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.

The Bank from Hell

Perhaps because it was announced just days before Christmas, the Consumer Financial Protection Bureau’s giant enforcement action against Wells Fargo has not received all the attention it deserves. The agency imposed a whopping $1.7 billion civil penalty and ordered the bank to provide more than $2 billion in consumer redress.

CFPB took these steps in response to what it called illegal practices affecting over 16 million consumer accounts. Wells was found to have repeatedly misapplied loan payments, wrongfully foreclosed on homes, improperly repossessed vehicles, and incorrectly assessed interest and fees, including surprise overdraft charges. Wells Fargo, it seems, was behaving like the bank from hell.

CFPB’s action does not come as a complete surprise. Wells already had a dismal track record. As shown in Violation Tracker, the bank has paid over $20 billion in fines and settlements during the past two decades. It has been especially tainted since 2016, when the CFPB revealed that bank employees, pressured to meet unrealistic sales goals, had been secretly opening unauthorized accounts in the name of unsuspecting customers who found themselves paying fees for services they had not requested.

Wells was initially fined only $100 million by CFPB, but the controversy over the bogus accounts continued. In 2020 the bank had to pay $3 billion to resolve criminal and civil charges brought by the Justice Department and the SEC. The impact of the case was diminished by the fact that DOJ offered Wells a deferred prosecution leniency agreement and by the decision not to prosecute any individual executives.

A different approach was taken by the Federal Reserve in its capacity as a bank regulator. In 2018 it announced that Wells would be subject to restrictions on its growth until it sufficiently improved its governance and internal controls. The Fed also pressured the bank to replace four members of its board of directors.

The new CFPB case suggests that neither the DOJ nor the Fed action was sufficient to get Wells to change its ways. Other evidence comes from private class action lawsuits. These include a $386 million settlement to resolve allegations the bank added unnecessary insurance fees to car loan bills and a $30 million settlement of allegations it improperly charged interest on Federal Housing Administration-insured loans after they were paid off.

All of this leads to two questions: Why does anyone continue to do business with Wells Fargo? And why do regulators allow it to continue to operate? The answers to both have a lot to do with the enormous concentration in the U.S. banking sector. In some parts of the country, Wells may be one of only a tiny number of full-service commercial banks doing business.

Size is also a factor in how Wells is treated by regulators. As outraged as they may be about the bank’s misconduct, they are not inclined to take any punitive action which might threaten its viability. A villainous Wells Fargo is apparently seen as preferable to the collapse of a bank with nearly $2 trillion in assets.

It is difficult to avoid the conclusion that Wells is taking advantage of this situation by pretending to reform its practices while continuing to conduct its dubious form of business as usual. Regulators need to find a way to bring this rogue bank under control once and for all.

Note: The new CFPB action was announced right after we completed an update of Violation Tracker. It will be added to the database as part of the next update later this month.

The 2022 Corporate Rap Sheet

The prognosis for the U.S. economy remains uncertain, but it is clear that 2022 has been a bumper year for corporate penalties. Including an update that will be posted soon, Violation Tracker will end up documenting more than $56 billion in fines and settlements. Among them are a dozen individual penalties in excess of $1 billion.

Many of the largest cases were brought by state attorneys general against large drug companies and pharmacy chains for their role in fueling the opiate crisis. Teva Pharmaceuticals entered into a settlement worth up to $4.25 billion to resolve allegations it deceptively marketed opioid products. Allergan paid $2.37 billion in a similar case.

Settlements were even higher in cases involving the failure of large pharmacy chains to question extraordinarily high volumes of suspicious opioid prescriptions. Walgreens paid $5.7 billion, CVS $5 billion and Walmart $3.1 billion.

The biggest Justice Department penalties were imposed on foreign companies in criminal cases. Allianz, the German insurance company and asset manager, paid $5.8 billion to resolve allegations that it misled public pension funds into investing in complex and risky financial products, causing them to suffer heavy losses. Denmark’s Danske Bank A/S paid $2 billion to settle charges that it lied to U.S. banks about its anti-money-laundering controls in order to help high-risk customers in countries such as Russia transfer assets.

