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Voluntary Disclosure Programs: Confession May Be Good For The Soul, But Is It Good For The Body Corporate?

November 1995

Co-Authors: Brian C. Elmer and Ramona E. Romero.

I. INTRODUCTION

Encouraging companies to disclose corporate fraud or crimes voluntarily is an increasingly favored law enforcement tool. Press reports reflect that the willingness of governmental authorities to exercise prosecutorial discretion favorably with respect to companies that implement strong compliance programs and advise the Government of their own wrongdoing appears to be beneficial for both the government and participating contractors.1

Formal disclosure programs exist in the defense, environmental, antitrust and health care areas. Although these programs share the goal of promoting self-reporting, their policy underpinnings, the permitted participants, the requirements associated with participation, and the benefits conferred on participants differ in significant ways. Further complicating the equation for companies considering such disclosures are the attendant collateral consequences, which range from adverse impact on employee productivity and morale to virtually certain civil liability (with a punitive element). Nonetheless, voluntary disclosures offer a tempting incentive to most companies that discover potentially criminal misconduct: the possible avoidance of criminal prosecution. This article compares the features of the Department of Defense, Department of Health and Human Services, environmental, and antitrust voluntary disclosure programs, explores the benefits and risks associated with such disclosures, and suggests approaches for reducing some of those risks.

II. THE DEFENSE, ANTITRUST, ENVIRONMENTAL AND HEALTH AND HUMAN SERVICES VOLUNTARY DISCLOSURE PROGRAMS

A. The Department of Defense Voluntary Disclosure

The Department of Defense ("DOD") established its Voluntary Disclosure Program in 1986. 2 Perhaps because it was launched more as a means of honoring and promoting contractor self-governance than as a law enforcement tool, 3 the DOD Program is available only to corporations. It offers no protection to the corporate officers and employees involved in the fraudulent conduct disclosed.

The overall outline of the DOD Program is found in the Taft letter of July 24, 1986 and the memorandum that accompanies it. That letter encourages contractors to adopt "a policy of voluntary disclosure as a central part of [their] corporate integrity program." It instructs contractors to disclose matters involving potential civil or criminal fraud to the DOD Inspector General, and matters not implicating fraud to the appropriate contracting officer or representative of the Defense Contract Audit Agency.

On July 17, 1987, the Criminal Division of the Department of Justice ("DOJ") issued a memorandum detailing its policies concerning prosecution of contractors making disclosures under the DOD Program. 4 As an initial matter, the Hendricks Memorandum incorporates the criteria established in the July 1986 Taft letter for DOD recognition of disclosing companies as "volunteers":

  1. Disclosure cannot be triggered by the Government's imminent discovery of the underlying facts;5
  2. Disclosure must be made on behalf of the business entity;
  3. The corporation must take "prompt and complete corrective action," including disciplining employees and reimbursing the Government; and
  4. The corporation must cooperate fully with any Government investigation or audit undertaken to verify the disclosure.

The Hendricks Memorandum also lists the factors DOJ considers in determining whether or not to prosecute a volunteer corporation:

  1. Whether the contractor made a candid, complete and prompt disclosure;
  2. Whether the contractor had an effective compliance program in place prior to the illegal activity;
  3. The extent of the fraud (in terms of its financial impact on the Government);
  4. The pervasiveness of the fraud (a pervasive fraud may reflect systemic abuses, the "condonation of criminal behavior" or the absence of a "meaningful compliance program");
  5. Whether upper management participated in the criminal behavior;
  6. The extent and timeliness of corporate cooperation, including the corporation's willingness to make any internal investigation report available to prosecutors, and to assist the Government in its investigation; and
  7. The institution of remedial action, including the disciplining of culpable employees, and the payment of restitution to the United States.

The Procurement Fraud Unit of the Criminal Division has primary jurisdiction over disclosures made under the DOD Program. United States Attorneys cannot charge disclosers or decline prosecution without that Unit's "concurrence."6 Not surprisingly, DOJ's prosecutorial decisions are "independent of any . . . determination made by DOD" concerning suspension and debarment.7

The respective obligations of the contractor, DOD and DOJ in each disclosure are specified in a written agreement (known as the XYZ Agreement) contractors admitted into the DOD Program are required to sign.8 The form agreement now in use specifies that contractors are not required to conduct an internal investigation or to tender a written report even if such an investigation is conducted.9 However, the statement in the Hendricks Memorandum that "[an]y corporation that holds itself out as a volunteer should be prepared to cooperate with the government in making the results of its investigation available to investigators and prosecutors" plainly indicates that a contractor refusing to provide its internal report does so at its own peril.

B. The Voluntary Disclosure Programs for Environmental Violations

There are two programs designed to promote disclosure of environmental violations. DOJ's program is aimed at criminal conduct. The second program was instituted by the Environmental Protection Agency ("EPA") in mid-1995, and provides relief from civil penalties, as well as other benefits.

