Justice Department's Use of Deferred Prosecution Causes Backlash

As the British government prepares to introduce deferred-prosecution agreements as a new enforcement tool to fight corporate bribery and corruption, some serious questions over the effectiveness of such agreements are emerging here in the United States.

In recent years, the Department of Justice has used deferred-prosecution and non-prosecution agreements with increasing frequency to secure settlements with companies across a wide range of industries for various offenses. According to analysis conducted by law firm Gibson Dunn & Crutcher, the Justice Department entered 35 agreements—19 DPAs and 16 NPAs—in 2012. That total marks the second highest level since 2010, when the Justice Department reached a total of 39 agreements.

“Clearly, DPAs and NPAs have been woven into the fabric of corporate resolutions at the Justice Department,” says Joseph Warin, a partner at the law firm Gibson Dunn & Crutcher. The Securities and Exchange Commission also entered into one DPA in 2012, bringing the total to five since the Commission first started using such agreements in 2010.

Despite criticism of DPAs and NPAs, companies that enter them aren't exactly getting off easy, at least not in terms of the penalties they pay. Last year government agencies collected a record $9 billion in penalties related to settlements involving DPAs and NPAs, shattering the previous record of $5.9 billion set in 2006. Nine agreements involved settlements of at least $100 million, and the average settlement value was $250 million. 

Three agreements reaches last year came with fines and payments in excess of $1 billion, including a $3 billion settlement with GlaxoSmithKline for drug misbranding, a $1.9 billion agreement with HSBC to settle money-laundering charges, and a $1.5 billion settlement with UBS for fraud violations.

Despite the eye-popping figures, Justice Department decisions to enter into settlements with companies to resolve cases have earned plenty of criticism from those who say the agreements let companies and executives off easy, since they don't have to admit to the crimes and they don't face jail time. For example, senators blasted the Justice Department last month for its decision to forego criminal charges against officials of banking giant HSBC over charges of money laundering and violations of trade sanctions.

That case stemmed from allegations that HSBC failed to maintain an effective anti-money laundering program and failed to conduct appropriate due diligence on its foreign correspondent account holders. The bank also conducted illegal transactions on behalf of customers in Cuba, Iran, Libya, Sudan, and Burma—all countries that were subject to sanctions enforced by the Office of Foreign Assets Control.

By failing to implement proper anti-money laundering controls, HSBC facilitated the laundering of at least $881 million in drug proceeds through the U.S. financial system, according to the Justice Department. In a letter to U.S. Attorney General Eric Holder, Sen. Charles Grassley (R-Iowa) called the agency's decision not to prosecute a single HSBC employee “inexcusable.”

“HSBC has quite literally purchased a get-out-of-jail-free card for its employees for the price of $1.92 billion,” Grassley wrote. Standard Chartered Bank and ING Group also entered into DPAs with the Justice Department related to similar charges. 

‘Too Big to Jail'

DPAs and NPAs with large banks in particular have created the most controversy, with opponents of such agreements assailing them as a “too big to jail” approach to law enforcement.  “I am deeply concerned that four years after the financial crisis, the Department [of Justice] appears to have firmly set the precedent that no bank, bank employee, or bank executive can be prosecuted even for serious criminal actions if that bank is a large, systemically important financial institution,” Oregon Senator Jeff Merkley wrote in a letter to Holder.

“[The] use of NPAs or DPAs allows under-prosecution of egregious instance of corporate conduct while at the same time facilitates the over-prosecution of business conduct.”

—Mike Koehler,

Law Professor,

Southern Illinois University School of Law

“Had Congress wished to declare that violations of money laundering, terrorist financing, fraud, and a number of other illicit financial actions would only constitute civil violations, it could have done so; it did not,” Merkley added.  

Cases charging violations of trade sanctions and export-control violations have become likely candidates for DPAs and NPAs. From 2007 to 2012, the Justice Department entered 13 agreements—11 DPAs and 2 NPAs—involving such violations, the majority of which have involved financial institutions. The conduct alleged in these agreements covers violations of numerous laws and regulations, including the International Emergency Economic Powers Act, the Trading with the Enemy Act, and the Arms Export Control Act. 