Glencore, a commodity trading and mining company headquartered in Switzerland, paid $1.2 billion in a case involving international bribery. In another case brought under the Foreign Corrupt Practices Act, ABB Ltd, also based in Switzerland, paid DOJ a penalty of $315 million. It was also offered a leniency agreement called a deferred prosecution agreement, even though it was not the first time the company had been caught up in a bribery case.

In another case in which DOJ targeted a foreign company for actions abroad, the French building materials company Lafarge (part of the Holcim Group) paid $777 million to resolve allegations that it gave material support to terrorist groups such as ISIS when it made payments in exchange for permission to operate a cement plant in Syria.

Coming in just under a billion was the $900 million settlement DOJ reached with the drug company Biogen to resolve allegations that it paid illegal kickbacks to physicians to induce them to prescribe its products. This was the largest penalty among some 200 resolutions of cases brought under the False Claims Act during the year.

The biggest environmental fine of 2022 was the $299 million paid by automaker FCA US LLC (formerly the Chrysler Group and now part of Stellantis) to resolve criminal charges that it defrauded regulators and customers by making false and misleading representations about the design, calibration, and function of the emissions control systems on more than 100,000 of its vehicles. The allegations were similar to those faced by Volkswagen in its emissions cheating scandal, for which it paid around $20 billion in fines and settlements in previous years.

This year also saw an environmental settlement of $537 million paid by Monsanto (owned by Bayer) in a case involving the contamination of water supplies with polychlorinated biphenyls, or PCBs.

Privacy was the focus of numerous large cases, especially ones involving the tech giants. Google paid $391 million in a settlement with 40 state attorneys general of allegations the company misled consumers about the collection and use of their personal location data. Twitter had to pay $150 million to resolve allegations by DOJ and the Federal Trade Commission that it misrepresented how it employed users’ nonpublic contact information.

Employment-related cases tend to have lower regulatory penalty amounts, but private class action cases can result in sizeable settlements. This year saw Sterling Jewelers pay $175 million to settle a lawsuit alleging that for years it had discriminated against tens of thousands of women in its pay and promotion practices. Business services company ABM Industries agreed to pay $140 million to settle litigation alleging it failed to keep accurate records of time worked by its janitor employees, causing them to be underpaid.

There were also cases that overlapped employment issues and antitrust. Cargill, Sanderson Farms and Wayne Farms agreed to pay a total of more than $84 million to settle allegations that they violated antitrust laws by sharing poultry workers wage and benefit information, thereby depressing compensation levels.

In 2022 large corporations once again paid vast sums of money in connection with a wide range of misconduct. At the same time, they are spending more than ever to tout their supposed social responsibility credentials. The country would be a lot better off if big business focused less on ESG PR and more on compliance.

Update: After this blog was posted, several other major penalties were announced. The Consumer Financial Protection Bureau announced the largest penalty in its history against Wells Fargo, which was ordered to pay a fine of $1.7 billion and provide $2 billion in customer restitution to resolve allegations that the bank imposed illegal fees and interest charges on borrowers for automobile and home loans. The Federal Trade Commission fined software company Epic Games $520 million for violating online privacy protections for children. And a subsidiary of Honeywell was fined more than $160 million for paying bribes in Brazil.

Corporate Crime Groundhog Day

ABB Ltd, an industrial equipment giant based in Switzerland, seems to have a problem doing business honestly. The company has a tendency to get caught paying bribes to government officials around the world to obtain contracts to supply its goods and services.

The latest example of this came last week, when the U.S. Justice Department announced that ABB would pay a criminal penalty of $315 million to resolve allegations relating to the bribery of a high-ranking official at South Africa’s state-owned energy company. DOJ brought its action under a U.S. law, the Foreign Corrupt Practices Act, but in coordination with prosecutors in Switzerland and South Africa.

At first glance, one might think DOJ is throwing the book at ABB. Yet a closer reading of the announcement reveals that the company is the recipient of a kind of leniency agreement known as a deferred prosecution agreement. Under this arrangement, ABB Ltd pays a penalty but avoids having a criminal conviction.

