DPAs were virtually unheard of in business settings prior to 2004, but their growing popularity in the U.S. is now being felt in Canada with SNC-Lavalin lobbying the Liberal government to have its fate determined by a DPA, rather than the criminal trial the Harper government pursued. Probe International’s Patricia Adams for the National Post.
Corporate shakedowns: Companies under threat of prosecution are filling government coffers
The U.S. government has discovered a lucrative way to raise revenues without taxing the public: Threaten corporations with criminal action for white-collar crimes and regulatory infractions. Faced with the prospect of bottomless legal costs, depressed stock prices, loss of licences and government contracts — not to mention jail time for executives — corporations are rushing to accept the alternatives: deferred prosecution agreements (DPAs) and similar “settlement agreements.”
The growing popularity of DPAs in the U.S. has led to their being viewed favourably in other jurisdictions, by governments as well as corporations. SNC-Lavalin, in trouble over charges of corruption and fraud, is lobbying the Liberal government to have its fate determined by a DPA, rather than the alternative the Harper government pursued — a criminal trial that could bar the company from federal contracts for a period of up to 10 years. In this event, it would face closure and its 40,000 employees unemployment, an illogical outcome, it says, given that its “alleged reprehensible deeds” were perpetrated by former employees “who left the company long ago.”
DPAs were virtually unheard of in business settings prior to 2004 — they were originally developed in the 1930s to discourage juvenile offenders who successfully completed rehab from reoffending. Sixty years later, government bodies such as the U.S. Department of Justice ( DOJ) and the Securities and Exchange Commission (SEC) are using these instruments against corporations. If the corporation accepts responsibility for the wrongdoing, co-operates with public prosecutors in an investigation and goes through rehab under the watchful eye of a state-approved “monitor,” the corporation and its executives can escape a criminal indictment and conviction by paying a financial penalty.
The number of settlement agreements is now exploding with monetary penalties sometimes climbing to nine figures: Toyota coughed up $ 1.2 billion, Alsthom Grid and Alsthom Power $1.5 billion, JP Morgan $1.7 billion and HSBC Bank USA, N.A. and HSBC Holdings plc $1.9.
Since 2000, according to law firm Gibson Dunn, the U.S. government has extracted almost $50 billion from 337 Deferred Prosecution Agreements and their close cousin, the Non-Prosecution Agreements.
The rationale for these extractions seems sensible: to deter wrongdoing by reforming the corporate culture. But these extractions also serve to meet other goals of governmental agencies, among them the funding of expanded operations. In the case of the DOJ and the SEC, the DPA-NPA leaders, the amount they collected last year — $5.1 billion — amounts to 18 per cent of their total annual budgets. According to Margaret Lemos and Max Minzner writing in the Harvard Law Review, agencies that share in such spoils — known as “eat what ( they) kill” — can be expected to increase enforcement.
“Contrary to the conventional wisdom,” they write, “public enforcers often seek large monetary awards for self-interested reasons divorced from the public interest in deterrence. The incentives are strongest when enforcement agencies are permitted to retain all or some of the proceeds of enforcement — an institutional arrangement that is common at the state level and beginning to crop up in federal law.”
The DOJ and SEC have good reasons to prefer a DPA over a criminal trial, which is the traditional method of punishing wrongdoing.
Winning a conviction of one of the many infractions that these resolution agreements cover is expensive and uncertain while DPAs bring assured gratification along with cash.
The regulators can then crow about changing bad corporate behaviour to good and take credit for preventing an Arthur Anderson-style collapse of a corporation convicted of a criminal offence, in the process saving innocent staff and shareholders.
As former Attorney General Alberto Gonzales summed it up, it is “easy, much easier quite frankly” for the DOJ to do business this way since such resolution vehicles not only take “less of a toll” on the DOJ’s budget but actually provide it with revenue.
But DPAs are not — as might seem at first blush — win-win propositions for corporations and governments. As Gonzales and others point out, in some cases the corporation has done nothing wrong, but finds it expedient to pay up to avoid an indictment and the expense and uncertainty of a trial.
Even when wrongdoing has occurred, DPAs lead to perverse results. While corporations should be required to disgorge ill-gotten gains from bribery and corruption, there is little benefit — and much harm — in treating corporations, rather than their culpable employees, as criminals.
Part II of this series will describe the harm to corporations, and to free markets and society at large, from the rapidly increasing dependence of government agencies on DPAs.
Patricia Adams is an economist and executive director of Probe International.