Historically, the DOJ had two choices when a business organization was the subject of criminal scrutiny. The two choices — which have served as the foundation of the U.S. criminal justice system for nearly a century when corporate criminal liability was first recognized — was either charge the entity with a legal violation or not charge.
Yet as highlighted in this chronological post ending with DOJ statements last week, in recent years DOJ “enforcement” has become a joke. When reading the below chronology of events, recognize that the vast majority of them occurred long before the Trump administration.
The DOJ’s binary (charge vs. not charge) approach to criminal law enforcement began to change in the early 2000’s in response to an isolated event.
Upon being criminally indicted in connection with Enron’s demise, Arthur Andersen exercised its constitutional right to a jury trial and put the DOJ to its burden of proof and in 2002 the jury criminally convicted the business organization of obstruction of justice. As a result of the criminal charges and criminal conviction, Arthur Andersen suffered numerous collateral consequences, including the loss of its certified public accounting license and the resulting inability to audit public companies.
Ultimately in 2005 the Supreme Court unanimously reversed Arthur Andersen’s conviction. However, the near immediate negative consequences of the criminal charges and conviction had already occurred and could not be reversed. The perceived “Arthur Andersen effect” (i.e. that criminal charges alone, and certainly criminal convictions, could be the death sentence of a business organization) caused the DOJ to reconsider its historical binary option to resolving alleged instances of corporate criminal liability.
In 2003, then Deputy Attorney General Larry Thompson issued an official DOJ memorandum regarding “Principles of Federal Prosecution of Business Organizations” that became widely-known as the “Thompson Memo.” It began as follows:
“As the [DOJ] Corporate Fraud Task Force has advanced in its mission, we have confronted certain issues in the principles for the federal prosecution of business organizations that require revision in order to enhance our efforts against corporate fraud.”
The Thompson Memo set forth guidance to all DOJ enforcement attorneys on factors prosecutors should consider when a business organization is the subject of criminal legal scrutiny and set forth a subtle, yet important, change to DOJ policy that reflected concerns about the perceived constraining aspects of its historical binary approach to criminal law enforcement.
Under the heading “Charging a Corporation: Cooperation and Voluntary Disclosure,” the Thompson Memo stated:
“In some circumstances . . . granting a corporation immunity or amnesty or pretrial diversion may be considered in the course of the government’s investigation. In such circumstances, prosecutors should refer to the principles governing nonprosecution agreements generally.”
Even though the Thompson Memo made “only the most fleeting of references” to alternative resolution vehicles it “effectively open[ed] the door to the use of DPAs and NPAs.” As with any new law enforcement policy, there was a period of absorption before the new policy became an accepted practice (even though the first DPA the DOJ used to resolve an enforcement action is believed to have occurred in 1994).
In late 2004, the DOJ used alternative resolution vehicles for the first time in an FCPA enforcement action against InVision Technologies, Inc. and General Electric Company (“GE”). After additional NPAs/DPAs were used in 2005 to resolve FCPA enforcement actions against business organizations, a new way of resolving FCPA criminal actions was clearly developing, although it was still noted that alternative resolution vehicles were “not yet the norm in corporate investigations.” However, the new norm quickly emerged and alternative resolution vehicles became the dominant way for the DOJ to resolve corporate FCPA scrutiny.
The next evolution in DOJ policy regarding alternative resolution vehicles occurred in 2008 with the release of an official DOJ memorandum by then Deputy Attorney General Mark Filip in what became widely known as the “Filip Memo.” Similar to prior DOJ memos, the Filip Memo concerned “Principles of Federal Prosecution of Business Organizations” and began:
“[This memo] is a revision of the Principles of Federal Prosecution of Business Organizations . . . . The revised Principles will be set forth for the first time in the United States Attorneys’ Manual, and will be binding on all federal prosecutors within the Department of Justice. The revised Principles will be effective immediately, on a prospective basis.”
Compared to the prior DOJ memos which made only fleeting reference to NPAs and DPAs, the Filip memo specifically stated, in pertinent part:
“In certain instances, it may be appropriate . . . to resolve a corporate criminal case by means other than indictment. Non-prosecution and deferred prosecution agreements, for example, occupy an important middle ground between declining prosecution and obtaining the conviction of a corporation . . . .
[W]here the collateral consequences of a corporate conviction for innocent third parties would be significant, it may be appropriate to consider a non-prosecution or deferred prosecution agreement with conditions designed, among other things, to promote compliance with applicable law and to prevent recidivism. Such agreements are a third option, besides a criminal indictment, on the one hand, and a declination, on the other. Declining prosecution may allow a corporate criminal to escape without consequences. Obtaining a conviction may produce a result that seriously harms innocent third parties who played no role in the criminal conduct. Under appropriate circumstances, a deferred prosecution or non-prosecution agreement can help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct, while preserving the government’s ability to prosecute a recalcitrant corporation that materially breaches the agreement. Such agreements achieve other important objectives as well, like prompt restitution for victims. Ultimately, the appropriateness of a criminal charge against a corporation, or some lesser alternative, must be evaluated in a pragmatic and reasoned way that produces a fair outcome, taking into consideration, among other things, the Department’s need to promote and ensure respect for the law.”