1. The DOJ Program

In a statement issued on July 1, 1991, the Department of Justice formally announced its policy of

encourag[ing] self-auditing, self-policing and voluntary disclosure of environmental violations by the regulated community by indicating that these activities are viewed as mitigating factors in the Department's exercise of criminal environmental enforcement discretion.10

The Environmental Policy Statement lists six factors federal prosecutors should consider in determining whether "lenience" (up to and including a declination of prosecution) is warranted in a given case:

  1. Whether the entity or individual made a "voluntary, timely and complete disclosure";
  2. Whether the entity or individual offered "full and prompt cooperation" after a voluntary disclosure or after the Government independently learned of the violation;
  3. The existence, presumably prior to the violations disclosed, of a "regularized, intensive and comprehensive environmental compliance program";
  4. The pervasiveness of the noncompliance, since a pervasive problem may reflect systemic abuses, the "condonation of criminal behavior" or the absence of a "meaningful compliance program";
  5. Whether there was "an effective system of discipline for employees who violated . . . compliance policies";
  6. The presence or absence of prompt subsequent compliance efforts designed to remedy the disclosed violation.

As is apparent from even a cursory review, these factors are very similar to those listed in the Hendricks Memorandum. DOJ does not consider disclosures voluntary if required by the applicable environmental statutes.11

2. The EPA Interim Policy Statement

On December 22, 1995, the EPA issued a final policy statement, which became effective January 22, 1996, designed "to enhance protection of human health and the environment by encouraging regulated entities to discover voluntarily, disclose, correct and prevent violations of federal environmental law."12 Under the EPA Policy, "regulated entities" (i.e., companies and public agencies regulated under the federal environmental laws) that comply with the requirements of the program can qualify for a reduction or waiver of civil penalties.

To obtain the EPA Policy benefits, entities must meet nine conditions:

  1. The violation must be discovered through an environmental audit or due diligence;
  2. The violation must be voluntarily discovered;
  3. The violation must be promptly disclosed;
  4. The discovery and disclosure must be independent of the government or third-party plaintiff;
  5. The violation must be corrected within sixty days of discovery and the entity must promptly remediate any imminent and substantial harm caused by the violation;
  6. The entity must agree to implement steps to prevent a recurrence of the violation;
  7. Previous violations will bar a regulated entity from obtaining relief under the policy;
  8. Penalty reductions are not available for violations that resulted in serious harm or have presented endangerment to public health or the environment; and
  9. The entity must cooperate as required by the EPA.

Entities that meet all of the conditions are entitled to a waiver of gravity-based penalties provided the violations have caused no harm or endangerment to human health or the environment. If the violation was not discovered during an environmental audit or due diligence but meets all of the other conditions, the gravity-based penalties are not completely waived but are reduced by 75 percent.

Criminal prosecution will not be recommended for entities which discover violations through environmental audits or due diligence and disclose and immediately correct them. In addition, if a company has met the criteria for avoiding criminal prosecution, the entity will not face civil liability for gravity-based penalties. This policy does not apply when the violations have caused harm or endangered human health or the environment, when corporate officials are involved in or "willfully blind to violations," or when violations are concealed or noncompliance is condoned.

The EPA will continue its policy not to request or use environmental audits for the purpose of initiating a civil or criminal investigation of an entity.

C. The Antitrust Leniency Policies

1. The Corporate Leniency Policy

On August 10, 1993, the Antitrust Division of the Department of Justice announced its new "Corporate Leniency Policy," expanding the program it has had in place since 1978.13 Both the words "corporate" and "leniency" in the title are somewhat misleading. First, the policy covers individual directors, officers and employees who come forward in conjunction with a corporate disclosure, as well as corporate entities. Second, rather than leniency, which can mean simply a reduction in the charges brought, the policy grants automatic amnesty to antitrust violators who make voluntary disclosures before the Antitrust Division has initiated an investigation and meet other specified criteria. For the first time in the history of the antitrust program, volunteers may receive amnesty even if they come forward after the Division has already started an investigation, provided they satisfy enumerated requirements.14 Also, leniency is no longer automatically unavailable for the originator or leader of an antitrust conspiracy.

Corporations reporting illegal activity before the Antitrust Division has initiated an investigation will not be prosecuted if:

  1. At the time of the disclosure, the Antitrust Division has not received any other reports of the illegal activity;
  2. The corporation "took prompt and effective action" to end its participation when it discovered the activity;
  3. The corporation makes a candid and complete disclosure, and fully cooperates with DOJ throughout the latter's investigation of the activity;
  4. The disclosure is a corporate act;
  5. The corporation makes restitution to injured parties (if possible); and
  6. "The corporation did not coerce another party to participate in the illegal activity and clearly was not the leader in, or originator of, the activity."

Alternatively, corporations which make voluntary disclosures after the Antitrust Division has initiated an investigation may be granted amnesty if they meet conditions 2, 3, 4 and 5 above, and also:

  1. The corporation is the first to make a disclosure and qualify for leniency in connection with the illegal activity at issue;
  2. At the time of the voluntary disclosure, the Antitrust Division does not have sufficient evidence against the discloser to obtain a sustainable conviction;
  3. The Antitrust Division determines that given the nature of the illegal activity, the corporation's role in it, and the timing of the disclosure, granting amnesty would not be unfair to others.