DOJ did compel two of ABB’s foreign subsidiaries to enter guilty pleas, but freeing the parent of that consequence was a significant concession that allows the company to continue doing business as usual.

In its press release, DOJ congratulates itself on the handling of the case, stating: “This resolution demonstrates the Criminal Division’s thoughtful approach to appropriately balancing ABB’s extensive remediation, timely and full cooperation, and demonstrated intent to bring the misconduct to the department’s attention promptly upon discovering it, while also accounting for ABB’s historical misconduct.”

The last phrase is alluding to the fact that this is not the first time ABB has been charged with bribery by DOJ. In 2010 the company and two subsidiaries were charged in connection with bribes paid to a Mexican state-owned utility company and to officials in Iraq. The outcome was amazingly similar to this year’s case. The parent was offered a deferred prosecution agreement, while two subsidiaries pled guilty. The parties paid criminal penalties totaling $19 million.

There was also a Groundhog Day quality to the announcement last week by the SEC, which handled the parallel civil case against ABB and fined the company $75 million. After mentioning that it relieved ABB of having to pay an additional $72 million in disgorgement because of reimbursements it made to the South African government, the SEC casually noted that “ABB was the subject of two prior FCPA cases by the SEC in 2004 and 2010.” The 2010 case was related to the DOJ action cited above, while the 2004 SEC matter concerned illicit payments in Nigeria, Angola and Kazakhstan.

There is something almost comical about this history. ABB keeps getting caught breaking the rules and keeps promising to mend its ways. DOJ and the SEC keep giving special consideration to a company whose business model seems to depend on the use of improper payments.

Leniency deals such as deferred prosecution agreements are supposed to act as a deterrent against future misconduct, but the arrangement loses all meaning if the company continues to offend and is then offered another agreement. The financial penalties rise, but they are still insignificant for a company with annual revenues of about $30 billion and assets of about $40 billion.

Finding the most effective way to handle corporate crime is no easy task, yet DOJ should at least deny leniency deals to repeat offenders.

Getting Tougher with the Monopolists

The Antitrust Division of the Justice Department has announced that the former president of a paving and asphalt company based in Montana has pleaded guilty to criminal charges of attempting to monopolize the market for highway crack-sealing services in that state and Wyoming.

It is encouraging to see DOJ take aggressive action against an individual executive, especially since this action was the first criminal case to be brought under the Section 2 anti-monopoly provisions of the Sherman Act in decades.

Yet it is difficult to get too excited about the case, given that it involves a pretty small culprit in a minor market. DOJ should set its sights higher.

In doing so, prosecutors may want to look back at a case that shook up the corporate world 60 years ago. In what became known as the great electrical equipment conspiracy, dozens of executives from companies such as Westinghouse and General Electric were charged with colluding to fix prices and rig bids in the sale of transformers and other gear to industrial customers.

The defendants included a variety of vice presidents, division managers and other fairly high-level managers in the companies. Faced with incontrovertible evidence gathered by the DOJ during the Eisenhower Administration, they pleaded guilty or no contest and threw themselves on the mercy of the court. As Time magazine reported in 1961, defense attorneys argued for leniency:

One by one, as the sentencing went on, lawyers rose to describe their clients as pillars of the community. William S. Ginn, 45, vice president of General Electric, was the director of a boys’ club in Schenectady, N.Y. and the chairman of a campaign to build a new Jesuit seminary in Lenox, Mass. His lawyer pleaded that Ginn not be put “behind bars with common criminals who have been convicted of embezzlement and other serious crimes.”

Federal District Judge J. Cullen Ganey was not swayed. He sentenced Ginn and half a dozen other defendants to 30-day jail sentences, while many of the others received suspended sentences for reasons of age or health. A month was not a long stretch, but it was shocking at the time to see prominent businessmen being led off in handcuffs. In fact, it was the first time in the 70 years following the enactment of the Sherman Act that executives of large companies were incarcerated for antitrust offenses.

In the ensuing years, DOJ vacillated in its position on individual criminal charges for cartel activity. In the 1970s Congress revised the Sherman Act to allow violations to be prosecuted as felonies rather than just misdemeanors, but those provisions were not always applied.

