2022 and Beyond - Regulatory Enforcement Trends in the Biden Administration

2022 and Beyond - Regulatory Enforcement Trends in the Biden Administration

by Richard H. Girgenti, Founder & CEO, IDPL Consulting, LLC and Senior Counsel, Compliance Systems Legal Group (CSLG)

“It is difficult to make predictions, especially about the future.” Yogi Berra

?Twelve months into the Biden administration it is increasingly clear that there are new sheriffs in town who have proclaimed a more aggressive enforcement regime at the Department of Justice (DOJ), the Securities Exchange Commission (SEC), and other federal regulatory and enforcement agencies. The extent to which such proclamations will result in greater government scrutiny of corporate misconduct, or more enforcement actions with more severe outcomes, or a closer look at the effectiveness of corporate efforts to manage risk remains to be seen. However, there is little doubt that new sheriffs have set a tone far different than the one set by the previous administration.

?In addition to the tone of agency heads appointed by Biden, the emergence of ESG at the top of the corporate agenda; political agendas fueled by inflation, climate change and investor protection; and cybersecurity risk, including the expansion of cryptocurrency, have shaped the landscape of regulation and enforcement in the coming year. Some of the major trends that one can look for in 2022 and beyond are:

• Focus on domestic and international corruption
• Stepped up enforcement and response by DOJ of corporate crime
• Increased enforcement and expanded focus by the SEC
• ?Increased antitrust enforcement
• Expanded role for corporate compliance and risk management

1.??????Focus on domestic and international corruption

Early in the administration, the White House announced efforts to develop a presidential strategy to combat domestic and international corruption. In June of 2021, the president issued a national security memorandum on “Establishing the Fight Against Corruption as a Core United States National Security Interest.” The administration’s first national security memorandum was sweeping in tone citing the “staggering” cost of international corruption and the threat to “national security, economic equity, global anti-poverty and development efforts, and democracy itself.” It called for an interagency review to “promote good governance and prevent corruption,” “[c]ombat all forms of illicit finance,” and “[h]old accountable corrupt individuals, transnational criminal organizations, and their facilitators” and report with recommendations within 200 days for the president to review and adopt.

Despite its sweeping nature, framing anti-corruption efforts as a “national security interest,” there is little evidence to date about what this will mean. While the tone is markedly different and more aggressive than the one of the previous administration, there are yet no specifics as to how and when the strategy will unfold. At least in year one of the Biden administration, core corporate FCPA enforcement actions were significantly lower than the average in each of the four years of the Trump administration.

Looking forward, to understand the scope of the administration’s anti-corruption efforts, it will be important to analyze not just the data from the SEC and DOJ on FCPA actions, but also the efforts of Treasury’s Office of Foreign Assets Control (OFAC) in implementing sanctions on corrupt governments and individuals and the Financial Crimes Enforcement Network (FinCEN) implementation of the Corporate Transparency Act (CTA), including the creation of a beneficial owner disclosure program. The results of this program will be available to other government agencies and would expand the reach of the DOJ and SEC and lead to new sources of potential cases for these agencies’ FCPA units. The focus of the Presidential memorandum on the targeting of corrupt foreign government officials will also likely lead to increased cooperation within the DOJ itself, including its Public Integrity Section, the Money Laundering and Asset Recovery Section, and the Market Integrity and Major Frauds Unit.

2.??????Stepped up DOJ enforcement and response to corporate crime

In October, the DOJ disclosed a number of policy changes intended to toughen its enforcement of corporate misconduct. These changes announced by Deputy Attorney General Lisa Monaco were described as “changes of degree and not kind” and included:

·??????Restoring prior DOJ guidance that corporations must provide all non-privileged information about all individuals involved in misconduct to be eligible for cooperation credit;

·??????Taking into consideration a corporation’s full history of criminal, civil, and regulatory matters in making charging decisions or settling a case with offers of deferred and non-prosecution agreements whether similar or dissimilar to the conduct at issue;

·??????Prosecutors are free to impose a corporate monitor whenever they deem it appropriate to do so effectively rescinding the Trump’s administration’s guidance that had curbed the use of external compliance monitors;

·??????Surge resources to the department’s prosecutors with a new squad of FBI agents embedded in the Criminal Fraud Section;

·??????Reminder that companies need to actively review their compliance programs to ensure that they adequately monitor for and remediate misconduct and emphasized DOJ’s responsibility to incentivize responsible corporate citizenship, a culture of compliance and accountability in making charging decisions and evaluating credit

3.??????Increased focus by the SEC on investor protection, insider trading, fast-moving technology innovations, cyber preparedness and emerging trends such as the impact of ESG on the financial markets

In his first year as SEC Chair, Gary Gensler, has made it perfectly clear that he intends to use the agency’s rulemaking authority to require disclosures in areas of ESG, climate change, board diversity, human capital management and cybersecurity risk governance. (Compliance Week, Winter 2021). In December, the SEC proposed amendments to Rule 10b5-1 of the Securities Exchange Act of 1934 intended to strengthen investor protections through enhanced disclosure relating to trading activity of corporate insiders and issuers.

