Corporate Crime

Declining Prosecution

Three attorneys at Covington & Burling recently received a letter that could be seen as the ultimate achievement of a corporate lawyer. The U.S. Justice Department wrote to inform them that, although fraud was committed by employees of their client, Proterial Cable America, no charges would be filed against the firm.

Proterial, formerly known as Hitachi Cable America, is the latest recipient of a DOJ leniency practice known as declination. The Department has frequently been criticized for its extensive use of deferred prosecution and non-prosecution agreements. These arrangements allow companies involved in criminal misconduct to avoid having to enter a plea, though they must pay a penalty. DOJ holds open the possibility of an actual prosecution at a later date if the company does not change its behavior.

In a declination, prosecution is in effect taken off the table entirely. The only real consequence for the company is having to disgorge the profits it earned as a result of the fraudulent behavior. In the case of Proterial, that amount is about $15 million. This is a far cry from the amounts companies pay in deferred and non-prosecution agreements, which for firms such as Wells Fargo and Boeing have been several billion dollars.

Proterial’s fraud consisted of misrepresenting to customers that the motorcycle brake hose assemblies it sold met federal safety performance standards. The problem was not that the company failed to test the assemblies. It did the tests but lied to customers about the results, claiming that the assemblies had passed when in fact they had failed.

The Justice Department justified its declination in various ways. It said Proterial self-reported the misconduct; it cooperated with the investigation; it terminated the employees; and it agreed to the disgorgement. DOJ’s declination letter does not, however, explain how the misconduct came about—specifically, the issue of whether the employees who lied about the test results were acting at the direction of supervisors or managers.

It is difficult to believe that low-level employees would decide on their own to engage in the deception. It may very well be that they were pressured, whether explicitly or implicitly, by their bosses to do so. This is what happened, for example, at Wells Fargo, where employees facing impossible demands from managers to increase revenue resorted to the creation of bogus accounts, unbeknownst to customers.

Proterial’s parent, Hitachi Metals Ltd., does not have a spotless record. In 2014 it pled guilty and paid a $1.25 million criminal fine to the DOJ for its role in a conspiracy to fix prices and rig bids for automotive brake hoses installed in cars sold in the United States and elsewhere. This prior offense should have made the company ineligible for the declination.

Since the Biden Administration took office, the DOJ has carried out half a dozen declinations, according to a list published on the Department’s website. It is unclear how many other leniency agreements contain the additional benefit of remaining anonymous.

The DOJ seems wedded to the idea that leniency provides an effective incentive for companies to self-report misconduct, but it may also be a way for rogue companies to take themselves off the hook.

The $1 Trillion Cost of Corporate Misconduct

When you hear a reference to $1 trillion, it usually is in connection to the stock market capitalization of a handful of the largest tech companies. Yet that ten-figure number can now also be applied to what those companies and others have together paid in fines and settlements to resolve allegations of misconduct.

The total penalties documented in the Violation Tracker database for the period from 2000 through the present now surpass $1 trillion. To mark this milestone, my colleagues and I have just issued a report called The High Cost of Misconduct, which looks back at the last quarter-century of corporate crime and regulatory non-compliance.

Total payouts grew from around $7 billion per year in the early 2000s to more than $50 billion annually in recent years. This amounts to a seven-fold increase in current dollars, or a 300 percent increase in constant dollars.

The $1 trillion total could not have been reached without the massive penalties paid by companies such as Bank of America ($87 billion, mainly in connection with the toxic securities and mortgage abuses scandals of the late 2000s), BP ($36 billion, mainly from the Deepwater Horizon disaster), Wells Fargo ($27 billion, largely from the bogus accounts scandal), and Volkswagen ($26 billion, primarily from the emissions cheating scandal). There are 127 companies with penalty totals of $1 billion or more.