In contrast to the DOD Program's well-defined procedures, the Antitrust Program offers only limited procedural guidance to potential participants. The "leniency procedure" included in the Antitrust Policy Statement instructs staff attorneys to forward any request for leniency and a recommendation for action to the Director of Operations, without waiting to prepare a factual memorandum recommending prosecution of co?conspirators. While corporate counsel is encouraged to approach the Director of Operations when the staff recommends against leniency, the policy notes that such a meeting is a matter of discretion, not entitlement.15 All requests are forwarded to the Assistant Attorney General for a final determination.

2. The 1994 Individual Leniency Policy

On August 10, 1994, the Antitrust Division announced a program allowing individuals to qualify for leniency even when they are not part of a corporate voluntary disclosure. Under the new "Individual Leniency Policy," leniency (again, an assurance of no prosecution) will be granted to individuals reporting illegal conduct before an investigation has started, if:

  1. The Division does not have information about the illegal activity from any other source;
  2. The individual provides information about the illegal activity "with candor and completeness and provides full, continuing and complete cooperation . . . throughout the investigation"; and
  3. The individual has not coerced anyone to participate in the illegal activity and "clearly was not the leader in, or originator of, the activity."

Individuals who do not satisfy all these criteria may still be considered for statutory or informal immunity from prosecution under the policy. Such decisions are made on an ad hoc basis. The "procedures" applicable to requests for individual leniency are essentially identical to those that govern requests under the Corporate Leniency Policy.

D. The Department of Health and Human Services' Operation Restore Trust

The newest voluntary disclosure program was announced by President Clinton on May 3, 1995, and is part of an effort to curb Medicare and Medicaid fraud, waste, and abuse dubbed "Operation Restore Trust." The Department of Health and Human Services ("HHS") program is modeled after the DOD Voluntary Disclosure Program, but is far more limited. It covers only home health agencies, skilled nursing homes, hospice care facilities, and durable medical equipment suppliers.16 Other health care providers (e.g., individual doctors, hospitals, clinical laboratories) and fiscal intermediaries and carriers are excluded.17 The program originally was limited to five states -- California, Florida, Illinois, New York, and Texas.18 Recently, the program has been expanded to include twelve other states: Arizona, Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, and Washington.

The HHS Office of Inspector General is administering the new program. Admission is predicated on:19

  1. Corporate disclosure (not available to individuals, officers, or employees);
  2. "Voluntary" disclosure -- that is, there is no federal or state investigation relating to the matter or practice, nor is the entity subject to any audit or criminal, civil, or administrative proceeding relating to the matter or practice; and
  3. Disclosure of specific information about the wrongdoing and continued cooperation with investigatory efforts.

The IG determines voluntariness based upon a survey of IG components and governmental agencies that might have knowledge of any pending matter involving the disclosure.20 Companies are notified in writing of whether or not they are accepted into the program, and if accepted, must execute a standard voluntary disclosure program agreement within two weeks of the notice.21

DOJ, as well as HHS, is a signatory to the standard agreement. In determining whether or not to prosecute, DOJ uses the same criteria used in the DOD context.22

As is the case in the DOD Program, companies making disclosures to HHS have the option of submitting a report on the results of their internal reviews. Even if a report is not submitted, however, HHS requires a certified Statement of Financial Impact.

E. Differences and Similarities

While the programs described above share certain similarities, they are far from identical. The differences underscore inconsistencies in the enforcement policies of the Department of Justice which can result in disparate treatment of both corporations and individuals.

Perhaps the key difference among the programs is the failure of the HHS and DOD Programs to afford any protection to individuals. According to the Office of Inspector General's recent summary report, 54 individuals have been convicted as a result of voluntary disclosures.23 Even recognizing the vicarious nature of corporate liability and the value of individual accountability as a deterrent, the DOJ's inconsistent treatment of individuals in these programs is difficult to justify. It hardly seems fair that individuals who cooperate with the Government in the context of disclosures made pursuant to the DOD Program or the new HHS Program may be treated more severely than similarly cooperative employees involved in environmental or antitrust offenses disclosed directly to DOJ.

All the programs offer one key incentive for participants: the potential to forestall criminal prosecution. While the Antitrust Division's approach offers a guarantee of no prosecution to qualified entities and individuals, the other programs do not.24 Rather, the latter programs leave the nature of the leniency offered (a reduction in charges or no prosecution) to the discretion of the cognizant prosecutors. Thus, maximizing the chances of avoiding prosecution must be at the forefront of the analysis companies should make when considering whether and how to disclose.

The nature of leniency may also influence the level of participation in the different programs. The EPA voluntary disclosure program, which has a policy to not recommend criminal prosecution for entities that discover and immediately correct violations, has a participant number of 76.25 This far outweighs the DOD program, which has a more limited leniency program, participant number which is 12 companies to date.26 Nevertheless, the number of participants does not measure the fiscal success of such a program. While the DOD program has fewer participants than the other programs, it recovers more monies than the other programs, and since 1986 has recovered $385.1 million dollars.27

As a practical matter, making a good-faith disclosure under the DOD Program virtually ensures that a company will avoid prosecution. As of July 1, 1995, only three of the 344 disclosures made to DOD resulted in conviction of the disclosing contractor.28 The prosecution of McHaffie, Inc., the only contractor indicted after being admitted into the DOD Program, resulted from its alleged concealment of the true scope of the conduct it disclosed and the destruction of documents after disclosure.