Despite this aggressive agenda, the number of enforcement actions in FY ’21 decreased three percent from the total actions filed in FY ’20. (SEC Annual Report). Nonetheless, SEC Enforcement Division Director, Gurbir Grewal, heralded a number of first-of-their kind enforcement actions that could foreshadow future actions and provide a road map for SEC priorities. These included, among others: charges in the crypto space involving securities using decentralized finance technology; enforcement action involving Regulation Crowdfunding; and an action against an alternative data provider for engaging in deceptive practices.

Grewal has also cited other areas of SEC’s enforcement focus, including:

• Holding gatekeepers, such as lawyers and auditing partners at major accounting firms, accountable;
• Requiring admissions of wrongdoing, barring culpable officers and directors from serving at any public company, enjoining specific conduct in the future and mandating that companies undertake to hire an independent compliance consultant; and
• Increased focus on companies who violate the FCPA.

Bottom line, look for SEC enforcement more like the era of SEC Chair Mary Jo White than that of Jay Clayton.

4.??????Increased focus by federal government antitrust authorities on the lack of corporate competition

Recently (NY Times, 12/26/21), the Biden administration, threatened by rising inflation (a 40 year high), unleashed the full panoply of federal antitrust authorities to address what the administration perceives to be a lack of competition among a few large players in several industries that could potentially be driving higher prices than a more competitive market would allow.

What is unique about this focus is that, in addition to the Department of Justice (DOJ) and Federal Trade Commission (FTC), it involves federal agencies like the Agriculture Department, the Federal Maritime Commission that have not traditionally been part of antitrust enforcement. This effort will target large meatpackers who control significant portions of the poultry and pork markets and have tripled profit margins during the pandemic; large oil companies for potential price gouging and large shipping companies at the heart of the supply chain. What impact this effort will have remains to be seen.

5.??????Expanded role for compliance and risk management

The role of compliance and risk management will need to evolve in 2022. The emergence of ESG as a corporate priority; the impact of the pandemic and a remote workforce; the heightened concern for cyber security; the developments in data analytics; and the administration’s focus on accountability and enforcement have increased the challenge for the compliance and risk functions.

Compliance will need to play a meaningful role in assisting a company’s ESG efforts. While multiple functions within an organization will have responsibility for ESG, compliance is uniquely positioned to ensure that internal policies, procedures and systems are designed to assist a company in meetings its ethical and legal obligations to its stakeholders while mitigating legal, regulatory and operational risks. According to a White Paper issued by the World Economic Forum in December 2021, a strategic approach to integrity in an ESG driven world will include: governance, incentives and performance; efforts to drive longer-term organizational strategy and planning; consideration of stakeholder interests, perceptions and shifts; and engagement with external partners.

Compliance and Risk Officers will face a steep learning curve in coming up to speed to understand, track, verify and report on a wide variety of material ESG elements that are emerging with different standard setting bodies.

Compliance and Risk officers will also be under increasing pressure to be more proactive and ramp up their efforts around data analytics and to harness the full potential of continuing developments in AI and predictive analytics. There can be little doubt that the SEC, DOJ and other federal agencies will be looking at the way companies optimize their data analytic efforts to mitigate risk across their organization.

With an increasingly remote workforce, developments in our understanding, and our ability to leverage the science of human behavior, will be critical in ensuring compliance program effectiveness. As companies seek to transform their culture to one focused on purpose and integrity, incorporating the lessons of human behavior and neuroscience will be key in the development of effective training programs and compliance communication that will motivate and encourage employees and influence the right attitudes and behavior.

Conclusion

Whether the tough tone of the new heads of Biden's regulatory and enforcement agencies will result in increased enforcement and more severe penalties is still an open question. However, the next few years of this administration are certainly not the time for compliance and risk professionals, corporate executives and board directors to become complacent about what they need to do to ensure that they are effectively managing their company's risks.