With these companies and many others, their totals reflect flagrant recidivism. Looking only at the more serious cases, two dozen parents have been involved in 50 or more cases in which they paid fines or settlements of $1 million or more. Bank of America has the most, with an astounding 225 such cases.

While the vast majority of the 600,000 cases in Violation Tracker are civil actions, the database contains more than 2,000 entries involving criminal charges. These account for more than 13 percent of the $1 trillion penalty total. Twenty-six parent companies have paid $1 billion or more in criminal cases, with the largest totals coming from the French bank BNP Paribas in connection with economic sanctions violations and from Purdue Pharma for its role in causing the opioid epidemic.

In many of these criminal cases, the companies were able to resolve the matter without having to plead guilty. That is because the Justice Department makes extensive use of arrangements known as deferred prosecution agreements and non-prosecution agreements. These are leniency deals by which companies pay substantial penalties but avoid a criminal conviction. Violation Tracker documents more than 500 cases involving a DPA or an NPA, with total penalties of more than $50 billion.

The theory behind these leniency agreements is that companies will learn from their mistakes and clean up their conduct. Yet there have been numerous instances of companies that signed a DPA or NPA ending up embroiled in another scandal. Amazingly, some of these companies were offered another leniency agreement, thus making a mockery of the deterrence concept. Among the double-dippers are American International Group, Barclays, Boeing, Deutsche Bank, HSBC, and Teva Pharmaceuticals.

The fact that penalties have reached the 10-figure level suggests that during the past quarter century we have been living through a continuous corporate crime wave. Every year, companies pay out billions of dollars for a wide range of offenses. Many large corporations are fined or enter into settlements over and over again, often for the same or similar misconduct.

Monetary penalties are meant in part to deter future transgressions, but there is no indication that is happening. Instead, the fines and settlements seem to be regarded as little more than a cost of doing business. Presumably, the profits from wrongdoing outweigh the penalties.

It is odd that amid a move to return to tougher policies to combat street crime, there is not an analogous effort to crack down on corporate crime. Instead, the Justice Department continues to employ leniency agreements that have frequently been ineffective in getting rogue companies to change their ways. The DOJ also remains reluctant to bring criminal charges against corporate executives, except in the most flagrant circumstances.

In a few cases, DOJ has experimented with different approaches, including forcing companies to exit lines of business in which they behaved illegally. Last year, for example, Teva Pharmaceuticals and Glenmark Pharmaceuticals were not only fined for scheming to fix prices of several generic drugs—they had to divest their operations relating to one of the drugs. That kind of penalty should shake up companies more than fines alone and thus should be used more frequently.

Mega-Scandals

Over the past quarter century, large corporations have paid hundreds of billions of dollars in fines and settlements for a wide range of misconduct. In Violation Tracker we document many thousands of these cases and place them in various categories. We have just added a new way of looking at the most egregious kinds of wrongdoing.

On the website we now identify clusters of major cases in which companies paid substantial penalties—from $25 million up to the billions—for practices that harmed large numbers of consumers, workers, investors or community members. We call these Mega-Scandals.

Chronologically, the first mega-scandal was the series of accounting and corruption scandals of the early 2000s at companies such as Enron, the high-flying energy trading company that went out of business—taking its auditor Arthur Andersen with it—when it turned out to be engaged in brazen accounting fraud.

Similar misconduct came to light at companies such as WorldCom, a telecommunications provider found to have inflated its assets by billions of dollars; Tyco International, a security systems firm whose CEO was convicted of misusing corporate funds to support a lavish personal lifestyle; and Adelphia Communications, whose principals were found guilty of looting the firm. One of the new mega-deal summary pages in Violation Tracker documents over $6 billion in penalties resulting from these cases.

The magnitude of the Enron era cases would be dwarfed by another mega-scandal which erupted later in the 2000s. It was the outgrowth of a period of financial deregulation that allowed Wall Street to create a slew of complex investment products backed by shaky home mortgages. When the housing market softened and many of those mortgages became delinquent, the value of residential mortgage-backed securities plunged. They came to be known as toxic securities.

