Civil Monetary Penalties Imposed by The Department of Justice: Ensure Compliance with DOJ Inability to Pay Memorandum

Civil monetary penalties imposed by the Department of Justice (“DOJ”) are typically in connection with an entity’s past wrongdoing. Given such monetary penalties are paid by the entity in the present, this payment can potentially cause undue financial hardship to the entity in the future, including but not limited to threatening the entity’s ability to continue operating as a going concern.[1]

When faced with the imposition of a civil monetary penalty, an entity needs to address the following questions:

• • How should the entity evaluate its ability to pay the full payment of the civil monetary penalty without causing undue financial hardship?
  • In the event the entity determines the full payment of the civil monetary penalty would cause undue financial hardship, how should it present its assertion to the DOJ?
  • Finally, how will the DOJ assess the entity’s assertion and potentially determine an amount it can fairly pay without causing undue financial hardship?

The DOJ’s internal memorandum titled “Assessing an Entity’s Assertion of an Inability to Pay” (the “DOJ Inability to Pay Memo”)[2] helps to address these questions by outlining the analytical framework the Department will use to assess an entity’s assertion of inability to pay and potentially determine an amount that could be assessed without causing undue financial hardship.[3]

While the DOJ published this internal memo, it is not the responsibility of the DOJ to assert inability to pay. This responsibility rests solely with the entity. Accordingly, an entity’s most effective approach to assert inability to pay should start with utilizing the DOJ Inability to Pay Memo. Experienced financial professionals specialized in responding to regulators can assist in preparing and supporting an entity’s assertion in accordance with the DOJ’s process.

What is the DOJ’s process?

When presenting to the DOJ an assertion of inability to pay, an entity must submit a Financial Disclosure Form (and relevant supporting documentation) that discloses information regarding its assets and liabilities, current and anticipated income and expenses, cash flow, projections, working capital, and other relevant information. The Financial Disclosure Form is required to be certified under penalty of perjury that the information provided is complete, accurate, and current.

To assess an inability-to-pay assertion, the DOJ analyzes the entity’s responses to the certified Financial Disclosure Form with the assistance of a qualified financial expert to consider the following seven factors listed in the DOJ Inability to Pay Memo:

• • Background on Current Financial Condition: The DOJ may consider whether a civil monetary penalty would create financial harm to the entity.

• • Alternative Sources of Capital: The DOJ may consider the entity’s ability to reasonably raise or borrow capital to pay a civil monetary penalty.

• • Timing of Payments: The DOJ may consider the entity’s ability to pay a civil monetary penalty immediately or over a period of three to five years.

• • Tax Deductibility: The DOJ may consider the tax deductibility of a civil monetary penalty.

• • Contingency Arrangements: The DOJ may consider whether a civil monetary penalty would trigger any existing contingencies.

• • Collateral Consequences: The DOJ may consider whether a civil monetary penalty would strain the entity’s ability to meet certain future financial obligations or maintain certain financial conditions (e.g., financial ratios required by law or regulation).

• • Third Party Liability: The DOJ may consider whether the entity’s third parties (e.g., family members or related parties) may be liable for the entity’s debt. This may allow the DOJ to seek payment of the entity’s civil monetary penalty from the entity’s third parties.

The DOJ Inability to Pay Memo makes clear that the DOJ may consider these seven factors in totality or each factor individually. It is incumbent on the entity to evaluate its facts and circumstances to determine which of these seven factors — or other relevant information — are applicable to its inability-to-pay assertion.

What are the benefits of engaging experienced financial professionals?

While the DOJ Inability to Pay Memo provides entities with insight into the DOJ’s analytical framework, presenting an inability-to-pay assertion can nonetheless be a complex process that requires careful analysis supported by relevant documents and assumptions. Experienced financial professionals specializing in responding to regulators can assist entities to prepare a complete and accurate Financial Disclosure Form and utilize the DOJ’s analytical framework to proactively assess the entity’s financial health and evaluate the impact of a potential monetary civil penalty on future operations.

For example, experienced financial professionals can help to demonstrate an entity’s limited capacity to incur additional and/or unexpected financial obligations from an imposed civil monetary penalty through analysis of an entity’s existing debt, outstanding liabilities, and other financial commitments. Experienced financial professionals can also perform a detailed analysis of financial statements (i.e., balance sheet, income statement, and cash flow statement) to assess liquidity, cash flow constraints, and overall financial health and evaluate how a potential civil monetary penalty may impact the entity’s liquidity, cash reserves, and ability to meet ongoing operational costs.

Conclusion

Engaging experienced financial professionals specializing in responding to regulators is essential to prepare and present a well-supported inability-to-pay assertion.

There may be a perception that engaging external resources to assist with a regulatory matter is inefficient from a cost and timing perspective. In reality, the opposite is true. Engaging external resources to assist can be the best tool for an entity to achieve the right balance between an effective assertion to the DOJ and efficient use of the entity’s time and resources. After all, if the DOJ utilizes a financial expert, so should an entity when asserting its inability to pay.

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