Today the Antitrust Division regularly brings charges against individuals under Section 1 of the Sherman Act for price-fixing and bid-rigging, but the case volume is low and the sentences are not much harsher than those meted out by Judge Ganey. Moreover, the defendants in those cases are rarely high-level executives at large companies.

DOJ’s new willingness to bring Section 2 criminal cases is encouraging, but in order to shake up the business world the way the electrical equipment prosecutions did, the Antitrust Division will have to take aim at high-level executives at some of the mega-corporations that dominate our economy.

DOJ’s Not-So-Hard Line on Corporate Crime

Last year, Deputy Attorney General Lisa Monaco gave a speech promising a crackdown on corporate criminals, especially repeat offenders. That gave rise to hopes that the Justice Department, after having gone soft on corporate prosecutions during the Trump years, would return to a more aggressive stance.

After months of consultation with various parties, Monaco has just given another speech to signal what is coming next. The new approach, explained in more detail in a memo to federal prosecutors, has some laudable features, but it does not go far enough in bringing down the hammer on rogue companies and their executives.

For example, Monaco’s 2021 statement included a vow to take into account a company’s past behavior when deciding on a prosecution strategy. As someone who spends his time documenting corporate non-compliance, I was eager to see DOJ take a harder line on companies that break the law over and over again.

That commitment remains in the new policy, but there are hedges. Monaco writes: “Not all instances of prior misconduct, however, are equally relevant or probative. To that end, prosecutors should consider the form of prior resolution and the associated sanctions or penalties, as well as the elapsed time between the instant misconduct, the prior resolution, and the conduct underlying the prior resolution.”

Monaco specifies that criminal offenses that occurred more than ten years ago or civil offenses more than five years old can be given less weight. But then she acknowledges that “depending on the facts of the particular case, even if it falls outside these time periods, repeated misconduct may be indicative of a corporation that operates without an appropriate compliance culture or institutional safeguards.”

This “on the one hand, on the other hand” language sends a mixed message. It would have been preferable to tell prosecutors to give serious consideration to previous bad acts and leave it at that.

Then there’s the issue of individual accountability. Now, as last year, Monaco encouraged prosecutors to bring cases against culpable corporate executives and to expedite the handling of those cases. That sounds fine, but the main way Monaco wants to accomplish this is by giving corporations incentives to cooperate more thoroughly with investigations.

Getting companies to turn in wrongdoers is a good idea, but Monaco’s approach could come at too high a cost. She states that, “absent the presence of aggravating factors, the Department will not seek a guilty plea where a corporation has voluntarily self-disclosed, fully cooperated, and timely and appropriately remediated the criminal conduct.” Her memo also states that the imposition of an independent compliance monitor need not occur when a cooperating company “demonstrates that it has implemented and tested an effective compliance program.”

Keep in mind that the kind of cases involved here are mainly ones in which an unscrupulous executive was taking actions that benefited the company and that should have been prevented by internal controls. Such corporations need to be held fully accountable and put under close supervision.

They also should not be allowed to go on receiving special deals such as non-prosecution and deferred prosecution agreements—sometimes more than once. Rather than calling for an end to these practices, Monaco weakly states that multiple deals are “generally disfavored” and goes on to dilute that position even more by suggesting that everything should be done to incentivize voluntary disclosure.

On the plus side, Monaco’s policy would pressure corporations to claw back compensation paid to executives who engage in misconduct. In too many cases, these corrupt individuals have been allowed to keep lavish pay and benefit packages—and often the company would pay their legal expenses.

Overall, Monaco puts too much emphasis on the carrot and not enough on the stick. Corrupt corporations have been treated leniently for too long. Now is the time for a tougher approach.

Another Crooked Bank

When one large corporation is found to be breaking the law in a particular way, there is a good chance that its competitors are doing the same thing. The latest evidence of this comes in an announcement by the Consumer Financial Protection Bureau concerning U.S. Bank.

The CFPB fined the bank $37.5 million for illegally accessing credit reports and opening checking and savings accounts, credit cards, and lines of credit without customers’ permission. U.S. Bank employees were said to have done this in response to management pressure to sell more financial products and thus generate more fee revenue.