The country avoided a complete financial collapse, but those toxic securities brought about significant legal and monetary consequences for the financial institutions held responsible for devising and marketing them. They found themselves the target of major lawsuits brought by the federal government, state governments, institutional investors and others. We estimate that the banks ended up paying more than $148 billion in fines and settlements, making this the most expensive of the mega-scandals.

The legal fallout from the financial crisis was also felt by the financial institutions that originated those shaky home mortgage loans behind the toxic securities. In some cases, they were part of the same banks that marketed the securities. Banks were sued both for luring low-income consumers into unsustainable mortgages and for misleading investors about those practices.

Far and away, the biggest payout in this category came from Bank of America, whose $53 billion total resulted from giant settlements with the U.S. Justice Department, state attorneys general, the loan guarantee agency Fannie Mae and others. JPMorgan Chase and Wells Fargo each racked up close to $9 billion in payouts. Overall, the mortgage abuse cases resulted in fines and settlements of more than $80 billion.

It was not long after the financial crisis that the next corporate mega-scandal burst onto the scene. It began on April 20, 2010 when an explosion occurred at the Deepwater Horizon drilling rig operated by BP in the Gulf of Mexico (photo). The accident killed 11 crew members and released a vast amount of oil into the gulf. It turned out to be the largest oil spill in history.

BP—along with the owner of the rig, Transocean, and Halliburton, which helped construct it—faced a wave of litigation alleging deficiencies in their actions before, during and after the accident. They ended up paying about $36 billion in settlements, with most of that coming from BP.

The pharmaceutical industry is responsible for several mega-scandals, the worst of which is the role drugmakers played in bringing about the opioid epidemic. Much of the blame has fallen on Purdue Pharma, which was relentless in promoting pain killers such as oxycodone, downplaying the risks of addiction even as overdose deaths soared. Purdue finally consented to a settlement in which it agreed to pay $8 billion and effectively go out of business, though the deal has been caught up in controversy over the effort of the Sackler family, which controlled the company, to shield itself from liability.

Other companies such as drug wholesalers and pharmacy chains have also faced major litigation over their alleged failure to question the enormous volume of prescriptions coming from dubious sources such as shady pain clinics known as pill mills. The Violation Tracker tally on the opioid mega-scandal estimates that total payouts have now surpassed $70 billion.

Among the other mega-scandals are:

The emissions cheating controversy centering on Volkswagen: $32 billion.
The wildfire liability controversy centering on PG&E: $18 billion.
The bogus bank account controversy centering on Wells Fargo: $8 billion.

More on these and other mega-scandals can be found on the Violation Tracker Summaries Page. Mega-scandals are also now included in the Offense Type dropdown on the Advanced Search page and thus can be combined with other variables.

The 2023 Corporate Rap Sheet

The splashiest corporate crime prosecutions in 2023 came in the crypto sector. Binance pleaded guilty to charges of violating anti-money-laundering regulations and paid over $4 billion in criminal and civil penalties; its founder and CEO Changpeng Zhao was also charged personally and admitted guilt. The Justice Department won a conviction on fraud and conspiracy charges of crypto mogul Sam Bankman-Fried in connection with the collapse of his FTX exchange.

Otherwise, the DOJ has not had many blockbuster cases this year, and many of its bigger successes have involved foreign-based corporate defendants. Among the latter are a $1.4 billion settlement with the Swiss bank UBS in a toxic securities case that originated during the financial crisis a decade ago and a $629 million settlement with British American Tobacco involving a scheme to evade economic sanctions against doing business with North Korea.

While major convictions and settlements lag, DOJ has stepped up its dubious policy of corporate leniency. This includes frequent use of non-prosecution and deferred prosecution agreements under which companies are allowed to sidestep criminal pleas by agreeing to pay monetary penalties and promising to change their behavior—promises that are often broken.

