Publicly, politicians and top law enforcement officials are loudly proclaiming the days of light fines and settlements with corporations to resolve allegations of criminal wrongdoing are over.
Policies Encouraging Compliance and Disclosure Create the Corporate Snitch
Under a steady stream of feel good laws and rules adopted since the 2009 economic meltdown, corporations are under increasing pressure to monitor their internal activities for indications of fraud. In certain circumstances corporations can avoid, or minimize, criminal liability and massive financial penalties if they have have made good faith efforts to meet compliance standards, investigated indicators of criminal activity and disclosed certain information regarding misconduct to law enforcement and agency regulators.
Fighting Corporate Fraud Top Priority
In September, the U.S. Justice Department (DOJ), with great fanfare, announced an aggressive new policy that will target for prosecution those Wall Street bankers and executives who get involved in financial fraud schemes. In its announcement Deputy Attorney General Sally Yates announced that “Fighting corporate fraud and other misconduct is a top priority of the Department of Justice.”
New DOJ policy has increased this duty by announcing that in order for corporations to qualify for credit for cooperation, they must provide to the DOJ all relevant facts relating to the individuals responsible for misconduct. This creates an inherent tension and conflict of interest for in-house, corporate counsel between the representation of the best interest of the company and representation of the suspected wrong-doer.
DOJ Seeking Individual Criminal Liability for Corporate Crimes
Additionally, the new DOJ policy, as announced in the 2015 Yates Memo, requires that all decisions not to prosecute individuals suspected of being involved in corporate wrongdoing must be approved by the U.S. Attorney heading the division handling the case. This, along with the remaining policy guidelines, is intended to strengthen the agency’s policy that individual responsibility is the best manner to curb corporate crime.
In a speech delivered at the New York University Law School, Deputy Attorney General Sally Quillian Yates summed up the new policy by saying corporate misconduct is no different from the multitude of other crimes investigated and prosecuted by law enforcement. The statement reinforces the latest trend from law makers proclaiming that “white collar” individuals should be treated like other criminal suspects and defendants.
She added that the DOJ has an obligation to hold “lawbreakers accountable regardless of whether they commit their crime on the street or in the boardroom.”
Criminal Defense Lawyers Weary of New Tough on Crime Policies
As experienced criminal defense lawyers representing both businesses and individuals accused of committing serious crimes in federal courts, we are typically concerned when law enforcement “gets tough” on a new group of offenders. In our experience it always leads to over-charging and “making a point” with the unfortunate souls who run afoul of the system. These get tough policies are intended to soothe public anger, but typically lead to a trail of unjust convictions and unreasonable prison sentences.
But, is the DOJ serious with this new policy?
Numbers Indicate Business as Usual
Not if the agency continues business as usual, says the Transactional Records Access Clearinghouse (TRAC), if recent history is a guide.
TRAC reported in October 2015 that there was a 29 percent drop in the prosecution of corporations during the decade between 2004 and 2014.
TRAC had to wage a 17-year legal battle to access the records that proved that DOJ officials, including the Attorney General himself, had been misleading the American public about its “tough policy” on prosecuting corporate crime.
In September 2014, former Attorney General Eric Holder told the NYU Law School:
“For my colleagues and me – at every level of the Department of Justice – instilling in others an expectation that there will be tough enforcement of all applicable laws is an essential ingredient in ensuring that corporate actors weigh their incentives properly – and do not ignore massive risks in blind pursuit of profits.”
Politicians Say Doing All They Can to Protect America from Financial Fraud
Eighteen months earlier, the director of President Obama’s Financial Fraud Enforcement Task Force, Michael J. Bresnickat, told a Washington conference of state bank supervisors that the task force had been formed “with the understanding that no matter the office or agency – federal, state, or local; law enforcement or regulatory – all of us within government share a common desire and have a core obligation to do everything we can to protect the American public from the often devastating effects of financial fraud, whether it be mortgage fraud or investment fraud, grant or procurement fraud, consumer fraud or fraud in lending.”
Just this past March, FBI Director James B. Comey told the Senate Appropriations Committee that “corporate fraud” is one of the eight most serious “threats and challenges” facing law enforcement and the general public.
Statistics Say Otherwise
But TRAC found that the DOJ’s “own data” provided “strong evidence” that there has for many years been an “extraordinarily small and declining number of corporate prosecutions.”
For example, in the year 2000, 304 corporations were convicted of federal crimes but that number decreased to 162 in 2014.
Simultaneously, as reported by Forbes in 2012, there was a 62 percent increase in financial fraud during the previous three years (2008-11). In fact, in Utah alone, there was a $2 billion in fraud losses between the years 2010 and 2012.
The Kroll Global Fraud Report (2015) found that 76 percent of American businesses have experienced fraud while one in five has experienced theft of physical assets or stock.
Low Man on the Totem Pole Takes the Hit
The numbers indicate that, while top law enforcement officials tout a get tough on corporate crime rhetoric, the DOJ typically goes after low level corporate and business employees while allowing the corporations themselves and their top executives a free pass on criminal prosecution.