If this sounds familiar, it is exactly what came to light in 2016 regarding Wells Fargo, which was initially fined $100 million by the CFPB for the fraudulent practice and subsequently faced a wave of other legal entanglements, including a case brought by the U.S. Justice Department in which Wells had to pay $3 billion to resolve civil and criminal charges.

The U.S. Bank case has not yet generated the tsunami of outrage that accompanied the revelations about the phony accounts at Wells. Perhaps that is because it is the middle of the summer. Yet chances are that the CFPB’s enforcement action will not be the only punishment the bank will face.

U.S. Bank’s practices were no less egregious than those of Wells. According to the CFPB, the management of the bank, which currently has more than half a trillion dollars in assets, was aware for more than a decade that its employees were creating fictitious accounts.

And like Wells, U.S. Bancorp has a long history of questionable behavior. Violation Tracker documents more than $1.2 billion in penalties from 40 cases dating back to 2000. Half of the total comes from offenses involving serious deficiencies in anti-money-laundering practices, including a 2018 case in which the bank had to pay $453 million to settle criminal charges brought by the U.S. Justice Department plus another $75 million to the Office of the Comptroller of the Currency to resolve civil allegations.

In 2014 U.S. Bank had to pay $200 million to settle allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the Federal Housing Administration that did not meet applicable requirements. The bank also had a previous run-in with the CFPB, which penalized it $53 million in 2014 for unfairly charging customers for credit identity protection and credit monitoring services they did not receive.

It is likely that U.S. Bank’s penalty total will rise substantially through additional cases prompted by the CFPB’s latest allegations, which include accusations the bank violated not only the Consumer Financial Protection Act but also the Fair Credit Reporting Act, the Truth in Lending Act, and the Truth in Savings Act.

Apart from monetary penalties, U.S. Bank may face an additional form of punishment applied to Wells: in 2018 the Federal Reserve restricted the growth of the firm until it cleaned up its practices and improved its governance. Since fines have proven to be a weak deterrent against corrupt practices at major financial institutions, more aggressive measures provide the only hope of bringing the big banks under control.

The Biden Administration’s First Corporate Crime Mega-Case

Observers of the corporate crime scene have been waiting to see when the regulators and prosecutors of the Biden Administration would announce a mega-case of the sort that had largely disappeared during the lackluster enforcement period of the Trump years. That case has arrived, and the target is not exactly a household name in the United States: the German financial services corporation Allianz.

The Justice Department and the Securities and Exchange Commission have announced that Allianz and its investment management arm, Allianz Global Investors (AGI), will pay more than $6 billion to resolve criminal and civil allegations relating to what the SEC called a “massive fraudulent scheme.” The victims of that scheme included public employees participating in pension funds that were misled about the riskiness of complex financial products marketed by AGI. The true extent of the risk became evident during the COVID-related market volatility of 2020, when the pension funds and other investors suffered catastrophic losses.

The $6 billion settlement ranks among the 20 largest penalties recorded in Violation Tracker for the period since January 2000. More than half of those cases involve financial services corporations.

Allianz, whose Violation Tracker penalty total until now was $182 million, joins the 30 banks and other financial services companies that have each paid more than $1 billion in aggregate penalties. These include 13 European banks, among which are two from Germany: Deutsche Bank and Commerzbank.

There are a couple of encouraging aspects of the AGI case that go beyond the substantial monetary penalty. First, the SEC announced that AGI, because of its guilty plea in the DOJ case, will be disqualified from providing advisory services to US-registered investment funds for the next ten years, and will exit the business of conducting these fund services.  This contrasts with other cases in which financial services companies have avoided these sorts of consequences in criminal cases by arranging for the guilty plea to be submitted by a minor subsidiary—or by getting a waiver.

In addition, criminal charges were brought not only against the company but also against several individuals, including Gregoire Tournant, the chief investment officer of AGI. Tournant was charged with securities fraud and investment fraud as well as obstruction of justice. The latter related to allegations that Tournant and the other defendants made multiple, ultimately unsuccessful, efforts to conceal their misconduct from the SEC, including, the agency stated, “false testimony and meetings in vacant construction sites to discuss sending their assets overseas.”