Given its relatively recent inception and discretionary approach, it remains to be seen whether or not the leniency policy DOJ announced in the Environmental Policy Statement will offer any real protection to participants. Thus far, several regulated entities have disclosed environmental violations under the new federal environmental audit policy.29 The EPA's December 1995 commitment not to recommend disclosing entities for prosecution offers some further assurance in this area. Also, EPA's stated policy not to request results of internal environmental audits and other evaluative activities associated with compliance programs under circumstances -- such as routine inspections -- where they might serve as a trigger for a civil or criminal enforcement action is also a step in the right direction.30 Further, since the policy has been enacted, more that 75 percent of the regulated companies have conducted environmental audits.31 Clearly, credible implementation of these policies is required if their stated aim (promoting compliance programs and self-reporting of environmental crimes) is to be achieved.

With their requirement that companies be formally accepted into their programs and their formal written agreements specifying the respective rights and responsibilities of DOD or HHS, the contractor, and DOJ, the DOD and HHS Programs are the most structured. For example, the XYZ Agreement provides that the DOJ and DOD will not argue that the submission of a voluntary disclosure report constitutes a waiver of applicable privileges, and warrants that the Government will not use the report as an admission of a party opponent in subsequent litigation.32 HHS' standard agreement contains similar provisions, while the environmental and antitrust programs offer no such assurances.

III. THE BENEFITS AND RISKS OF DISCLOSURE

A. The Potential Advantages

Voluntary disclosures entail both benefits and risks. As discussed above, the key benefit voluntary disclosure programs offer is the potential for corporate entities (and in the case of the Antitrust and Environmental Programs, their directors, officers and employees) to avoid criminal prosecution. Even when that goal is not achieved, however, prompt voluntary disclosures can result in significant benefits to the disclosing corporation.

First, under the Sentencing Guidelines for Organizations, adopted in November 1991, even companies that are criminally prosecuted can derive some benefit in sentencing from having voluntarily disclosed their wrongdoing. Under the guidelines, defendants who make prompt voluntary disclosures, cooperate with the Government, and accept responsibility for their criminal conduct receive a 5 point reduction in the culpability score used to calculate the fine applicable upon conviction.33 Contractors who had an effective compliance program in place prior to the violation may also be entitled to reductions in their culpability.34

Second, although time has shown that civil liability under the False Claims Act, 31 U.S.C. §§ 3729 et seq., is almost a foregone conclusion in cases involving DOD disclosures, voluntarily disclosing fraud may result in measurable monetary benefits. The Act provides that double rather than treble damages can be imposed if there is a judicial finding that the defendant

  1. provided investigators with all available information about the violation within 30 days of its discovery;
  2. fully cooperated with any Government investigation of the violation; and
  3. at the time of the disclosure, no criminal, civil or administrative action had commenced, and the defendant did not have actual knowledge of any ongoing investigation into the violation.35

Because most voluntary disclosures result in settlement negotiations with the Civil Division rather than trial, the practical implication of this provision is that those discussions proceed under a double, rather than treble damages ceiling.

The third significant benefit of voluntary disclosure for contractors disclosing under the DOD Program is the increased likelihood of avoiding suspension and debarment. As of July 1, 1995, only two of the 307 disclosures made under the DOD Program resulted in debarment of the contractor.36 The experience under the HHS program may prove to be similar to that at DOD because the HHS Inspector General's Office administers the Department's exclusion -- i.e., debarment -- program. The issue is far more complex in the antitrust and environmental contexts since neither DOJ program provides any assurance in this respect. However, the new EPA Policy might result in increased coordination between DOJ and the Agency, with concomitant advantages.

Certainly, any contractor that pleads guilty to a lesser offense (or fewer counts) after obtaining "leniency" under either of the two programs DOJ administers directly will still face suspension and debarment scrutiny. Companies granted amnesty will likely undergo suspension and debarment consideration when the nature of their conduct becomes apparent through the announcement of civil sanctions or through publicity attendant to the prosecution of co-conspirators. The track records of suspension and debarment authorities at DOD and other agencies suggest that "present responsibility" determinations will ensue when the underlying facts reflect wrongdoing -- even if the criminal conduct goes unprosecuted. Consequently, although experience suggests that agencies are likely to look favorably upon disclosures made under the antitrust and environmental programs, companies need to anticipate and resolve suspension and debarment concerns at the earliest practical stage.

B. The Potential Disadvantages

The decision to make a voluntary disclosure is not without significant risks. First, even in the Antitrust Program, which is most liberal in the sense that it virtually guarantees amnesty to volunteers who meet the specified conditions, prosecutors exercise a great deal of discretion in determining whether the conditions have in fact been met. Perhaps the most significant potential area of contention is the requirement for "cooperation" common to all the programs. Any refusal to meet the demands of the investigators verifying a disclosure can leave a company open to charges that it has failed to cooperate, negating the expectation that self-reporting will decrease the likelihood of prosecution. Even in instances where criminal prosecution is successfully avoided, Government attorneys pursuing civil recovery can call into question the sufficiency of an entity's cooperation.

