Federal sentencing, including the imposition of fines and penalties against corporate defendants, are governed by the Federal Sentencing Guidelines. Under some circumstances, the Guidelines allow fines to be reduced if a company demonstrates that it cannot afford to pay the proposed fine by an amount not “more than necessary to avoid substantially jeopardizing the continued viability of the organization.” Assessing such inability-to-pay claims can be inconsistent and vary depending on the specific case. On October 8, 2019, Brian Benczkowski, Assistant Attorney General, issued a memo (the “Benckowski Memo”) outlining guidance for U.S. Attorneys to follow when evaluating a business organization’s claimed inability to pay a fine or monetary penalty. The Benckowski Memo requires that before prosecutors may consider an inability-to-pay argument, the company and the DOJ must reach two agreements: First, the parties must agree that the proposed penalty or fine is proper based on the law and facts giving rise to the penalty. Second, the parties must agree on the resolution (e.g., corporate guilty plea, non-prosecution agreement, etc.).

A company that claims it cannot pay a fine or civil monetary penalty (CMP) must prove its inability to pay. At a minimum, a company that asserts an inability-to-pay argument must complete the “inability-to-pay Questionnaire.” The questionnaire requires disclosure of cash flow projections, operating budgets, capital budgets, profitability projections, acquisition or divesture plans, restructuring plans, claims to insurer, liens, and other detailed factors that may assist the prosecutors in determining the validity of the inability-to-pay claim.

Besides disclosure, the questionnaire requires the production of various materials, including audited financial statements for the previous five years, compensation plans for the ten highest compensated employees, and federal corporate income tax returns for the previous five years. All information and materials provided will be analyzed by prosecutors. The Benckowski Memo notes that prosecutors likely will need to consult with accounting experts, which is already common practice throughout the DOJ.

In determining whether a company has met its burden and demonstrated an inability to pay, the DOJ will consider four factors: (1) background on current financial condition; (2) alternative sources of capital; (3) collateral consequences; and (4) victim restitution considerations. If a company’s inability-to-pay claim is accepted, then the Benckowski Memo provides that prosecutors should recommend an adjustment to the fine or CMP. The adjustment can only be “to the extent necessary to avoid” risking the viability of the company or impairing the company’s ability to pay restitution to victims. The adjustment is not limited to the fine or CMP amount. Instead, prosecutors may use installment schedules to facilitate the payment of the fine or CMP. Importantly, any reduction in monetary penalties must be approved by supervisors and the Section Chief. And, if the reduction exceeds 25%, the Assistant Attorney General for the Criminal Division (or his/her designee) must approve.

While the Benckowski Memo does not necessarily represent a sea change in already-existing DOJ practice when it comes to inability-to-pay arguments, it will likely provide consistency throughout the Department and the country’s 93 U.S. Attorneys’ Offices, and help ensure that corporate defendants do not face financial ruin when entering into a resolution with the DOJ.