Will this Ailing Economy Become the New Loophole for Corporate Misconduct?

October 14, 2020  •   David Pring-Mill

By David Pring-Mill

Brian C. Rabbitt, the Acting Assistant Attorney General for the U.S. Department of Justice Criminal Division, recently acknowledged that the “once-in-a-lifetime pandemic” is being cited during settlement negotiations with companies. He told the Wall Street Journal’s Risk and Compliance Forum: “We certainly have seen arguments raised—claims raised—about ability to pay during the pandemic.”

In 2019, the Criminal Division sent out guidance and an analytical framework to cover instances where a business agrees to the fairness of a criminal fine, but asserts that it is unable to pay it. The underlying principle here is that the continued viability of the business is desirable, because of the jobs it creates, so that it can pay restitution, or for other reasons.

The first publicly acknowledged application of this framework happened in September when Sargeant Marine, a company that transports asphalt and bitumen, had its criminal fine reduced from US $90M to $16.6M, despite paying millions of dollars in bribes to foreign officials in South America over an eight-year period.

The proposed $90M was already discounted well below the baseline fines for severe violations of the Foreign Corrupt Practices Act (FCPA), on the basis of cooperation and efforts to remediate the misconduct. The company is owned by the wealthy Sargeant family, which has previously been engaged in litigation against one another. Harry Sargeant III, who is no longer involved in Sargeant Marine and was not a defendant in this case, is a major fundraiser for the Republican Party with alleged connections to the Trump–Ukraine scandal.

How many other companies will cite their inability to pay? Will this ailing economy become the new loophole for corporate misconduct? Will compliance programs ever get things right?

When it comes to the financial sector, in particular, the public perception increasingly seems to be that the very idea of compliance is farcical and the core conduct is problematic or destructive. Despite the financial sector’s role in the sophisticated allocation of capital that empowers growth and efficiencies, and its creation of derivatives that can have an at least temporary effect of hedging risks (Warren Buffett calls them “time bombs”), it is harder and harder to argue against the growing mistrust. 

Following an ICIJ and BuzzFeed News investigation into the active role of banks in global money laundering to the tune of trillions, the superintendent of the New York State Department of Financial Services conceded: “Over decades we have allowed the problem to metastasize so that it’s endemic in the system and wrapped within the guts of financial institutions.”

Banks facilitate these massive transactions through international networks of shell companies, take their cuts, and notify the Financial Crimes Enforcement Network without any serious concerns about accountability. Provided that prosecution even occurs, the imposed fines aren’t large enough (proportionate to banking revenue) to deter continued laundering.

Whenever corporate misconduct occurs, is identified, and prosecuted, the imposed sanctions across industries aren’t meant to be just a matter of punishment and remedy. They are meant to deter misconduct and motivate better internal compliance mechanisms. It’s worth noting that a true organizational realignment with laws and ethics requires even more than this carrot-and-stick approach.

Two factors can mitigate a criminal fine: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility.

The existence of an effective compliance program means a lesser fine, but the compliance program was obviously not completely effective, by virtue of the fact that wrongdoing and prosecution occurred in the first place. However, federal sentencing guidelines provide room for inevitable error and imperfection. The focus is on maintaining a program that is generally effective.

Attention is also supposed to be paid to the organizational culture around that program.

Employees working on compliance programs may do so begrudgingly, especially if it comes to represent a process of box-checking. They can’t shake the feeling that it’s somewhat about optics, and from a legal perspective, they’re somewhat right.

This can, in part, be traced back to 1991, when the United States Sentencing Commission amended its guidelines to offer firms reduced fines if they could point to a well-formulated attempt at compliance. Prosecutors and civil regulators started to look for signs of good faith efforts, which predictably created an entire industry of compliance products and services.

Processes that are designed to be demonstrative and processes that are earnestly striving to be effective may not necessarily be in conflict, unless the finite resources of time, energy, and money consistently favor the demonstrative.

To anecdotally demonstrate the weaknesses of demonstration: 

When I was a kid, I had a math teacher with an unconventional method of grading homework. She simply walked in-between the rows of desks, glanced at everyone’s homework papers, and made a quick determination as to whether each student had tried. She said she cared more about the “doing” of the homework than the accuracy of the solution. I wrote down the correct answers but solved the equations in my head.

She graded me poorly.

Her logic seemed to be that anyone’s correct answers could have been copied from peers. Theoretically, the revealing of a thought process could help a teacher to help a struggling student, though my teacher’s process seemed to be more about expediting the grading. Each homework assignment received only her fleeting glance and gut reaction.

Eventually, I decided to play the game and “show my work.” I tried to numerically capture a sense of dramatic striving on each sheet of paper. Things were crossed out. Random mathematical symbols popped up as I seemingly tried to conjure up different equations, perhaps even entirely new or unrelated branches of mathematics, all in an effort to solve a simple problem. I would have smeared drops of sweat over the graphite but I thought that might veer too far away from credibility.

My grades vastly improved.

a documented process

Hui Chen, a former compliance counsel expert for the DOJ, tried to better merge the demonstrative and the effective. She drafted a list of questions to help prosecutors tease out whether a firm’s compliance program was being meaningfully implemented through regular improvements, testing, documented investigations, accountability, and the proper sharing of information.

By now, it’s perhaps easy to predict the irony of where this is going:

Some companies created a checklist for their checklists.

They used incomplete and invalid metrics to defend their compliance efforts, and didn’t adequately communicate to management and employees that it isn’t just about showing your work. It’s about doing the work, and doing what’s right.

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