During this year, DOJ has offered companies NPAs and DPAs at least 17 times. Among these are the British American Tobacco case cited above, a price-fixing case against Teva Pharmaceuticals, and a foreign bribery case against the chemical company Albemarle. A DPA was also used by the Occupational Safety and Health Administration to resolve a case against a construction company called Skinner Tank on charges of willfully ignoring safety regulations and creating conditions that led to the death of a worker.

DOJ is also making increasing use of another form of leniency known as a declination. Companies that self-report illegal behavior that occurred under their roof are given a guarantee they will not be prosecuted and are allowed to pay a reduced fine. A DOJ webpage lists three declinations for this year, but a report by Public Citizen suggests that the department may be agreeing to keep some of these deals confidential.

Among most other federal agencies, this year has seen only a sprinkling of large case resolutions against major companies. For example, the Commerce Department’s Bureau of Industry and Security fined Seagate Technology $300 million for export control violations in its sale of disk drives to China’s Huawei Technologies. The Federal Reserve fined Deutsche Bank $186 million for failing to comply with previous consent orders involving sanctions compliance and anti-money-laundering practices.

Although most of its penalties are below $100 million, the Consumer Financial Protection Bureau has brought a steady stream of cases against financial predators. These include a $90 million penalty against Bank of America for imposing unfair overdraft fees, withholding reward bonuses explicitly promised to credit card customers, and misappropriating sensitive personal information to open accounts without customer knowledge or authorization.

The Securities and Exchange Commission has kept up its case volume, but the number of large resolutions in 2023 has been down from the previous year. And a larger portion of those major cases involve civil add-ons to criminal bribery cases brought by the Justice Department under the Foreign Corrupt Practices Act. There are also signs that the SEC is joining the leniency bandwagon. Recently, the agency waived a $40 million penalty against the drug company Mallinckrodt in a case related to its failure to disclose loss contingencies linked to an investigation of its Medicaid billing practices.

The Federal Trade Commission has also tended toward smaller settlements this year, though that agency handles many matters—including merger reviews—that may not involve monetary penalties. The biggest fine it imposed this year was $25 million in a case against Amazon.com for violating the Children’s Online Privacy Protection Act Rule.

The Environmental Protection Agency has held steady in 2023. Its largest settlement has been a $242 million deal with BP in which the oil giant paid a $40 million penalty and agreed to spend $197 million on emission control upgrades at its Whiting refinery in Indiana.

Major cases have been down at the state level. There have been about two dozen resolutions involving penalties of $50 million or more, compared to the previous year’s total of 50, which included numerous opioid-related settlements. This year there has been one such settlement involving a $1.4 billion deal with supermarket chain Kroger.

Year to year changes do not tell the whole story, yet it is discouraging to see a drop-off in successful major enforcement actions. Let’s hope that in 2024 both federal and state regulators and prosecutors find the means to step up the pressure on rogue corporations.

Note: Details on the cases cited above and many more are in Violation Tracker.

The Missing Crackdown

Joe Biden came to office vowing to get tough on corporate abuses, reversing the soft-on-white-collar-crime approach of his predecessor. Biden went on making those promises, and they were echoed by Attorney General Garland and other Justice Department officials.

That crackdown, however, has not materialized. A new report from Public Citizen shows that the Justice Department concluded only 110 corporate criminal prosecutions in 2022—lower than in any year of the Trump Administration. In fact, it was the smallest number since 1994.

In addition to the decline in overall cases, Public Citizen points out a drop in the number of those cases in which the defendant company received a leniency deal. These are arrangements known as non-prosecution and deferred prosecution agreements in which a firm can avoid a guilty plea by paying a penalty and promising to change its behavior.

Those pledges are frequently broken, and the companies are charged again. Instead of throwing the book at these recidivists, DOJ often offers them a new leniency agreement, making the whole process a farce.

