LEGAL
"The greatest deterrent effect is not to prosecute a corporation – although that's important – the greatest deterrent effect is to prosecute the individuals in the corporations that are responsible for those decisions."[1]
Eric H. Holder, Jr., U.S. Attorney General
The regulatory environment is changing and enforcement actions are on the rise, particularly in the financial industry. Since Operation Casablanca involving the indictment of Mexican banks in 1998 to the multi-billion dollar recoveries in 2013 and 2014 involving the largest money-center banks, the U.S. Government has continually increased the regulatory pressure on the financial industry with respect to regulatory obligations ranging from anti-money laundering to predatory lending. This has extended to other regulatory regimes, such as the Foreign Corrupt Practices Act (FCPA), in other diverse industries ranging from textiles and manufacturing to public accounting. While the initial historical target of enforcement actions focused on corporate responsibility, the recent trend is to also focus on individual employees whom may have played a role in the subject activity.
As the Department of Justice (DOJ) has increased enforcement pressure through the use of Deferred Prosecution Agreements (DPA) and Non-prosecution Agreements (NPA) (DPA and NPA collectively referred to as "Agreements") during the past decade, there has been a continual increase of enforcement actions by the DOJ and other regulatory agencies that included the individuals involved in the subject activity. Whether naming the individual is an effective deterrent mechanism for enforcement will be a function of future enforcement actions. That which is certain today, however, is that individuals will more frequently be named in prosecutions and enforcement actions. This trend will have important implications to financial institutions and their implementation of compliance programs.
Through the pursuit of enforcement actions, the DOJ, and other regulatory agencies, are in essence, if not enacting, then strongly influencing, policy. Regulatory agencies use the Agreements and enforcement actions in general to require subjects to implement programs which comply with the regulatory agencies' interpretation of the law and increase the standards of an effective compliance program. A secondary, and in many respects a more important effect, is the guidance provided to the overall industry through such enforcement actions. One DPA, for example, may produce changes in the compliance programs of companies throughout the industry and beyond. From one agreement to the next, the regulatory agencies are refining their direction regarding the legal requirements and providing needed guidance to the industry.
Proactive corporate governance and compliance professionals study enforcement actions in their industry, as well as related industries, and evaluate their own programs against such actions. A recurring argument is that this proactive approach to compliance consumes significant resources. As the trend continues and the rise of DPAs/NPAs and other enforcement actions spreads to other enforcement regulators, such as the Securities and Exchange Commission (SEC), the corporation's proactive approach may very well be the most cost-effective strategy for dealing with the highly regulated environment and to mitigate the threat of becoming the target of a prosecution or an enforcement action. The appropriateness of this proactive approach is fortified further by the recently announced BNP Paribas Consent Order and forfeiture of $8.9 billion. The European Central Bank, as a result of the materiality of the forfeiture and fine, is considering the inclusion of potential regulatory penalties as an additional element in its stress testing algorithm to assess capital adequacy.[2] With each enforcement action, the potential ramifications to the business, and industry, as a whole grow. BNP Paribas clearly demonstrates this principle. Similarly, the probability for further liability imposed on individuals increases. The latter is the manifestation of the desired deterrent effect. Its effectiveness regarding the individual as target, however, remains a function of the specific enforcement action and will differ among the primary employee groups: business line staff, compliance and board.
Historically, four primary justifications for criminal punishment have been identified in structuring punishment regimes: (1) retribution, (2) deterrence, (3) incapacitation, and (4) rehabilitation. These four primary goals for criminal punishment are in line with the basic responsibilities of the enforcement branch of the government: (1) making certain that the general purposes of the criminal law are adequately met, while (2) making certain that the rights of individuals are scrupulously protected.[3]
The principal justifications for including an employee in an enforcement action are retribution and deterrence. Ultimately, deterrence is the primary justification where the principle goal of enforcement is the implementation of effective compliance programs on an industry-wide basis.