Moreover, any contractor considering a voluntary disclosure must fully appreciate the collateral civil consequences. The Civil Division of DOJ has in recent years invariably and aggressively sought to maximize the Government's recovery in DOD voluntary disclosures. An April 10, 1988 letter to DOD from the Civil Division concerning the acceptance of restitution payments tendered by disclosing contractors illustrates the point.37 The letter discourages the solicitation and acceptance of such payments, noting that they might limit the Civil Division's "ability to maximize the Government's recoveries in voluntary disclosure cases. . . ." The letter adds that

negotiations with prospective defendants are far more effective if the single damages have not previously been settled. Where the estimated single damages previously have been paid back, in order to collect further damages we must convince the contractor we are likely to prevail on the merits of our fraud allegations.

Given this history, there is every reason to believe that disclosures of environmental, health care, and antitrust criminal violations will trigger civil penalties even where prosecution has been avoided. Indeed, the Environmental Policy Statement specifies that it is not intended to "limit the lawful litigative prerogatives, including civil enforcement actions, of the Department of Justice or the Environmental Protection Agency."38 The EPA Policy affords a measure of certainty in this respect by providing for the waiver or reduction of civil penalties. However, this provision does not apply in all cases. (See Section II.B.2 above.)

Voluntary disclosures may also expose corporations to a variety of civil actions from a broad range of putative plaintiffs. For example, employees implicated in the misconduct disclosed and disciplined or dismissed as a result may sue for defamation and/or wrongful termination.

More significant, corporate insiders with knowledge of the misconduct are uniquely situated to bring qui tam actions under the civil False Claims Act, sometimes even before a company has completed its internal investigation. Section 3730 of the Act grants standing to sue on behalf of the United States to any individual or entity aware of a potential violation. The Act generally entitles successful qui tam plaintiffs to between 15 and 30 percent of any recovery, creating a significant incentive for such lawsuits. Qui tam lawsuits subject corporations to the penalty and treble damages provisions of the Act in the same manner as if the Government had brought the action itself.

Finally, voluntary disclosures may result in shareholder derivative actions against corporate officers and directors. Shareholders of disclosing corporations may seek legal redress on behalf of the corporation, arguing that the directors and officers responsible for the division or subsidiary where the misconduct disclosed occurred breached fiduciary duties recognized under state law.

In addition to increasing the likelihood of a civil action, voluntary disclosures compromise the discloser's ability to assert certain evidentiary privileges relative to third parties. Voluntary disclosure to the Government of information developed pursuant to a privileged internal investigation may be construed as a waiver of the attorney-client privilege and work product protection (assuming they apply).39

IV. ALTERNATIVE APPROACHES

Before committing to a voluntary disclosure, companies should consider available alternatives. Under the DOD Program, a non-fraud disclosure can be made to the contracting officer or the Defense Contract Audit Agency. Such a disclosure, coupled with the appropriate corrective action and monetary adjustment, can result in essentially a "single damages" resolution. Likewise, environmental violations may be reported directly to the EPA. Even prior to the institution of the new EPA Policy, that agency has always been willing to settle many violations through administrative procedures and consent decrees. These mechanisms do not necessarily involve DOJ personnel with criminal prosecution responsibilities, and administrative resolutions often result in smaller payments than those exacted after a prolonged -- and presumably costly -- review by DOJ attorneys with criminal enforcement discretion. In the case of serious antitrust violations, there is no apparent administrative alternative.40

Provided no affirmative steps are taken to conceal felonious conduct,41 companies can opt not to disclose, while immediately ceasing all questionable practices, implementing prospective corrective action, and instituting a compliance program. Since the types of disclosures recognized as voluntary by the DOD, environmental, antitrust and HHS programs are not mandated by law, such an alternative is not untenable. This is especially true in cases involving financial issues rather than violations where the failure to disclose could impair the health or safety of Government personnel or the general public.

Admittedly, implementation of the nondisclosure alternative is problematic when the Government has suffered a monetary loss as a result of the pertinent practice or conduct. While this may not normally be an issue in the environmental or antitrust contexts, in DOD procurement and health care cases there is often a readily quantifiable financial impact on the Government. Some might argue, however, that even in the DOD and HHS contexts such situations can be handled through credits or adjustments designed to make the Government whole without the formality of a disclosure.

But opting not to disclose is not without risk. First, there is always the likelihood that the Government might independently uncover the pertinent conduct and pursue civil and criminal sanctions. Second, in cases involving practices actionable under the False Claims Act, the possibility of a qui tam lawsuit by an insider aware of the problem is significant in light of the enormous financial gain relators can reap from such actions. Such a lawsuit may in turn prompt a criminal investigation.

Companies that decide to disclose should consider carefully the best avenue for disclosure in light of the differing features of the available programs. They must also keep in mind, though, that any choice will be fraught with uncertainty given the as yet unresolved jurisdictional conflicts inherent in the availability of distinct programs administered by different divisions of DOJ.42 Contractors disclosing under the DOD Program are almost never prosecuted or debarred. Thus continued reliance on that program is generally advisable when it is among the available alternatives.

