“A slap-on-the-wrist culture.” This is how Senator Elizabeth Warren (D-Mass.), speaking publicly this spring, characterized recent decisions by the Department of Justice, the Securities and Exchange Commission and other regulators not to impose the most severe regulatory penalties available on corporations that have pleaded guilty to crimes. Senator Warren’s comments were made during a year in which criminal penalties have reached historic heights, including the sentencing of French bank BNP Paribas SA to pay nearly $9 billion in connection with its 2014 guilty plea for violating U.S. economic sanctions. Senator Warren is only the latest in a line of congressmen, public interest groups and media pundits to argue that such criminal fines are not enough. But these critics, though well intentioned, may be overlooking some of the key issues informing agency determinations about add-on penalties.
Complex, interlocking regulatory regimes governing banks, healthcare and pharmaceutical companies and other highly regulated entities allow agencies to impose additional restrictions on a company’s business as a result of a corporate guilty plea. Those collateral consequences for a bank can include, for instance, a revocation by the SEC of the bank’s valuable privileges as a “well-known seasoned issuer.” For a pharmaceutical manufacturer, a guilty plea could mean exclusion by the Department of Health and Human Services from participation in federal healthcare programs. And for a defense contractor, a criminal conviction might trigger debarment from doing business with the Department of Defense. Many of these collateral consequences are discretionary, however, and regulators sometimes decline to impose the most devastating ones. A timely example is the Department of Labor’s April 14, 2015, decision not to bar BNP Paribas from serving as a qualified asset manager.
The question of how much regulatory punishment should follow a guilty plea cannot be distilled down to the one-dimensional goal of ensuring that “big business” receives no quarter for unlawful conduct. In reality, thoughtful regulators must afford equal consideration to many factors, including how much they are willing to punish innocent employees, counterparties and other stakeholders in order to convey the message that they are tough on corporate crime. In appropriate cases, a show of restraint may be a subtler but no less effective tool in achieving justice.
It is a truism in science, with a corollary in business, that killing the host is but one way to kill a parasite. Sometimes, an entity may be so corrupt and irredeemable that even innocent third parties may be fairly called upon to suffer negative consequences in the service of rectifying corporate misdeeds. Other times, though, the size and sprawl of global companies makes eliminating or severely curtailing certain lines of business an ill-fitting treatment for misconduct located principally in other business divisions or geographies – i.e., gratuitously cutting off an arm to treat a disease of the toe.
During the past few years, the understandable passion for stemming corporate criminality seems to have transformed into an unyielding pressure on federal and state agencies and watch-dog organizations to take regulatory retribution against each and every convicted corporation. Regulators are rightly wary that the most extreme of these penalties might, for instance, put thousands of law-abiding, entry- and mid-level bank employees out of work. Or might put a manufacturer of life-saving medications in bankruptcy in the wake of misconduct that involved only one of the manufacturer’s drugs. The list of troubling scenarios is lengthy.
Of course, prosecutors, regulators and lawmakers should continue to study the extent to which investigated corporations are overstating the undesirable repercussions that might flow from new business restrictions associated with their pleas. Assistant Attorney General Leslie Caldwell of the Justice Department’s Criminal Division addressed precisely this topic in a speech in November of last year. Her predecessor, Lanny Breuer, was criticized during his tenure for being too preoccupied with ensuring that penalties on convicted companies did not destabilize financial markets or have other uncontrollable impacts; AAG Caldwell, for her part, distanced herself from that view by describing such concerns as “overblown.”
Even officials who are skeptical about such dangers, though, might agree that many observers unwittingly engage in a logical fallacy – believing that a company’s decision to plead guilty is made without regard for the full scope of its anticipated punishment. To the contrary, companies negotiating with the government almost always consider the collateral regulatory consequences of a criminal conviction well before they enter their plea. They might balk at a plea deal if they cannot receive reassurances from prosecutors and regulators about the farthest-reaching collateral consequences to which they could be subjected.
By providing these reassurances in appropriate cases, the government may save itself from a protracted and extremely expensive fight – one it might lose. In so doing, it might more expediently bring justice and closure to an open investigation. Alas, such well-balanced judgment is rarely a source of positive headlines or acclaim for regulators. It is all the more important, then, that opinion leaders be encouraged to acknowledge the complexity of these determinations even if they disagree with the outcomes.
Published June 1, 2015.
