Implications of the U.S. Department of Justice’s Increased Pursuit of Corporate Guilty Pleas and Stringent Settlement Terms. In recent years, the U.S. Department of Justice (“DOJ”) has become increasingly aggressive in prosecuting and resolving corporate crimes within the financial services industry. This trend was likely precipitated by public demands to hold financial institutions accountable for misconduct following the 2008 financial crisis. This trend reflects a stricter enforcement stance against white-collar crime in general and has important consequences for companies under criminal investigation as well as associated individuals.
Trends in Recent DOJ Settlements. DOJ’s increasingly aggressive prosecution of corporate crime marks a shift from its approach over the past decade, where criminal investigations were generally concluded by non-prosecution agreements (“NPA”) or deferred prosecution agreements (“DPA”). An NPA or DPA allows a corporation to avoid pleading guilty to criminal conduct in exchange for cooperating with the government’s investigation, agreeing to make reforms, and paying financial penalties.
From DOJ’s perspective, these agreements enable DOJ to obtain admissions of misconduct, while simultaneously avoiding the potentially disastrous consequences corporate guilty pleas can cause. As context, in 2002, Arthur Andersen LLP, an accounting firm, collapsed after its indictment and conviction for obstruction of justice in connection with the Enron scandal. At the time, it employed approximately 85,000 people and had generated $9.3 billion in revenue in 2001.
The DOJ’s unwillingness to pursue guilty pleas from large financial institutions likely stemmed from its concern about the serious harm to the economy and global financial markets that could otherwise result. Over the past three years, however, DOJ has begun to condition settlements of major investigations on guilty pleas and has imposed record-breaking penalties. This practice represents a significant break from its previous approach towards financial institutions, and an escalation of its approach in other industries.
Guilty Pleas—DOJ has obtained numerous guilty pleas from corporations in recent years. For example, two Swiss banks pleaded guilty to aiding and abetting tax evasion: (1) Wegelin & Co. in 2012; and (2) Credit Suisse AG in 2014. Additionally, two other financial institutions recently pleaded guilty to manipulating the London Interbank Offered Rates (“LIBOR”): (1) UBS Securities Japan Co., a subsidiary of UBS AG, in 2012; and (2) RBS Securities Japan Limited, a subsidiary of the Royal Bank of Scotland plc, in 2013.
Outside of the financial services industry, corporate guilty pleas over the past decade were not unheard of, but this practice has continued and intensified in parallel with DOJ’s increased aggressiveness towards financial institutions. Indeed, DOJ has required many guilty pleas in recent years to settle corporate criminal investigations in a variety of industries. For example, Alstom S.A., a French power and transportation company, pleaded guilty in 2014 to violating the Foreign Corrupt Practices Act. Bridgestone Corporation, an automotive parts manufacturer, pleaded guilty in 2014 to participating in a conspiracy to fix prices. Several pharmaceutical companies have pleaded guilty in recent years for fraud in the healthcare industry, including a subsidiary of Johnson & Johnson in 2013, and GlaxoSmithKline plc in 2012. As stated above, the increase in the number of pleas in these other industries is a less novel development but nonetheless illustrates DOJ’s heightened enforcement efforts.
Financial Penalties—Recent DOJ settlements have also included larger financial components, including multiple settlements over $1 billion.
For example, in addition to pleading guilty, BNP Paribas paid $8.9 billion in 2014 to resolve criminal liability for violations of U.S. trade sanctions, while Credit Suisse paid $2.8 billion in total to settle charges related to offshore tax evasion. In 2012, GlaxoSmithKline paid $3 billion to DOJ in connection with criminal and civil charges that it unlawfully promoted certain prescription drugs. At least 11 criminal settlements since 2012 have included total financial penalties greater than $1 billion.
Driving Forces Behind Recent Trend. DOJ’s increased pursuit of guilty pleas and more stringent settlement requirements is part of a more aggressive enforcement environment for white-collar crime generally.
Financial institutions have been among the most visible targets of DOJ’s recent enforcement trend. This appears to be a direct result of the substantial public pressure to hold the financial services industry accountable for criminal conduct and to deter future misconduct in the wake of the 2008 financial crisis. Indeed, Congress has closely scrutinized and criticized DOJ’s efforts in investigating and prosecuting domestic and foreign financial institutions over recent years. For instance, in a February 2014 hearing related to DOJ’s investigation of Credit Suisse, the Senate Permanent Subcommittee on Investigations pressured DOJ to be more aggressive in prosecuting Swiss banks and their employees for aiding and abetting tax evasion by U.S. taxpayers. Shortly thereafter, Credit Suisse entered into a guilty plea and paid $2.8 billion to settle investigations by DOJ and related state and federal authorities.
