United States: DOJ Criminal Division Issues Comprehensive Guidance on Evaluating Claims of Inability to Pay Criminal Fines or Penalties

On October 8, 2019, the Criminal Division of the U.S. Department of Justice (DOJ) announced comprehensive guidance on how the DOJ will evaluate a company's claim of inability to pay a proposed criminal fine or monetary penalty. This guidance is the latest action by the Criminal Division to provide greater transparency regarding its prosecutorial decision-making and follows the division's April 2019 guidance on how to evaluate corporate compliance programs. In a speech announcing the new guidance, Assistant Attorney General for the Criminal Division Brian A. Benczkowski stated the new guidance will "help ensure that prosecutors stick to a more uniform set of considerations, and also that companies looking to resolve matters have greater insight into how prosecutors think."

The New Guidance

Federal law and the federal sentencing guidelines allow courts to take into account a criminal defendant's ability to pay a criminal fine before assessing a fine. But neither the law nor the guidelines provide much guidance on the factors that should be considered when evaluating a defendant's inability to pay claim. The guidelines provide that when a company cannot pay the minimum fine applicable under the guidelines, the court may reduce the fine―but not by "more than necessary to avoid substantially jeopardizing the continued viability of the organization." Beyond this statement, there are no standards identified to assist the government's evaluation of a company's claim of inability to pay. The new guidance attempts to offer this assistance.

As a threshold issue, before Criminal Division attorneys will consider a company's inability-to-pay argument, the parties must reach an agreement regarding the form of a corporate criminal resolution (e.g., nonprosecution agreement, deferred prosecution agreement or corporate guilty plea) and the appropriate monetary penalty based on the law and facts, irrespective of inability to pay considerations. The burden of establishing an inability to pay rests with the company making the claim.

Inability-to-Pay Questionnaire

The new guidance requires the company claiming inability to pay to submit a completed "Inability-to-Pay Questionnaire." The 11-point questionnaire seeks to determine the company's current assets and liabilities, as well as to compare current and anticipated cash flows against working capital needs. The questionnaire seeks the following information:

  • Recent cash flow projections
  • Operating budgets and projections of future profitability
  • Capital budgets and projections of annual capital expenditures
  • Proposed changes in financing or capital structure
  • Acquisition or divestiture plans
  • Restructuring plans
  • Claims to insurers
  • Related or affiliated party transactions
  • Encumbered assets
  • Liens on the company's assets
  • Additional materials, such as audited financial statements, federal corporate income tax returns, appraisals or valuation studies, aging of receivables and payables reports, credit and loan agreements, information on compensation plans for the company's 10 most-highly compensated employees and reports provided to major lenders.

The new guidance notes that where legitimate questions exist regarding an organization's inability to pay, the analysis can be more complex, requiring the consideration of a range of additional factors, such as further background on the company's current financial condition, alternative sources of capital, collateral consequences and victim restitution considerations.

According to the guidance, once prosecutors find that a company is unable to pay the otherwise appropriate fine or penalty, they should recommend to their supervisors that the company receive an adjustment to the monetary amount, but only to the extent necessary to avoid: (1) threatening the continued viability of the company; and/or (2) impairing the company's ability to make restitution to victims. Adjustments may include a reduction in the amount of the fine or a payment installment schedule over a reasonable period of time. As can be seen through a cursory review of the factors DOJ wants addressed, in most cases the road to establishing inability to pay may be difficult and complicated.

Increased Predictability

Benczkowski stated that the Criminal Division's recent guidance documents and policies, such as the inability to pay guidance, are part of its broader mission to "establish more predictable guideposts by which companies can gauge expectations." Inability to pay is often the last argument that companies can make to avoid a crippling fine. The new guidance should lead to greater predictability on the likelihood that such arguments will succeed.

For Further Information

If you have any questions about this Alert, please contact Christopher H. Casey, Forrest Hansen, Rebecca S. Ruffer or any of the attorneys in our White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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