This charge is supported by TRAC’s research which shows that between 2004 and 2014, the DOJ prosecuted more than 1.6 million defendants in corporate fraud matters, but only one in 500 (two-tenths of one percent) involved companies.
Why is the lower level white collar criminal defendant prosecuted while corporations and their executives who engage in the same criminal wrongdoing are not?
The Filip Policy
Some of it dates back to 2008 when former Deputy Attorney General Mark Filip authored a 21-page DOJ policy, titled “Principles of Federal Prosecution of Business Organizations,” which asserted publicly that “the prosecution of corporate crime is a high priority for the Department of Justice.”
But the Filip policy was more bluster than substance as demonstrated by TRAC:
“But this broad mandate about how federal prosecutors should investigate, charge and prosecute corporate crimes is considerably modified when it comes to specifics. The [Filip] document advises prosecutors to consider the ‘corporate context’ when filing a case against a corporation and to ‘take into account the possible substantial consequences to a corporation’s employees, investors, pensioners and customers’ many of whom may have played no role in the criminal conduct, have been unaware of it or have been unable to prevent it.’ In addition, Filip said, the prosecutors should take into consideration ‘the non-penal sanctions that may come with a criminal charge’ such as a potential suspension or disbarment from bidding on lucrative government contracts.”
Evidence of this “get out of jail free” pass can be found in the following coded language in the Filip policy: “Ultimately, the appropriateness of a criminal charge against a large corporation must be evaluated in a pragmatic way that produces a fair outcome.”
Corporate Prosecutions Declined
Further, evidence of the DOJ’s “soft” on corporate crime approach can be gleaned from the prosecutorial referrals made by the FBI and IRS to the DOJ during the five-year periods before and after the Filip policy. While those referrals remained consistent through both periods, the prosecution of corporations declined by 21.9 percent during the five years after the Filip policy than the five years before it.
“The officially stated goals of most organizations in the United States are ambitious and high minded. So two central questions can fairly be asked: is the agency achieving its stated objectives and if not, why not? The Justice Department’s own records make it clear that when it comes to criminal enforcement against corporate violators the agency falls far short of its goals. What is far harder to determine is why. To resolve the second question would require a well-functioning and principled oversight system operated by the administration itself, Congress, the news media, public interest groups and others – all under pressure from an informed public. But given the current national mood, this clearly is a tall order.”
DOJ’s Hires Consulting Expert to Fraud Section
Apparently trying to get its house in order, the DOJ on November 3, 2015, announced the hiring of Hui Chen, the former head of compliance for Standard Chartered Bank, as its full-time compliance officer. She will answer to the Chief of the DOJ Fraud Section and to the Acting Chief of the Strategy, Policy, and Training Unit in the Fraud Section.
Ms. Chen brings to the DOJ the expertise to determine whether a corporation is the victim of rogue employees or whether it has acted in a corrupt manner. Her job will be to assist federal prosecutors in making this determination. “Among her duties as a consulting expert, Chen will provide expert guidance to Fraud Section prosecutors as they consider the enumerated factors in the United States Attorneys’ Manual concerning the prosecution of business entities…”
More Aggressive Policy?
The DOJ’s September announcement of its new corporate crime crackdown and the immediate rumors about the creation of the new position now held by Ms. Chen was apparently enough to convince corporations and their executives that Attorney General Lynch is prepared to fulfill her new, more aggressive policy toward prosecution of them. Apparently this concern has led to behind the scenes lobbying by business interest who now find themselves interested in criminal justice reform.
Mens Rea Reform Causes Intrigue
Tucked into a package of bills that are intended to simplify the federal criminal code and reduce unreasonably harsh prison sentences, a provision seeking to change the mens rea required for certain criminal acts has sparked debate.
Political beneficiaries of the corporations and their executive are currently pushing two bills pending before Congress, the Criminal Code Improvement Act 2015 and the Mens Rea Reform Act 2015, whose public purpose is to make some technical corrections to federal criminal law. Introduced by Rep. F. James Sensenbrenner (R-WI) and Sen. Orin Hatch (R-Utah), the bills enjoy significant bipartisan support and are being held out as needed to bring about meaningful criminal justice reforms, especially “drug sentencing reform.”
But experience has taught us that anytime Congress undertakes any “reform” in criminal law there is usually a hidden agenda. Some believe this is the case with these two pieces of legislation.
On November 30, 2015, the New York Times reported that a key provision tucked deep inside this proposed “criminal justice reform” legislation will make it more difficult to prove certain white collar crimes, particularly those offenses generally used to prosecute corporations and their executives.
Peter J. Henning’s article said the provision “would require that if a federal criminal offense did not specifically set forth the intent needed to establish a violation, then prosecutors must show the defendant’s state of mind was “knowing.” At first glance this seems like a reasonable burden.