DOJ is also facing increased scrutiny and pressure from the courts. In February 2015, a federal judge in Washington, D.C. rejected a proposed DPA between DOJ and Fokker Services BV, a Dutch aerospace company. The proposed agreement was intended to resolve criminal liability stemming from violations of U.S. economic sanctions against Iran, and required Fokker Services to pay a $21 million penalty and reform its compliance programs. In rejecting the agreement, however, the judge stated that the DPA’s terms were “grossly disproportionate” to the defendant’s conduct and that “it would undermine the public’s confidence in the administration of justice and promote disrespect for the law for it to see a defendant prosecuted so anemically . . . .” In particular, the judge criticized the DPA because (1) the proposed penalty was not “a penny more” than the revenue Fokker Services had earned through the illegal activity; (2) numerous employees involved in the misconduct were allowed to stay at the company; and (3) the DPA did not require an independent compliance monitor.
Practical Implications. DOJ’s aggressive enforcement approach towards corporate criminal wrongdoing has several important consequences.
Negative Impact on Business—Most obviously, a guilty plea brings immediate negative publicity and attention for the settling corporation, and has repercussions on its ability to conduct business.
Notably, however, recent guilty pleas have not resulted in fatal consequences. This may be attributable to a number of factors, including the timing and context of the guilty plea. For example, Arthur Andersen LLP was indicted by a grand jury and collapsed even before being convicted at trial. Similarly, Wegelin was indicted by a grand jury and dissolved before pleading guilty months later. By contrast, Credit Suisse, Alstom, Bridgestone, and the subsidiaries of UBS and RBS had reached settlements with DOJ prior to the filing of criminal charges. They pleaded guilty to charges in a criminal information, not preceding indictment, announced as part of a negotiated settlement with DOJ.
With respect to Credit Suisse, moreover, various measures mitigated the potential for harmful collateral consequences. For instance, Credit Suisse paid a penalty to the New York Department of Financial Services, which in turn, agreed to not revoke Credit Suisse’s banking license. In announcing the settlement, DOJ explained that coordination with other regulators, including the Department of Financial Services, was crucial because “criminal charges involving a financial institution have the potential to trigger serious follow-on actions by regulatory agencies.”
In addition, as discussed above, in the LIBOR cases of RBS and UBS, only their subsidiaries were required to plead guilty, while the parent companies reached more favorable and less stigmatizing resolutions: an NPA for UBS and a DPA for RBS. DOJ likely structured the settlements in this way to avoid the damaging reputational and regulatory consequences that could result if the parent companies were required to plead guilty.
Even where not fatal, however, a guilty plea may have other harmful consequences, including loss of business, loss of regulatory approvals, and, for publicly-traded entities, a reduction in share price. As an example, in parallel with its DOJ settlement, BNP Paribas entered into a settlement with the Department of Financial Services, pursuant to which it agreed to suspend certain U.S. dollar clearing services for one year.
Increased Importance of Cooperation—The level of cooperation with the government remains a key factor to the ultimate settlement outcome. For instance, Alstom did not fully cooperate with DOJ’s investigation until after DOJ had publicly charged several Alstom executives. In announcing the settlement, DOJ explicitly stated that Alstom’s failure to voluntarily disclose and failure to fully cooperate for several years were among the key factors that led to the outcome. Similarly, Credit Suisse’s high penalty and guilty plea are attributable in part to its lack of cooperation and failure to conduct a thorough internal investigation.
Increased Costs for Resolving Liability—Another practical consequence of the new enforcement environment is that the costs of resolving corporate criminal liability have increased. High penalty amounts have become more prevalent, as discussed above. Further, as DOJ’s settlement demands and a corporation’s settlement expectations diverge, the time and expenses necessary to successfully advocate for and negotiate a satisfactory settlement have correspondingly increased.
Corollary Risks for Individuals—Finally, DOJ’s aggressive approach towards corporate wrongdoing has had spillover effects on individuals. Prosecutions of individual employees have become more common. For example, in connection with DOJ’s investigation into the manipulation of LIBOR by financial institutions, DOJ has also prosecuted several individuals, including six employees of the Dutch bank Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. In addition, many individuals, including those without a direct risk of prosecution, have suffered severe professional consequences. Just months after BNP Paribas settled with DOJ, its chairman resigned. Similarly, Credit Suisse’s chief executive officer stepped down less than a year after the bank’s settlement.
In light of the extensive public pressure and scrutiny on DOJ’s criminal enforcement efforts, DOJ will likely maintain its aggressive strategy for the time being, including by pursuing more guilty pleas, more stringent terms in DPAs and NPAs, higher financial penalties, and more prosecutions of company employees.