As Public Citizen notes, a decline in leniency agreements would be a good thing if it went along with an increase in the overall volume of prosecutions. Instead of replacing leniency agreements with conventional cases, the DOJ statistics suggest that the agency is simply choosing not to prosecute at all in many instances.

Public Citizen says DOJ may be making greater use of a process called declination, which is essentially a form of super-leniency in which no charges are brought. Some of these deals are made public, but the best corporate defense lawyers can negotiate declinations that are kept secret.

The analysis done by Public Citizen focuses on criminal cases. I decided to check comparable civil cases brought by the Securities and Exchange Commission. According to data collected in Violation Tracker, the SEC collected $1.4 billion in penalties from companies in 2021. This was down from the totals in the final two years of the Trump Administration. In 2022 the SEC’s total jumped to $4.4 billion, thanks in large part to a single case involving a $1 billion settlement with the German insurance company Allianz.

This year the SEC total through mid-October is $1.5 billion. Unless the agency announces some very large cases in the next nine weeks, its 2023 total will also fall behind the final Trump years.

While case and penalty totals do not tell the whole story, what we see in both the criminal and civil areas is something less than a major assault on corporate misconduct. There have been some laudable steps taken by other agencies such as the Federal Trade Commission and the Consumer Financial Protection Bureau, but both of those regulators have faced legal challenges to their enforcement powers. At the same time, the whole system of business regulation is threatened by Republican defunding efforts.

Overall, the Biden Administration has yet to show that it can overcome these obstacles and make good on the promises of a crackdown on rogue corporations.

DOJ’s Unweaponized Approach to Corporate Crime

There is a lot of loose talk these days about the supposed weaponization of the Justice Department in regard to a certain former president. Yet no one on any part of the political spectrum can claim that DOJ is being overly aggressive in prosecuting corporate defendants.

Despite promises early in the Biden Administration, DOJ has not carried out a serious crackdown on the most serious business offenders. There have been some major prosecutions, but they tend to focus on foreign-based companies (as I discussed in an April post) and the overall volume of cases has not surpassed the dismal record of the Trump years.

Instead, DOJ has devoted much of its energy to creating incentives for companies to report their own misconduct. This carrot-rather-than-stick approach may work in cases of transgressions by lower-level employees, but it is ineffective when the rot reaches all the way to the top.

Recently, DOJ rolled out its latest initiative. Unfortunately, it seems to focus mostly on image-burnishing. The department has created a webpage titled Corporate Crime summarizing all the ways in which it goes after business miscreants. It is a helpful list, but it does not include anything new in the way of enforcement—though DOJ’s self-reporting efforts are prominently featured.

There is one interesting feature on the page: a link to a new Corporate Crime Case Database. At the moment, it is a very modest resource consisting of links to 13 press releases issued recently by various branches of DOJ. The page states: “While it is still in the process of being populated, it will eventually contain the significant, relevant cases from each component and U.S. Attorney’s Office, resolved since the end of April 2023.”

We don’t know more about plans for the database because DOJ chose to roll it out with no fanfare—not even a press release. A department spokesperson told the Wall Street Journal that the scope might be widened to include cases resolved in the last several years.

Even with that addition, the database would be a less-than-robust response to the long-standing efforts by Ralph Nader and corporate accountability groups to get the federal government to produce a resource on white-collar offenses comparable to the FBI’s Uniform Crime Reporting Program, which has been assembling detailed data on street crime since the 1930s. It also does not appear to satisfy the proposal put forth by Senators Dick Durbin and Richard Blumenthal, along with Rep. Mary Gay Scanlon, in the Corporate Crime Database Act they introduced in Congress last year.

Since DOJ has been so reserved about the project, it is not clear whether the new database is meant to be its complete response to the proposals by Nader, Durbin et al. Those proposals envision something a lot more ambitious. The Corporate Crime Database Act would require the DOJ’s Bureau of Justice Statistics to create a resource that collects comprehensive information from every federal agency that carries out enforcement actions with respect to corporate offenses.

