Safe Harbor Policy Incentivizes Disclosure of Acquired Companies’ Misconduct

On October 4, 2023, Deputy Attorney General Lisa O. Monaco (DAG Monaco) spoke at the Society of Corporate Compliance and Ethics 22nd Annual Compliance and Ethics Institute and addressed several corporate compliance issues, and perhaps most notably unveiled the Department of Justice’s (DOJ) new safe harbor policy for voluntary self-disclosures (VSD) arising from mergers and acquisitions (Safe Harbor Policy). To qualify under the Safe Harbor Policy, acquiring companies must:

• disclose misconduct related to the acquired entity within six months from the date of closing regardless of whether the misconduct was discovered pre- or post-acquisition;
• remediate the misconduct fully within one year from the date of closing; and
• where appropriate, cooperate with the DOJ’s investigation and engage in remediation, restitution, and disgorgement efforts.

If the acquiring company successfully navigates to the safe harbor, it will receive the presumption of a declination and the acquired company may qualify for VSD benefits, up to and including a declination. As DAG Monaco put it: “[G]ood companies—those that invest in strong compliance programs—will not be penalized for lawfully acquiring companies when they do their due diligence and discover and self-disclose misconduct.”

The new Safe Harbor Policy is just one aspect of the Biden administration’s approach to combat wrongdoing. In her speech, DAG Monaco emphasized the DOJ’s continued focus on corporate crimes—especially those implicating national security issues—and touted the Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks (Clawback Policy). The DOJ will not only be adding 25 new corporate crime prosecutors to the National Security Division—including a Chief Counsel for Corporate Enforcement—but will also increase by 40 percent the number of prosecutors in the Criminal Division’s Bank Integrity Unit, which focuses on sanctions and Bank Secrecy Act compliance.

DAG Monaco provided further detail on the new Safe Harbor Policy. Like the DOJ’s general VSD policy that was implemented in March 2023, the Safe Harbor Policy will apply Department-wide. The VSD policy was meant to enhance transparency and predictability in corporate criminal enforcement and to provide an incentive for companies that promptly and fully disclose misconduct, regardless of the type or location of the case. We discussed this in a previous alert. DAG Monaco stated she views the Safe Harbor Policy as an extension of the DOJ’s existing VSD policy.

The Safe Harbor Policy sets clear timelines, requiring disclosure of misconduct within six months from the closing date and one year for full remediation. Importantly, these are “baseline” timelines and can be extended subject to a “reasonableness analysis” that takes into account the facts and circumstance of the transactions, including its complexity. DAG Monaco stressed, however, that when acquiring companies “detect misconduct threatening national security or involving ongoing or imminent harm” they should self-disclose as soon as possible.

If satisfied, the Safe Harbor Policy provides the presumption of declination for the acquiring company. Importantly, DAG Monaco stated that aggravating factors at the acquired company will not affect the acquiring company’s eligibility for a declination. Moreover, misconduct disclosed under the Safe Harbor Policy will not factor into future recidivist analysis for the acquiring company. Finally, the acquired entity can also qualify for benefits under the existing VSD policy—as long as there are no disqualifying aggravating factors, up to and including a potential declination.

The Safe Harbor Policy has limitations. It only applies to criminal conduct discovered in genuine, arms-length M&A transactions and does not cover misconduct already required to be disclosed or known to the DOJ. The Safe Harbor Policy does not address or impact civil merger enforcement. If an acquiring company fails to perform effective due diligence or self-disclose misconduct, it may face full successor liability.

The DOJ recognizes that “companies are on the front line in responding to geopolitical risks.” The new Safe Harbor Policy provides a carrot-and-stick approach to address that risk. Acquiring companies are expected to implement effective due diligence and compliance integration pre- and post-acquisition. If acquiring companies do so and in the process learn of misconduct, the Safe Harbor Policy provides a way to report the misconduct with minimal consequences for the acquiring company and, quite possibly, the acquired company. The DOJ sees this as a way to not only protect shareholders and companies, but as a means to strike at corporate crime and ensure national security.

The new Safe Harbor Policy is a reminder to acquiring companies that due diligence does not stop at the time of the acquisition. Acquiring companies should work quickly and diligently to discover and remediate compliance concerns and should consider voluntary self-disclosure to minimize the impact on the acquirer and the acquired company.

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