Including the individual in the enforcement action requires the government to have a clear view of the desired deterrent impact and whether the same will actually function to produce the intended effect. New York State Department of Financial Services Superintendent, Benjamin Lawsky, echoed this approach in his remarks at the Exchequer Club in Washington, D.C. on March 19, 2014. "Now, real deterrence, in my opinion, means a focus not just on corporate accountability, but on individual accountability." [4] He continued his remarks by stating, "Corporations are made up of people. If there is wrong doing at a corporation, that wrongdoing was committed by people... If we are just getting large fines from the corporations...we are really deterring future bad conduct."[5] An effective enforcement action, naming an individual, therefore, will achieve the primary goal of enforcement stated above, provide guidance to the industry regarding regulatory expectations, and serve as a clear deterrent to similar behavior by, both the employee and the corporation.
As the regulatory and enforcement environment evolves through the continued use of enforcement actions, the government naturally will continue to look for more effective means of creating deterrence. The natural evolution, therefore, will focus on the individual. This can be seen clearly in the United States Attorneys' Manual, Title 9, Section 9-27.220 Grounds for Commencing or Declining Prosecution:
Charging a corporation, however, does not mean that individual directors, officers, employees, or shareholders should not also be charged. Prosecution of a corporation is not a substitute for the prosecution of criminally culpable individuals within or without the corporation. Because a corporation can act only through imposition of individual criminal liability may provide the strongest deterrent against future corporate wrongdoing. Only rarely should provable individual culpability not be pursued, even in the face of an offer of a corporate guilty plea or some other disposition of the charges against the corporation.[6]
The DOJ recognizes the individual as possibly the strongest deterrent to corporate wrongdoing. The enforcement actions the DOJ publically announced in 2013, related to FCPA violations, tend to support this theory as 12 of the 19 cases were levied against individual defendants: 63 percent.[7] The federal and state banking regulators are part of the growing trend of naming individuals in enforcement actions. In the BNP Paribas case, for example, as part of the Cease and Desist Order and Assessment of a Civil Money Penalty, the bank was ordered to end employment related relations with eleven employees who were determined by the Federal Reserve Board investigation to have "participated" in the underlying activity. [8]
Naming the individual employee in an enforcement action however, is a matter of critical importance that requires a thorough analysis. As U.S. Attorney General Holder stated in his testimony before the Senate Judiciary Committee, "When you look at these cases, you see things were done wrong", then the questions is whether or not they were illegal."[9] Prosecutors, similarly, must evaluate the benefits of prosecuting the individual against the chilling effect such prosecution may have on, for example, attracting qualified board members and compliance personnel.
The principles of Federal prosecution in the United States Attorneys' Manual, Title 9 (Manual), are an aid, which are intended to promote the reasoned exercise of prosecutorial discretion by government attorneys regarding the spectrum of questions relevant to the prosecution process ranging from the decision to prosecute to sentencing, as well as entering into Agreements. [10]
When deciding whether to pursue criminal charges, both against an individual and an entity, the prosecutor is directed to evaluate whether the conduct constitutes a Federal offense and whether the admissible evidence will suffice to obtain and sustain a conviction. They must also evaluate if a prosecution should be declined, because:
The logical question is whether these basic responsibilities are met when the decision is made to prosecute a subject, legal entity or individual, and whether such prosecution will achieve the primary goals of enforcement.
View the full report, including who can be targeted, online.
References
[1] Statement of Eric H. Holder, Jr., United States Attorney General, before the United States Senate Committee on the Judiciary for the hearing "Oversight of the U.S. Department of Justice" on March 6, 2013.
[2] The Wall Street Journal, "ECB Anxious About Impact of U.S. Fines on EU Banks," Bisserbe, Noemie and Enrich, David, June 3, 2014.
[3] United States Attorneys' Manual, Title 9, Section 9-27.110(B) Purpose
[4] Remarks of Superintendent Lawsky on Financial Regulatory Enforcement at the Exchequer Club, Washington, D.C., March 19, 2014.
[6] United States Attorneys' Manual, Title 9, Section 9-27.220 Grounds for Commencing or Declining Prosecution
[7] Gibson Dunn, 2013 Year-End FCPA Update, (Jan. 6, 2014)
[8] In the Matter of BNP Paribas, S.A., United States of America, Board of Governors of the Federal Reserve System, Washington, D.C., Docket Numbers, 14-022-B-FP and 14-022-CMP-FB, Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended, June 30, 2014.
[10] United States Attorneys' Manual, Title 9, Section 9-27110 Purpose
[11] United States Attorneys' Manual, Title 9, Section 9-27.220, Grounds for Commencing or Declining Prosecution
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