The charges against Allianz were all the more appropriate in that the company’s U.S. operations have been involved in several other investor deception cases. For example, in 2004, three of its subsidiaries were fined $50 million by the SEC. Another subsidiary paid $18 million to settle a case with the New Jersey Attorney General. Yet another unit was fined $5 million by the industry regulator FINRA. Allianz’s U.S. insurance subsidiaries have also been fined numerous times by state regulators.

Let’s hope that the Allianz matter is a sign that the Biden Administration is serious about cracking down on corporate crime and that recidivists will be made to pay a significant price for their ongoing transgressions.

Reviving the Ultimate Corporate Punishment

Big business has despised the Consumer Financial Protection Bureau since its creation, and now the director of the agency has provided additional basis for that enmity. Rohit Chopra recently delivered a speech to the University of Pennsylvania Law School that amounted to one of the most aggressive statements on corporate misconduct ever made by a federal regulatory official. And he put forth some bold ideas for dealing with the problem.

Chopra began with the observation that the CFPB, which has been in operation for only about a decade, has had to take action against some major financial institutions on multiple occasions—five times in the case of Citigroup and four times against JPMorgan Chase, for example. These cases have resulted in billions of dollars in penalties and consumer redress.

The CFPB’s experience is not unique. “Repeat offenses – whether it’s for the exact same offense or more malfeasance in different business lines,” are, Chopra stated, “par for the course for many dominant firms.”

This conclusion is reinforced by the data collected in Violation Tracker. Over the past two decades, the commercial banks in the Fortune 100 have paid over $190 billion in fines and settlements. More than 100 corporations across all sectors have each paid over $1 billion in penalties.

The central question, as Chopra put it, is: “How do we stop large dominant firms from violating the law over and over again with seeming impunity? Corporate recidivism has become normalized and calculated as the cost of doing business; the result is a rinse-repeat cycle that dilutes legal standards and undermines the promise of the financial sector and the entire market system.”

Chopra’s address was remarkable in that it also put forth a vision for solving the problem. In addition to more prosecutions of individual executives, he calls for a focus on structural remedies, including putting restrictions on the ability of rogue corporations to grow.

This idea is not unprecedented; in fact, as Chopra notes, it was implemented by regulators in the case of Wells Fargo. In 2018, following revelations that the bank had created two million bogus customer accounts to generate illicit fees, the Federal Reserve took the unusual step of barring it from growing any larger until it cleaned up its business practices.

Chopra proposes to take even more aggressive measures. He wants to see misbehaving corporations forced to close or divest portions of their operations. He would deny such companies access to government-granted privileges. For example, pharmaceutical violators could lose their patents; lawless banks could lose access to FDIC deposit insurance.

Chopra indicated he is also exploring the most remedy of all: putting corrupt corporations out of business entirely. He warned that the CFPB will be deepening its collaboration with officials at the state level, where corporations are chartered, “to ascertain whether licenses should be suspended or whether corporate assets should be liquidated.”

In other words, Chopra is proposing greater use of what is often called the corporate death penalty (he doesn’t used that phrase). Such punishment is applied by some states in dealing with bad actors, but they are usually small, fly-by-night operations.

Talk of putting a large company out of business has been largely taboo since the case of accounting firm Arthur Andersen, which shut down in 2002 after being prosecuted for offenses relating to its role as the auditor of the fraudulent energy company Enron. There was a strong backlash in the business world against the prosecution, especially after the conviction was later overturned by the U.S. Supreme Court.

Chopra is no longer daunted by that episode. He argues that terminating corporate charters and licenses “should be considered for institutions of all sizes when the facts and circumstances warrant it.”

His speech may be a turning point in the prosecution of corporate crime. The two decades since the Enron/Arthur Andersen case have seen a tsunami of misconduct. Violation Tracker, whose mission is to document the phenomenon, is now up to more than 500,000 cases with fines and settlements of $786 billion.

While the penalties continue to accumulate, there is no evidence that corporate behavior is improving.  Another approach is needed. Chopra’s roadmap is a good place to start.