose monitorships. The following regulators are also mandating monitors or compliance consultants where appropriate:

1. SEC
2. NY Department of Financial Services
3. FCA
4. FTC
5. BaFin
6. Switzerland’s FINMA

Avoiding this fate

Given the anticipated increase in the use of monitors or compliance consultants, and the level of cost (both direct and indirect) and risk associated with these, it is important for firms to look at the circumstances in which monitors are likely to be mandated. 

The CFTC makes it clear in their advisory that they will require a monitor in “cases involving the most significant and/or pervasive compliance and control failures reflecting a lack of sufficient commitment to effective compliance”. In other words, monitors will be required where the regulator lacks faith that the firm will be able to resolve the issues independently and/or that the independent remediation will be effective enough to avoid future misconduct.

Ensuring the firm does not fall into this category begins long before enforcement happens. It requires the implementation of appropriate processes and controls that are reasonably designed to achieve compliance with relevant regulations and for this to be more than just a compliance checkbox exercise. You must be able to demonstrate your commitment to compliance, as this will give the regulator faith that you can remediate any breaches on your own, without oversight by a monitor or advice from a consultant. This means investing proactively and appropriately in compliance resources and controls, which will be more cost effective in the long run than doing so under the scrutiny of a monitor where there is less room for risk based decision making.

If you are looking to proactively enhance your control environment to avoid a potential future monitorship please reach out to us, as our product has been represented to many regulators over our nearly 10 years in business. Behavox also has extensive experience assisting clients during monitorships to ensure they are able to quickly, confidently and comprehensively respond to monitor requests.

References

1. Apex Fund Services (US) Inc. SEC order
2. Even As MCI Makes Strides, Monitor Richard Breeden Stays
3. White Collar – Corporate Monitors: Peace, at What Cost?
4. Compliance Monitors: Everything you wanted to know but were too afraid to ask
5. CFTC Enforcement Advisory on Penalties, Monitors and Admissions
6. Deputy Attorney General Lisa O. Monaco Gives Keynote Address at ABA’s 36th National Institute on White Collar Crime