That sounds like something more akin to what my colleagues and I have been doing with Violation Tracker, which also covers state and local enforcement activity and which extends back to 2000. Our aim has been to provide a repository of both civil and criminal actions in which corporations have been fined or reached settlements for a wide range of offenses.

DOJ, with resources much greater than ours, should be able to create something a lot more substantial than a list of links to its recent press releases.

Corporate Miscreants Foreign and Domestic

The Biden Administration appears to be really serious about economic sanctions–and not only those against Russia. The Justice Department and Treasury just imposed more than $600 million in penalties on British American Tobacco for violating prohibitions on doing business with North Korea.

Aside from the unusually harsh approach toward a product, tobacco, which does not have any obvious national security implications, the case is significant because it continues the administration’s seeming preoccupation with going after large corporations based outside the United States.

If we look at the largest fines and settlements –say, those above $200 million– announced since Biden took office and documented in Violation Tracker, most of them involve foreign companies. Aside from BAT, these include Germany’s Allianz, Denmark’s Danske Bank, Switzerland’s Glencore and ABB, Holland’s Stellantis, Sweden’s Ericsson, India’s Sun Pharmaceuticals and the United Kingdom’s Barclays.

These cases certainly have their merits, but it is surprising that there have been so few comparable actions announced against domestic corporations. Corporate crime and misconduct are not exclusively or even primarily an issue with companies based abroad.

After Biden was elected there was an assumption that the lax enforcement practices seen during the Trump years would disappear. A major crackdown has yet to materialize. Instead, the Justice Department has focused on finding ways to incentivize companies to cooperate with investigations.

There is no explicit policy to this effect, but it appears that prosecutors are going easier on domestic corporate targets while acting tougher with foreign ones. One gets the impression that business oversight is being used in a way to give domestic companies a competitive advantage.

This would be in keeping with the Biden Administration’s efforts to promote domestic manufacturing through legislation such as the CHIPS Act and Buy American policies. Yet there is a difference between industrial policy and regulatory policy.

Although those on the Right complain when they think government is picking winners and losers, that actually goes on all the time when tax policy is written or major procurement contracts are awarded. The legal system is another matter.

Every company, wherever it is headquartered, deserves equal treatment under the law. At the same time, the public deserves to be protected against misdeeds committed by domestic and foreign business entities.

Given that U.S.-based companies are likely to do more of their business in this country, any policy of regulating them more lightly would be especially problematic. Some of the offenses charged against foreign corporations– such as bribery committed abroad– mean a lot less to U.S. residents than serious environmental, financial or workplace transgressions that may be committed by domestic firms.

None of this should be taken as a call for retreating from enforcement actions against foreign companies. Nonetheless, it would be satisfying to see the Biden Administration bring more major cases against homegrown corporate miscreants.

Ill-Gotten Gains

The Justice Department has just announced a pilot program in which corporate executives involved in wrong-doing would be personally penalized. This is meant to alter the usual practice of having the company – and theoretically the shareholders – assume all of those costs.

As described in recent speeches by Deputy Attorney General Lisa Monaco and Assistant AG Kenneth Polite, DOJ would not go after the executives directly. Instead, companies that adopt executive-pay clawback policies would receive reductions in the penalties they have to pay.

Clawbacks are not a new idea, but their use has been limited. DOJ is now adding them to a package of efforts to create incentives for better corporate conduct. In this case, the company gets the carrot while misbehaving executives get the (financial) stick.

There are limitations with this approach. For one, it assumes that misconduct happens when executives go rogue. In reality, the offenses often occur as part of company policy. It is unclear whether in those cases the board of directors could compel everyone in the C-suite to surrender chunks of their compensation. Nonetheless, the DOJ program could help end the assumption of many unscrupulous corporate executives that they are shielded from personal liability.

