18 October 2019 Adam Lurie  -  Douglas Tween  -  Doug Davison  -  Patrick Ashby BusinessCrimeLinks

Can’t pay? Won’t pay! US DOJ issues guidance for inability-to-pay claims

The US DOJ takes the view that criminal fines should sting but should not be so large as to put companies out of business or otherwise threaten their viability. It has recently published guidance for prosecutors assessing assertions by a business that it is unable to pay an otherwise appropriate criminal fine or monetary penalty. Organizations facing large criminal fines or monetary penalties should conform their conduct and expectations accordingly.

Overview of an Inability to Pay Claim

On October 8, 2019, the U.S. Department of Justice Criminal Division (the “DOJ”) released a memorandum and Inability-to-Pay Questionnaire (the “Questionnaire”), intended to provide guidance and an analytical framework for prosecutors to assess assertions by a business organization that it is unable to pay an otherwise appropriate criminal fine or monetary penalty. 

Before prosecutors may consider an inability to pay argument, the parties must agree on a form of a corporate criminal resolution 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 business organization. The organization must provide a complete and timely response to the 11-point Questionnaire, as well as any follow up inquiries. Responses to the Questionnaire provide a picture of the company’s financial status, including its cash flow, operating budget, and divestiture plans. The analysis can be complex, and in most cases companies and prosecutors will each need to engage an accounting expert to examine the company’s financial condition.

Should a prosecutor find an organization is unable to pay the fine or penalty, he or she should recommend an adjustment only to the extent necessary to avoid (1) threatening the continued viability of the organization, (2) causing a severe adverse collateral consequence, and/or (3) impairing the organization’s ability to make restitution to victims. However, where an organization “operated primarily for a criminal purpose or primarily by criminal means,” a criminal fine or monetary penalty “shall be set at an amount (subject to the statutory maximum) sufficient to divest the organization of all of its net assets.” 

Adjustments may consist of a reduction in the proposed fine or penalty, or the implementation of an installment schedule.

Relevant Factors for Assessing Inability to Pay

Prosecutors will analyze the organization’s Questionnaire responses to determine the company’s current assets and liabilities and compare current and anticipated cash flows against working capital needs. Where legitimate questions exist regarding an organization’s inability to pay, DOJ attorneys will consider a range of factors, including:

  • How the organization’s current financial condition arose;
  • Any alternative sources of capital, such as the organization’s ability to raise capital through existing or new credit facilities, the availability of insurance or indemnification agreements, and details from company forecasts;
  • Significant adverse collateral consequences that are likely to result from the imposition of a criminal fine or monetary penalty exceeding an organization’s ability to pay, such as whether the proposed penalty is likely to cause layoffs, product shortages, or significantly disrupt competition in a market. The following generally are not relevant collateral consequences: adverse impacts on growth, future opportunities, planned or future product lines, future dividends, unvested or future executive compensation or bonuses, and planned or future hiring or retention;
  • Whether the proposed fine or penalty will impair an organization’s ability to make restitution to any victims; and  
  • Where there is uncertainty about an organization’s viability after payment of the fine or penalty, how, if at all, the organization has addressed going concern issues with its outside auditor prior to asserting an inability to pay claim.

The DOJ’s memorandum and Inability-to-Pay questionnaire (included as Attachment A) are available here.