More fines! More jail! More lawyers and litigation! Forget that compliance stuff!

More fines!  More jail! More lawyers and litigation!  Forget that compliance stuff! 

By Joe Murphy, CCEP 

There is much work to be done in the field of compliance and ethics to improve what we do. And no matter how hard we work there will always be wrongdoing. Our field will continue to require struggle against the abuse of power in organizations. But there are those who propose that the legal system offer no incentive for compliance programs, and that society should simply rely on strict liability.  To them the answer is more of the old regime:  more litigation, more fines, and more prison time for white collar offenders.  They see no need for any part of government to promote effective compliance and ethics programs. 

To take this laissez-faire approach, however, they have to ignore the substantial flaws in relying solely on the old system. This traditional approach depends fundamentally on a legal fiction that large, publicly-traded companies are just big human beings, or the alternative idea that simply punishing managers will deter all corporate crime. They seem to believe that the existing strict liability litigation system is fine, or only needs penalties to be increased to the theoretical optimum level; in this view, decreasing penalties because companies have made efforts to prevent violations will not work. But if companies are punished severely enough, this is all that is needed. (There is also the reality that those who have benefited from an existing system, such as our legal system, prefer to retain it, as is, and will fight any form of change.)

Among the flaws in this approach when dealing with large publicly-traded companies are: 

1.  Corporate “criminals” do not pay the fines; effectively the public shareholders pay. These include pension funds and sovereign wealth funds, i.e., retirees or a country’s citizens who pay taxes. An instructive example is a case involving hundreds of millions in penalties imposed on VimpelCom for corrupt practices. See Richard L. Cassin, VimpelCom Reaches $795 Million Resolution with U.S., Dutch Authorities, FCPA Blog (Feb. 18, 2016, 5:28 PM), https://www.fcpablog.com/blog/2016/2/18/vimpelcom-reaches-795-million-resolution-with-us-dutch-autho.html. However, later in the news stories it is revealed that VimpelCom is part of Norway’s Telenor. Id. Norway’s government owns fifty-four percent of Telenor. Id. Thus, Norway’s taxpayers pay fifty-four percent of the fine. Id. (I guess we taught those Norwegians a lesson this time!) Corporate managers, in effect, write a check on the accounts of these shareowners who had nothing to do with the violation.

2.  Companies’ shares are traded from moment to moment. Bryant Urstadt, Trading Shares in Milliseconds, MIT Tech. Rev. (Dec. 21, 2009), https://www.technologyreview.com/s/416805/trading-shares-in-milliseconds/ (discussing high-speed, high-volume trading). Even if it made sense to punish shareholders, no fine reaches back to hit past shareholders who owned stock when the crime occurred.

3.  If the theory of optimal punishment was correct, thus removing the need to promote compliance programs, then all corporate crime would have disappeared after Arthur Andersen suffered the corporate death penalty. See generally Stephan Landsman, Death of an Accountant: The Jury Convicts Arthur Andersen of Obstruction of Justice, 78 Chi.-Kent L. Rev. 1203 (2003). It is impossible to be more “optimal” than killing an entire company.

4.  If simply punishing managers in the optimal amount worked, then all corporate crime would have ceased after WorldCom’s Bernie Ebbers was effectively sentenced to life in prison. Krysten Crawford, Ebbers Gets 25 Years, CNN Money (Sept. 23, 2005), https://money.cnn.com/2005/07/13/news/newsmakers /ebbers_sentence/. Short of death, what punishment could be more optimal for an individual than life in prison? Those pinning their hopes on severe penalties for corporate leaders do not understand the role of arrogance at this level.  Even capital punishment does not deter if you think you are too smart to get caught.  

5.  Agency theories point out that the motives of individual actors in the company, who are the ones to actually engage in conduct that breaks the law, differ from what is in the best interests of the company; they get their pay, promotions, perks, and future careers set long before the corporate fine hits. D. Daniel Sokol, Cartels, Corporate Compliance, and What Practitioners Really Think About Enforcement, 78 Antitrust L.J. 201, 230 (2012).

6.  Markets do not necessarily punish wrongdoing; they punish uncertainty. Typically, when the enormous fine is announced, thus showing a matter has ended, the company’s stock goes up. See, e.g., Jill Treanor & Dominic Rushe, Banks Hit by Record Fine for Rigging Forex Markets, Guardian (May 20, 2015), https://www.theguardian.com/business/2015/may/20/banks-hit-by-record-57bn-fine-for-rigging-forex-markets (“Barclays was fined ￡1.5bn by five regulators, including a record ￡284m by the UK’s Financial Conduct Authority. . . . Yet Barclays’ stock market value rose by ￡1.5bn as a result of a 3% rise in its share price amid relief the fine was not even larger. RBS’s shares also rose 1.8%. The increases came even though the regulators said there could be more fines to come.”).

7.  Fines sufficient to impact large companies would likely over-deter socially beneficial conduct. William T. Allen, Commentary on the Limits of Compensation and Deterrence in Legal Remedies, 60 L. & Contemp. Probs 67, 75 (1997).

8.  Huge fines and potential bankruptcy for large companies cause enormous collateral damage to innocents, including employees, suppliers, customers, and neighboring communities SeeAndersen Died in Vain: 10 Years After an Ill-Fated Indictment, Chi. Trib. (Mar. 14, 2012), https://articles.chicagotribune.com/2012-03-14/opinion/ct-edit-andersen-20120314_1_andersen-s-professional-standards-group-andersen-case-founder-arthur-andersen. It may be emotionally satisfying to see those “bad guys” punished, until you see such side effects as the impact on the unemployed workers, the stranded suppliers, and the lost community tax revenues. Is it rational to punish a hundred thousand employees for the acts of a handful of executives? 

9.  All fine money comes from somewhere; if it is removed from the market, it is not then available for employment, investment, and other productive uses.

10.   Fines are no longer typically imposed by judges after trials; they are determined by prosecutors and regulators. The ability to force billion dollar-plus penalties puts enormous power in the hands of unelected officials. See Andrew Weissmann & David Newman, Rethinking Criminal Corporate Liability, 82 Ind. L.J. 411, 414 (2007)(“Contrary to the system of checks and balances that pervades our legal system, including the criminal law with respect to individuals, no systemic checks effectively restrict the government’s power to go after blameless corporations.”); id. at 425. 

11.   For its power, the law depends greatly on legitimacy and an appearance of fairness. When companies that have made substantial efforts to prevent wrongdoing are treated the same as those who willfully flout the law, the fundamental unfairness of the process and result undercuts the law’s legitimacy and may even encourage an “outlaw” approach. 

This is not to say that violators, including corporate criminals, should escape punishment (and certainly not the compensation of victims, which some commentators forget is different from punishment), but only that it is foolish to do this without a sense of reality. Society will rightly demand that any actor, including a company, be held accountable for wrongdoing?at least wrongdoing that it could have controlled. But unlike the fictions of the old approach, the compliance and ethics concept looks at how organizations actually work, walks away from relying on fiction, and uses management steps to achieve the desired results. No human system is perfect, but given the flaws in the current model, there can hardly be a presumption that the old, legalistic system should operate alone without considering more practical and targeted approaches. 

Excerpted from Joseph E. Murphy, Policies in conflict:  Undermining corporate self-policing, 69 Rutgers U.L. Rev. 421 (2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3685529