Another important consideration is the disclosure's timing. The emphasis the programs' policy statements, the False Claims Act and the Sentencing Guidelines place on prompt self-reporting indicates that in the voluntary disclosure context, good things come only to those who do not wait.43

V. CONCLUSION

Given the absence of a formalized agreement similar to those used in the DOD and HHS contexts, contractors making disclosures under the Antitrust and Environmental Programs should proceed with caution, anticipating and addressing as many potential issues as possible. The DOD Program provides a ready guide to the types of issues likely to arise.

For example, because of the likelihood of disputes concerning the sufficiency of cooperation and their potential to negate the key benefit of disclosure, companies should pursue clear, early understandings with the cognizant DOJ authorities about the form and extent of cooperation expected. Additionally, government contractors disclosing to DOJ under the Environmental and Antitrust Programs would be well served to explore DOJ's willingness to intercede with cognizant agencies on suspension and debarment matters.

Companies should also seek written assurances, in advance of their "cooperation," that the Government will protect (to the extent permissible by law) the confidentiality of information and documents provided pursuant to the disclosure, and will not argue in subsequent civil litigation that the provision of such information or materials constituted a waiver of any applicable privilege or protection.44 Similarly, companies should obtain a commitment that the Government will not attempt to use the voluntary disclosure as an admission in subsequent litigation. Otherwise, disclosing companies risk having the Government use their own privileged material against them in subsequent civil litigation arising from their voluntary disclosures.