Ignorance of the Law is No Excuse, or Is It?
However, the legislation goes further, stating that the government would have to establish a very particular mens rea. The provision states: “ … if the offense consists of conduct that a reasonable person in the same or similar circumstances would not know, or would not have reason to believe, was unlawful, the government must prove that the defendant knew, or had reason to believe, the conduct was unlawful.” This would allow some defendants to argue “ignorance of the law” as a defense.
The DOJ argues that allowing such a defense would create the ability for bad actors to feign ignorance or to turn a blind eye to criminal conduct of their subordinates.
Most federal statutes dealing with white collar offenses already use language like “knowingly,” “willfully,” and/or “intentionally.”
But, as the Times article pointed out, some white collar crimes like mail and wire fraud “do not specify any intent level even [though] the courts have determined that fraud requires proving the intent to deprive someone of money and property.”
Some legal scholars, like Jennifer Taub, professor at the Vermont Law School, believe that the purpose for injecting this hidden provision in the “criminal justice reform” debate is to make it more difficult to punish and deter white collar crime.
Legislation Being “Rushed Through” to Protect Elite Offenders
Writing in the November 25, 2015 edition of the Times, Professor Taub had this to say:
“The provision was rushed through before legal experts could provide meaningful insight on the impact these changes could have. Vocal opponents have already asserted that, if enacted, the law would undermine public health and safety and encourage business executives to remain willfully blind to criminal conduct and deliberately ignorant of the law.
“Protecting elite offenders seems incongruous with efforts to strengthen the criminal justice system that have drawn attention to staggering racial inequalities in our system and focused on addressing mass incarceration of those with the least societal power, an overhaul that includes reducing penalties for low-level, nonviolent drug offenses and expunging criminal records for juvenile offenders.
“The move also seems at odds with the prevailing excuse – the difficulty in proving intentional conduct – for not holding any high-level bankers criminally accountable in connection with the financial crisis.”
Criminal Justice Reform Creates Corporate Carte Blanche
It is, therefore, reasonable to conclude that corporations, and their conservative backers like the right-leaning Heritage Foundation and the Koch brothers, are indeed using criminal justice reform, particularly “drug sentencing reform,” to provide back door protection for high level corporate criminals.
Rena I. Steinzor, a law professor and former president of the Center for Progressive Reform, also believes corporations are trying to maintain their “get out of jail free” pass by worming their way into the bipartisan effort to bring about badly needed criminal justice reforms.
As the professor recently said:
“We don’t have a white-collar over-criminalization problem in this country. We have an under-criminalization problem.”
Her outrage palpable, Professor Steinzor added that “people die for preventable reasons every day in America and the vast majority of corporate managers responsible for such episodes escape even a hint of criminal charges. Federal and state prosecutors are overly hesitant to bring white-collar cases.”
While we may disagree that we have an under-criminalization problem, the professor’s point is well taken. Apparently agreeing with these sentiments, President Obama has indicated he is prepared to veto the so-called “mens rea” reform legislation.
In a recent statement issued to The Huffington Post, a White House official said:
“If the bill became law, a terrorist could only be found guilty for using a weapon of mass destruction if he specifically knew his victims were going to be U.S. nationals, a killer could only be found guilty of certain firearm crimes if he knew the gun traveled in interstate commerce, and a white-collar criminal could only be found guilty of bank fraud if he knew he was robbing a bank that was F.D.I.C.-insured.”
And, speaking for the DOJ, Peter Carr said the mens rea reform provision “would create confusion and needless litigation and significantly weaken [laws] that play an important role in protecting the public welfare.”
Justice Systems Screaming for Reform
We defend on a daily basis cases ranging from serious drug offenses to complicated white collar fraud which both scream for sentencing and mens rea reform. We wholeheartedly endorse these reforms, especially as they relate to the harsh mandatory minimums in drug cases and the majority of cases currently prosecuted as federal crimes.
Mens Rea Reform is Needed, But Not Just For a Few
We also recognize the need for mens rea reform in many white collar offenses, especially those associated with health care and corporate fraud conspiracies. It is unfair to prosecute an individual, no matter their socio-economic level, for a crime that is so obscure that the defendant had no notice that it was illegal. In fact, we would support this type of mens rea reform for all federal criminal conduct, if it was to be applied evenly across the board.
However, it does appear that big corporations and their conservative backers, like Charles and David Koch, have attempted to hijack the valid criminal justice reform effort to allow a few corporations and their executives to continue their “crime spree” across the public landscape with arrogance and impunity.
Supporters of the bill have responded to these criticisms of the legislation and have vowed to correct the mens rea issue by addressing valid criticisms concerning inadequate, and sometimes missing, intent requirements of some criminal statutes, while protecting the DOJ’s ability to prosecute criminal activity.
As we said previously, we always hold our breath when criminal justice reforms are announced. Somehow “reforms” always lead to more pain for those the most in need of leniency and rehabilitation. We will be watching this legislation with keen interest, and one eye open.