As it turns out, this DOJ initiative comes just as we are starting to learn more about the true magnitude of executive compensation. To comply with new SEC rules, publicly traded companies are issuing proxy statements with additional calculations reflecting the value of stock awards based on changes in share prices over the course of the year.

These new calculations, dubbed compensation actually paid, show that some executives are effectively receiving even more lavish pay packages than we thought. The Wall Street Journal notes the example of Eli Lilly, which recently reported that the compensation of CEO David Ricks last year under the new approach amounted to $64.1 million, well above the $21.4 million reported using the traditional measure.

I found another example in the proxy of AbbVie, also a pharmaceutical producer. The compensation actually paid to CEO Richard Gonzalez was over $67 million (compared to $26 million under the old calculation).

The compensation-actually-paid figure is not always far in excess of the traditional total compensation amount. Among the limited number of proxies that have been issued so far, the new amount is sometimes lower than the old one.

Bloated compensation, whether measured by the new method or the old one, is most problematic when it occurs at companies with tainted track records. AbbVie is a case in point. Last year its subsidiary Allergan agreed to pay over $2 billion to state attorneys general to settle litigation concerning the improper marketing of opioid medications. In Violation Tracker, AbbVie has cumulative penalties of nearly $6 billion.

There are many other examples of companies with long rap sheets that go on paying their top executives far too much. One is tempted to think that those individuals are in effect being rewarded for breaking the rules when that fattens the bottom line.

It is unclear that the new DOJ clawback program will do much to change this dynamic, but it may serve as a stepping stone to more aggressive measures to rein in corporate misconduct.

Handling Crime in the Suites

Figuring out how to get corporate executives to obey the law has been a perennial challenge. The Justice Department has apparently concluded that the key to compliance may be to threaten something CEOs and other C-Suite bigwigs love dearly: their annual bonuses.

As Law360 reports, compliance experts are abuzz about an unusual provision the DOJ included in the plea agreement it recently negotiated with Denmark’s Danske Bank. The company had agreed to forfeit $2 billion and plead guilty to fraud in connection with allegations that its lax anti-money-laundering (AML) controls allowed shady customers from Russia and other eastern European countries to funnel suspicious funds through Danske’s subsidiary in Estonia.

What is remarkable in the plea agreement is a requirement that Danske tie its executive bonuses to compliance with the stricter AML procedures the bank agreed to implement. The agreement states:

“The Bank will implement evaluation criteria related to compliance in its executive review and bonus system so that each Bank executive is evaluated on what the executive has done to ensure that the executive’s business or department is in compliance with the Compliance Programs and applicable laws and regulations. A failing score in compliance will make the executive ineligible for any bonus for that year.”

The bank is also supposed to structure its compensation system to “incentivize future compliant behavior and discipline executives for conduct occurring after the filing of the Agreement that is later determined to have contributed to future compliance failures.”

Tying executive compensation to compliance is not entirely new. For example, last year the SEC adopted a rule requiring executives at publicly traded companies to return bonuses in the event of erroneous financial reporting. The use of such clawbacks was raised in the 2010 Dodd-Frank Act and took a dozen years to come into existence.

I am of two minds about this innovation. On the one hand, it is encouraging that DOJ is experimenting with new ways to punish corrupt behavior in the corporate world. Imposing consequences on individual executives is an improvement over the usual practice of simply having the company pay a monetary penalty to make the case go away.

On the other hand, it is a bit dismaying that the punishment being contemplated for those executives is quite so mild. Taking a hit to a bonus worth six or seven figures may be unpleasant to a corporate executive, but it is far from a multi-year prison sentence.

The focus on financial incentives and disincentives for individual business offenders is consistent with the approach DOJ tends to take when cases are brought against companies. As I wrote about recently, the Department is offering corporations new inducements – in the form of reduced monetary penalties — to get them to voluntarily disclose misconduct. This is addition to continuing the practice of allowing companies to enter into leniency agreements known as deferred prosecution and non-prosecution agreements so they do not have to plead guilty to criminal charges.