NOTES

1. See, e.g., Scott Arnold, Voluntary Disclosure Program Benefits All Concerned: Confessing to Uncle Sam, Legal Times, June 17, 1996, at S32.
2. The DOD Program was established through two letters issued by then Deputy Secretary of Defense William H. Taft, IV. The first Taft letter, dated July 24, 1986, announced the program and enclosed a memorandum describing its general features. The second letter, dated August 10, 1987, made clear that: (1) DOD encouraged disclosures without legally or contractually mandating them; (2) suspension and debarment determinations would not be made until the government verified the disclosure; and (3) the DOD would consider contractor cooperation irrespective of whether or not the contractor was a volunteer.
For a detailed discussion of the DOD Program and related issues, see American Bar Association, Section of Public Contract Law, Voluntary Disclosure: 1994 Update (hereinafter "ABA Report"). The Taft letters and other pertinent documents are exhibits to the ABA Report.
3. The DOD acted in response to two initiatives that culminated in mid-1986. In June 1986, the President's Blue Ribbon Commission on Defense Management (the "Packard Commission") recommended in its final report that the Department of Defense implement a program encouraging voluntary disclosure with appropriate incentives. Packard Commission, "A Quest for Excellence," 101, 110-11 (1986). At about the same time, many of the largest defense contractors became signatories of the "Defense Industry Initiative on Business Ethics and Conduct" ("DII"). The DII expressly promotes contractor self-governance and requires the adoption of procedures within signatory companies providing for voluntary disclosure to the Government of violations of federal procurement laws and implementation of corrective actions.
4. Memorandum from William C. Hendricks III (Chief, Fraud Section, Criminal Division) to All United States Attorneys re "Department of Justice Guidelines Re: Department of Defense Voluntary Disclosure Program" (July 17, 1987) (hereinafter "Hendricks Memorandum"). See ABA Report, Tab 10, for text.
5. The existence of an ongoing investigation is not a per se bar to admission into the DOD Program if the contractor is unaware of the effort, but it is an important consideration. Morris Silverstein, Presentation on the Voluntary Disclosure Program Before the Public Contract Law Section of the American Bar Association (November 2, 1990). Prior to deciding whether to admit a company, the DOD Inspector General conducts an inquiry to determine whether the Government was investigating or had knowledge of the matter prior to the initial disclosure. See Office of the Inspector General, Department of Defense, The Department of Defense Voluntary Disclosure Program: A Description of the Process § C.6. (1990) (hereinafter "DOD IG Pamphlet"). It is fair to state that only rarely are companies admitted into the Program after an investigation has commenced.
6. Hendricks Memorandum, supra note 4.
7. Id.
8. To seek admission into the DOD Program, contractors need only write to DOD identifying the general nature and duration of the potential fraud, when the conduct occurred, the corporate divisions implicated and their locations, and the defense agencies and military departments affected (if known). After the DOD makes an initial determination that the contractor qualifies for admission into the Program, it notifies the company in writing, asking it to execute the XYZ Agreement and to specify within ten days whether it intends to provide a written disclosure report. Failure to execute the XYZ Agreement will result in the contractor's removal from the DOD Program. In addition to notifying the contractor of the removal, DOD also notifies the Civil and Criminal Divisions of DOJ, the Defense Criminal Investigative Organizations, the Defense Contract Audit Agency, and the suspension and debarment authorities. DOD IG Pamphlet § C, supra note 5.
9. XYZ Agreement (February 1993). Whether or not they submit disclosure reports, contractors conducting investigations must "determine the cost impact to the Government resulting from the matters disclosed, and submit to the Government a good faith statement of the cost impact and any supporting audit reports, auditing work papers, exhibits and all analytical documents." XYZ Agreement (February 1993). Companies that opt to provide a report are expected to follow guidelines attached to the XYZ Agreement, and to provide pertinent audit reports, work papers and analyses, a description of the internal investigation, a list of all individuals interviewed that includes their position at the Company and "a statement of each occasion on which they were interviewed," a description of the files, records or documents reviewed, and a summary of any audits and documents supporting their cost impact determinations. The XYZ Agreement also requires contractors to provide "a detailed statement of the facts, including the identity and role of employees involved in the matter disclosed." XYZ Agreement § A.5. DOJ and the DOD-IG may request additional information. See also DOD IG Pamphlet, supra note 5.
10. U.S. Department of Justice, Factors in Decisions on Criminal Prosecutions for Environmental Violations in the Context of Significant Voluntary Compliance or Disclosure Efforts by the Violator, 4 DOJ Manual § 5-11.104A (Supp. 1995-3) (Prentice Hall) (hereinafter "Environmental Policy Statement").
11. Environmental Policy Statement at 5-84.
12. Environmental Protection Agency, Voluntary Environmental Self-Policing and Self-Disclosure Final Policy Statement, 60 Fed. Reg. 66706 (December 22, 1995) ("EPA Policy").
13. Anne K. Bingaman, Antitrust Enforcement, Some Initial Thoughts and Actions, Address Before the Antitrust Section of the American Bar Association (August 10, 1993); see also Antitrust Division, U.S. Department of Justice, Corporate Leniency Policy (August 10, 1993) (hereinafter "Antitrust Policy Statement").
14. See "New Leniency Policy May Spur Criminal Docket," The DOJ Alert, Aug. 16, 1993, at 5; Antitrust Policy Statement at 2.
15. While such appeals to supervisory personnel are standard operating procedure for defense attorneys, DOJ's explicit recognition of the appeal process is unique.
16. According to June Gibbs Brown, the HHS Inspector General (and formerly the DOD-IG), these health care providers are particularly susceptible to fraud such as billing for excessive services or services not rendered, use of unlicensed or untrained staff, falsification of patient care plans, forged physician signatures, and kickbacks. Testimony of June Gibbs Brown, Inspector General, HHS, before the Senate Committee on Finance, July 31, 1995 (hereinafter "Brown Statement").
17. Intermediaries and carriers are entities -- such as Blue Cross and Blue Shield Plans -- that serve as fiscal agents for the Government in processing Medicare claims.
18. These states have nearly 40 percent of all Medicare and Medicaid beneficiaries. Brown Statement, supra note 17.
19. To seek admission, companies must make a preliminary written disclosure including the name and address of the disclosing entity; the geographic location of the pertinent events; a description of the origin of the information; the date of the initial discovery; a chronology of steps the entity took upon discovering the matter; a brief description of the nature of the fraud; an estimate of the Government's monetary loss; the time period involved; the HHS health care program(s) affected; the identities of the relevant Medicare carriers and fiscal intermediaries that have or may have handled claims related to the matter or practice; the relevant Medicare and Medicaid provider numbers; the names and titles of employees believed to be involved in the matter; and a certification that the entity is unaware of any HHS or other health care agency investigation or audit related to the matter or practice disclosed. Department of Health and Human Services Office of Inspector General HHS Fact Sheet-Voluntary Disclosure Program, Description of the Health and Human Services Voluntary Disclosure Program, Operation Restore Trust, OIG Procedures for Administering the Pilot Disclosure Program, 995 PLI/Corp 837, 842 (June 1997) (hereinafter "HHS Fact Sheet").