Mike Koehler, a law professor at Southern Illinois University School of Law, says use of NPAs and DPAs to resolve alleged corporate criminal liability presents two distinct, yet equally problematic, public-policy issues. “The first is that such vehicles—because they do not result in any actual charges filed against a company, and thus do not require the company to plead to any charges—allow egregious instances of corporate conduct to be resolved too lightly without adequate sanctions and without achieving maximum deterrence,” he says.

Secondly, the carrots and sticks used to resolve these enforcement actions, “often nudge companies to agree to these vehicles for reasons of risk-aversion and efficiency, and not necessarily because the conduct at issue actually violates the law,” adds Koehler. “Thus, use of NPAs or DPAs allows under-prosecution of egregious instance of corporate conduct while at the same time facilitates the over-prosecution of business conduct.”

Supporters of DPAs, on the other hand, say they serve the important purpose of allowing the government to settle cases of wrongdoing without lengthy, expensive trials that could be difficult to win in some cases. “I have yet to see a deferred-prosecution agreement that didn't accomplish everything a guilty plea would accomplish, if not more,” says Michael Rosensaft, a partner with law firm Katten Muchin Rosenman.

BREUER ON DPAS

In a recent speech to the New York City Bar Association, Lanny Breuer, Assistant Attorney General for the Justice Department's Criminal Division, offered the following insight on the use of deferred prosecution agreements:

Get serious about compliance. In order to avoid a guilty plea, or a criminal case altogether, a company must prove they are serious about compliance. “Our prosecutors are sophisticated. They know the difference between a real compliance program and a make-believe one. They know the difference between actual cooperation with a government investigation and make-believe cooperation. And they know the difference between a rogue employee and a rotten corporation.”

Know your obligations. “When a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing, agree to cooperate with the government's investigation, pay a fine, agree to improve its compliance program, and agree to face prosecution if it fails to satisfy the terms of the agreement. All of these components of DPAs are critical for accountability.”

Weighing the collateral consequences of an indictment. “In large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets is a real factor. Those are the kinds of considerations in white collar crime cases that literally keep me up at night, and which must play a role in responsible enforcement.”

When to enter into a DPA or NPA. A deferred prosecution agreement or non-prosecution agreement “may be the best resolution” in cases where a company “has gone to extraordinary lengths to turn itself around, for example, or provided the government with extensive cooperation.”

Source: SEC.

Through a DPA, the Justice Department still achieves restitution for victims, disgorgement of any profits from the crime, and strict oversight of the company, says Rosensaft. From a corporate perspective, more and more companies are self-reporting violations, which can be attributed directly to DPAs, he says.

Rosensaft further argues that, because these agreements precede any hearings or trials, critics lack the forethought to know how strong the evidence is against a company, or the extent of controls the company has put in place to remediate the wrongdoing.

“These are all the facts known to the prosecuting office and what they weigh in determining whether to bring a deferred prosecution agreement,” he says. “The public only sees the end result.”

The criminal indictment and subsequent collapse of auditing firm Arthur Andersen in 2002 highlights the potentially severe financial consequences awaiting a company that does not enter into such an agreement. “It's important for corporations to avoid these sorts of collateral consequences,” says Warin.

In addition to trade sanction and export control violations, other areas that commonly result in DPAs and NPAs run the gamut from Foreign Corrupt Practices Act violations to immigration violations and federal anti-kickback violations.

Another notable trend, Warin says, is that more and more U.S. Attorneys' Offices are also entering into DPAs and NPAs, whereas, historically, they were only used by the Justice Department's Fraud Section. Some examples include the Middle District of Tennessee, the Middle and Western Districts of Pennsylvania, and the District of Maryland.

Seeing how successful the Justice Department has been with DPAs and NPAs, the SEC will likely increase their use of DPAs, says Rosensaft.

On an international scale, the U.K. government continues to make progress toward its adoption of DPAs. “I expect,” says Rosensaft, “other countries to follow suit, as well.”