Time and again, we see corporate miscreants treated with kid gloves. The repeated calls for getting tough on crime never seem to apply when the offenses occur in the suites rather than the streets.

DOJ’s Polite Approach to Corporate Crime

The Justice Department cannot seem to decide what stance it wants to take toward corporate criminality. After Biden came into office, DOJ initially signaled a get-tough approach, only to hedge on that last year. A new policy creates even more ambiguity.

Assistant Attorney General Kenneth Polite Jr. just delivered a speech that lives up to his name. He insisted that DOJ is “using every tool at our disposal to combat corporate crime, including more sophisticated data analytics and other means to proactively identify criminal conduct.” Yet he put his main emphasis on the additional opportunities the department will give corporations to reduce penalties and avoid criminal prosecutions altogether. The presentation, in effect, offered a new get out of jail free card to Corporate America.

To be fair, the card is not entirely free—the price is self-reporting. DOJ has apparently decided that the silver bullet for fighting corporate crime is giving companies more incentives to snitch on themselves. Polite’s speech announced a set of enhancements designed to make self-disclosure even more appealing.

At times, the text of his talk reads like an advertisement for a going-out-of-business sale. “If a company voluntarily self-discloses misconduct, fully cooperates, and timely and appropriately remediates, but a criminal resolution is still warranted,” he states, “the Criminal Division will now accord, or recommend to a sentencing court, at least 50%, and up to 75% off of the low end of the U.S. Sentencing Guidelines fine range, except in the case of a criminal recidivist.”

There were even steep penalty discounts offered to companies that don’t come forward: “The revised CEP [Corporate Enforcement Policy] provides incentives for companies that do not voluntarily self-disclose but still fully cooperate and timely and appropriately remediate. In such a case, the Criminal Division will recommend up to a 50% reduction off of the low end of the Guidelines fine range.”

Polite tried to give the impression that a stick is waiting for those who do not opt for the carrots. “The policy is sending an undeniable message: come forward, cooperate, and remediate…Failing to take these steps, a company runs the risk of increasing its criminal exposure and monetary penalties.”

Unfortunately, Justice has squandered its ability to play the bad cop. Take the issue of recidivism. The Biden DOJ initially vowed to crack down on repeat offenders, but they have been allowed to take advantage of leniency deals. This was evident in the case of ABB Ltd, the Swiss company which recently was offered a deferred prosecution agreement to resolve foreign bribery charges despite the fact that it had been involved in similar misconduct in the past. ABB itself was able to avoid criminal prosecution, though two subsidiaries had to plead guilty.

Even that kind of gesture may no longer occur. Polite announced that recidivists will not necessarily be required to plead guilty when faced with new charges and may be eligible for reduced fines even when they do not self-disclose.

There is a fundamental flaw in DOJ’s belief in the benefits of incentivizing corporate self-reporting. That faith seems to be based on the assumption that corporate crime usually involves actions by lower-level personnel. Top executives supposedly learn of the misconduct after the fact and must weigh the costs and benefits of reporting it to the authorities versus keeping quiet.

This ignores the fact that top management frequently is the source of the criminality, either directly or indirectly, as when the leadership of Wells Fargo imposed highly unrealistic revenue targets on employees, prompting them to create millions of sham fee-generating accounts. Penalty incentives will not mean much to residents of the C-suite who may be at risk of individual prosecution.

The other problem with DOJ’s approach is that it projects weakness. Its emphasis on leniency agreements, reduced fines and other incentives gives the impression the department is overwhelmed and outmatched in dealing with corporate miscreants.

Rogue corporations should have to beg for lighter penalties and be offered them only in extraordinary circumstances. Offering special deals to lawbreakers will not blunt corporate crime.