Perhaps mindful that NPAs and DPAs represented a radical shift from the DOJ’s traditional binary approach to resolving alleged instances of corporate crime, the DOJ was quick to craft policy rationales to justify its new approach. For instance, in a 2005 speech then DOJ Assistant Attorney General Christopher Wray stated:
“[W]e’re encouraging prosecutors to develop flexible and innovative approaches as they work to ensure that companies accept responsibility and cooperate with us. In certain cases, an alternative resolution — like a deferred prosecution or even a nonprosecution agreement — can strike that balance. One option we’ve used increasingly is the deferred prosecution agreement, which some people describe as pretrial diversion. We file charges, but agree to defer prosecution for a year, two years, or even longer. In return, the company agrees to cooperate fully and admits publicly the facts of its misconduct. It also typically makes a payment, which can be structured as a fine, restitution, forfeiture, or some other category. We can also require the company to take remedial actions to make sure the conduct doesn’t happen in the future. If the company complies with the agreement, the charges are dismissed at the end of the term. If not, we go to trial, now armed with the company’s admission and all the evidence we obtained from its cooperation. In other words, if the company violates the agreement, its conviction is virtually a foregone conclusion.
The DP structure has many of the same benefits as a conviction. In terms of remedies, anything that the judge could impose under the organizational sentencing guidelines can be required under a DP agreement. The DP won’t result in a criminal conviction if the defendant complies with the agreement, but filing charges publicly condemns the company’s conduct. . . . .
In other cases, we’ve used nonprosecution agreements with cooperating companies. These don’t involve the filing of charges, but we still typically require the company to admit its conduct publicly. We also retain enormous leverage over the company, because we reserve the right to prosecute if it fails to comply with the agreement — again, armed with the company’s admissions. And we can still include virtually any combination of payments and remedial measures.”
The DOJ’s implicit policy assertion that NPAs and DPAs were needed to avert another “Arthur Andersen effect” was quickly embraced by the legal practitioners — perhaps because they stood to benefit from NPAs and DPAs because the agreements expanded the market for legal services — and the “Arthur Andersen effect” became accepted as a sort of gospel truth.
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Even as the isolated 2002 Arthur Andersen demise faded into history, the DOJ continued, over a decade later, to keep the perceived “Arthur Andersen effect” alive to justify its use of NPAs and DPAs. For instance, in 2012 then Assistant Attorney General Lanny Breuer stated:
“I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”
Breuer and others in the Obama administration went beyond justifying its extensive use of NPAs and DPAs to championing their use to resolve alleged instances of corporate crime. For instance, in 2012 then Assistant Attorney General Breuer maintained that such agreements “have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe.” Breuer further stated:
“The result has been, unequivocally, far greater accountability for corporate wrongdoing — and a sea change in corporate compliance efforts. . . . One of the reasons why deferred prosecution agreements are such a powerful tool is that, in many ways, a DPA has the same punitive, deterrent, and rehabilitative effect as a guilty plea . . . “
However, the DOJ’s policy justification rang hollow as there was no data to suggest that resolving alleged instances of corporate criminal liability through NPAs or DPAs achieves any meaningful deterrence. Indeed, in the FCPA context several companies that resolved FCPA enforcement actions through alternative resolution vehicles have subsequently resolved additional FCPA enforcement actions.
Fast forward to September 2016 when the Obama Department of Justice (in the aftermath of its April 2016 FCPA Pilot Program) invented yet another way to enforce the FCPA: the so-called declination with disgorgement (see here for the prior post).
The DOJ’s historical binary option of charging vs. not charging had long not been good enough, but now the DOJ’s frequent use of NPAs and DPAs were no longer good enough and the DOJ apparently needed a new tool. Pursuant to a short letter agreement subjected to no judicial scrutiny, the DOJ would “decline” bring criminal charges against a business organization if the organization agreed to pony up some money (often millions of dollars)
Soon however, this was not good enough either and in the November 2017 the DOJ tweaked the FCPA Pilot Program in its new FCPA Corporate Enforcement Policy. (See here). According to the DOJ, the new policy was needed “due to the unique issues presented in FCPA matters.”
However last week those “unique issues” became not so unique as the DOJ announced that it would be expanding the Corporate Enforcement Policy to non-FCPA matters.
As reported here:
“Barclays Plc will not face criminal charges over allegations that one of its traders defrauded Hewlett-Packard Co., signaling a new U.S. approach that results in lesser penalties for institutions that report securities fraud themselves.
The new position, similar to one implemented last fall on foreign corruption reporting, was announced on Thursday by Justice Department officials at a white-collar fraud conference in San Diego.
“When a company discovers misconduct, quickly raises its hand and tells us about it, that says something,” said John Cronan, acting assistant attorney general of the criminal division. “It shows the company is taking misconduct seriously and not willing to tolerate it and we are rewarding those good decisions.”
The approach isn’t a formal policy, but an incentive for companies to self-report misconduct, said Benjamin Singer, chief of the department’s securities and financial fraud unit. He said the new approach will be taken by his unit in Washington and isn’t binding on prosecutors in other parts of the country. He said there is less self-reporting of securities fraud than violations of the Foreign Corrupt Practices Act.
“The idea was maybe we can take some of those same principles that led to a little bit more self-reporting recently in the FCPA space to securities and financial fraud,” Singer said.”
For additional coverage see here:
“DOJ officials announced Thursday that the agency will now decline to bring some cases against companies that self-report crimes besides violations of the Foreign Corrupt Practices Act, starting with a $12.9 million front-running case against Barclays PLC.
John Cronan, the acting head of the DOJ’s Criminal Division, and Benjamin Singer, chief of its securities and financial fraud unit, told attendees at the American Bar Association’s white collar conference that criminal division prosecutors will use the FCPA Corporate Enforcement Policy as nonbinding guidance in other criminal cases.”
What is particularly funny about the DOJ’s announcement last week is that at the same ABA conference Deputy Attorney General Rod Rosenstein stated, as he frequently has in the past, that “the rule of law is not just about words on paper” and that the DOJ “must always be guided by the rule of law, transparency, fairness, and parity.”
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