20. Including HHS-IG field and headquarters offices; the FBI; DOJ; United States Attorney Offices; U.S. Postal Inspection Service; DOD; the Department of Veterans Affairs; State Medicaid Fraud Control Units; and Medicare carriers and intermediaries. HHS Fact Sheet, supra note 19.
21. The HHS Agreement is patterned after the DOD's XYZ Agreement. However, the HHS Agreement imposes additional obligations, including the requirement that companies certify that the information in the financial impact statements they must provide as a condition of participation in the disclosure program, and the information in their internal investigation reports (if submitted) "is true, complete and correct . . ."
22. See HHS Fact Sheet, supra note 19.
23. Office of the Inspector General, Department of Defense, Voluntary Disclosure Summary Report (July 1, 1995) (hereinafter "Summary Report").
24. This is a reflection of the conspiratorial nature of antitrust offenses. By encouraging companies and individuals to come forward, DOJ gains information that enhances its ability to prosecute other corporate and individual members of the conspiracy.
25. See "New Federal Audit Policy Leads 76 Companies to Disclose Environmental Violations, EPA Says," Env't Rep. (BNA), 784-785 (August 2, 1996).
26. These statistics come from information gathered in an October 1, 1997 report of the Department of Defense, Inspector General's Office. A more formal report will be published in 1998.
27. See note 27 supra.
28. Summary Report, supra note 25. Only one of those companies, McHaffie, Inc., was prosecuted after being accepted into the DOD Program. The other two convictions involved subsidiaries of TRW, Inc. which made their disclosures in 1984, prior to the institution of the formal DOD Program. See United States v. TRW, Inc., 4 F.3d 417 (6th Cir. 1993), cert. denied, 114 S. Ct. 1370 (1994). A third contractor, Rockwell International Corporation, argued that its indictment was based on voluntary disclosures made to DCAA, and should be dismissed because the Government failed to comply with the rules of the DOD Program. The court rejected the argument, holding that Rockwell did not qualify as a volunteer because DCAA discovered the pertinent fraud independently and the Company did not approach the DOD IG Office until the eve of indictment. See United States v. Rockwell Int'l Corp., 924 F. 2d 928 (9th Cir. 1991).
29. See supra note 25.
30. This policy was adopted in response to companies' often reported concern that such reports would be used against them. See Reports and Proposals, Environmental Crimes, 53 BNA Crim. L.R. 1439, 1443-45 (1993). This approach was adopted instead of a broad environmental self-evaluative privilege, which was favored by industry, but opposed by DOJ. See 60 Fed. Reg. at 66706.
31. See Env't Rep., supra note 16.
32. Of course, the Government's agreement not to argue that submission of the voluntary disclosure report constitutes a waiver of the attorney-client privilege does not ensure preservation of the privilege in litigation with third parties. See discussion infra, note 36 and accompanying text.
33. United States Sentencing Commission, Sentencing Guidelines for Organizations, § 8C2.5(g). Environmental crimes are not covered by the organizational guidelines, so that § 8C2.5 does not apply to environmental offenses. However, the U.S. Sentencing Commission, Practice Under The Federal Sentencing Guidelines (1997 Supplement), Chapter 12 contains a section entitled, "The Impact of the Sentencing Guidelines for Organizations on Environmental Cases." The Sentencing Commission's Advisory Working Group on Environmental Offenses released its second and final draft of the proposed guidelines on November 16, 1993. See Draft Corporate Sentencing Guidelines for Environmental Violations, printed in Env't Rep. (BNA), 1378-1387 (Nov. 26, 1993). The draft includes provisions reducing the base offense level by up to six points for companies that have compliance programs with specified features, promptly and voluntarily disclose violations, "fully cooperate" with the Government's investigation and take "all reasonable steps to assess responsibility within the organization and prevent recurrence." The Commission has yet to issue a final version of these provisions, and Commission sources indicate that they are not on the current agenda.
34. See Guidelines Manual § 8C2.5(f). See also U.S. Sentencing Commission, Practice Under The Federal Sentencing Guidelines, 12.D., 12-34 which states in its section entitled "The Impact of the Sentencing Guidelines for Organizations on Environmental Cases," ("An organization's, 'effective program to prevent and detect violations' generally warrants a three point reduction.")
35. 31 U.S.C. § 3739(a) (A) - (C). The statute provides that the disclosure must be made to "officials of the United States responsible for investigating false claims violations. . . ." DOJ has taken the position that only it meets this definition. During settlement discussions, DOJ generally does not resist the applicability of this provision to disclosures made through the DOD Program, nor does it enforce the statutory requirement that disclosures be made within thirty days after the violation is discovered.
36. Summary Report, supra note 25.
37. See Letter, Michael F. Hertz, Director, Commercial Litigation Branch, to Daniel R. Foley, Acting Assistant IG for Criminal Investigation Policy and Oversight, April 10, 1988.
38. Environmental Policy Statement at 5-91.
39. See, e.g., Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414 (3rd Cir. 1991); In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988), cert. denied, 490 U.S. 1011 (1989); Neal v. Honeywell, Inc., 1995 WL 591461 (Oct. 4, 1995) (production of interview notes to Government under DOD Program constituted subject matter waiver of attorney-client privilege and work product protection, except as to opinion work product never produced to government). But see Diversified Indus. v. Meredith, 572 F.2d 596 (8th Cir. 1977) (en banc) (voluntary disclosure of privileged materials to Government constituted only a "limited waiver" and did not waive privilege as to other parties); Chamberlain Manufacturing Corp. v. Maremont Corp., 1993 WL 11885 (N.D. Ill. January 19, 1993) (finding that interview summaries and notes prepared during internal investigation were protected by attorney-client privilege and work product doctrine, court rejected the argument that submission of report under the DOD Program waived those protections when summaries and notes themselves had not been disclosed).
40. Disclosures to the Federal Trade Commission might be appropriate in limited factual situations unlikely to arise in the procurement context.
41. See 18 U.S.C. § 4 (misprision of felony). However, conviction under § 4 requires active concealment; mere failure to report is not a violation. E.g., U.S. v. Warters, 885 F.2d 1266 (5th Cir. 1989).
42. For example, simultaneous disclosures to the DOD and the Antitrust Division of DOJ may seem the best alternative for a defense contractor whose conduct violated antitrust laws. Arguably, this approach would allow the contractor to assert entitlement to a guarantee of no prosecution -- at least with respect to the antitrust aspects of its conduct. To the extent the disclosure involves violations of other statutes, the Defense Procurement Fraud Unit of the Criminal Division would presumably still be able to charge the contractor, calling into question the value of involving two groups of DOJ prosecutors.
43. See Rockwell note 27, where the court noted that Rockwell was not a volunteer, having waited until the eve of indictment to try to avail itself of the DOD Program.
44. Also, such written assurances may enhance companies' limited ability to assert applicable evidentiary privileges in actions involving third parties by establishing the intent to protect confidential and privileged materials.

Brian C. Elmer
Retired Partner – Washington, D.C.
Email: belmer@crowellretiredpartners.com