She’s against the corporate compliance defense.
But for deferred and non prosecution agreements.
She leans against securing corporate guilty pleas.
But she’s strongly in favor of retaining corporate criminal liability.
And she’s in favor of criminally prosecuting responsible corporate officers.
She believes that you don’t have to change one law in the United States to deter corporate crime.
It’s about prosecutorial discretion.
Jennifer Arlen is a professor at New York University Law School.
In 1994, Arlen wrote an article titled The Potentially Perverse Effects of Corporate Criminal Liability.
In 1997, she co authored with Reinier Kraakman an article titled Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes.
Both paved the way for the current regime of deferred and non prosecution agreements.
The 1994 article said that “if you want to deter corporate crime, you have to be able to impose significant sanctions on individuals,” Arlen told Corporate Crime Reporter in an interview last week.
“To do that, you need to be able to detect crime when it is committed and to prosecute them. And that means you often need evidence from the firm. And strict respondeat superior liability, which is what we were doing, will not induce firms to self report and cooperate.”
“It pointed out that the regime we were using at the time said that if the employee commits the crime, the firm is liable. And that had perverse effects. It was causing the firm to not do the thing that we most needed it to do which is to detect, self report and cooperate.”
“The 1997 article presented a regime that would encourage firms to have a compliance program, self reporting and cooperation,” Arlen said.
“Reinier and I proposed imposing on firms a duty to have an effective compliance program, to self report and cooperate. Firms would face criminal liability for breaching those duties, in order get firms to do what we called policing. Any firm that did everything right would not be criminally liable, but would face civil penalties. The civil penalties are very important to make sure the firm doesn’t profit from a crime.”
“It does not work to say to a firm you can cooperate, report and do everything right and then pay nothing. Then firms would have an incentive to create compensation programs that encourage criminal behavior, self report and keep the profits.”
Did she propose deferred and non prosecution agreements?
“We didn’t,” Arlen says. “We proposed a mitigation regime that looks like what the DPAs and NPAs are doing. But we were focused on monetary penalties. We proposed a regime where you would defer prosecution and use civil penalties work with administrative agencies to impose civil penalties in order to achieve this goal.”
“DPAs and NPAs took our basic idea and do everything in one place.”
Is there any indication that your 1997 article influenced the Justice Department’s thinking?
“I have no way of knowing,” she says.
Do we know that this deferred prosecution regime has in fact helped to deter corporate crime?
“It’s very difficult to find evidence of deterrence,” Arlen says. “The only evidence you have is detected or suspected crime and then convictions. If you see changes in convictions rates, you never know whether it’s because there is more or less crime or more or less interest in enforcement.”
“The Holder memo came down just before Enron and WorldCom. Prior to Enron and WorldCom, there was not a lot of enforcement attention paid to crimes by publicly held firms, other than fraud against the government. The vast majority of corporate criminal convictions of publicly held firms before Enron concerned fraud against the government things like Operation Ill Wind government procurement fraud. It wasn’t until then that we started focusing on securities fraud, accounting fraud and much more recently, Foreign Corrupt Practices Act (FCPA), money laundering and health care fraud.”
There are groups like the Chamber of Commerce that are pushing for a corporate compliance defense. Arlen is opposed to a corporate compliance defense. Why?
“I am actively opposed to a corporate compliance defense,” she says. “Effective compliance programs are all too easy to fake. What makes an effective compliance program is not just the structure but the signals sent down from management about how serious management is about detecting wrongdoing.”
“If the firm is told that once it has something on paper, it has a get out of jail free card, it doesn’t have any incentive to detect the wrong and report it. It can have a paper compliance program which is the last thing we want.”
“We need firms to want to report wrongdoing and to cooperate with the government to make sure that the government gets the information it needs to prosecute the individuals. If you have a good faith defense for firms that allows them to avoid criminal liability based on a compliance program alone then why should they self report and cooperate?
There is no risk of corporate criminal liability. If they self report and cooperate, they risk civil liability. We need to make sure that firms have a very strong incentive to self report and cooperate.”
Is there a danger to over relying on private investigations of corporate crime?
“There are potential dangers,” she says. “To the extent that prosecutors believe they can maintain an adequate conviction rate relying on private investigations, they might not spend adequately on investigations.”
“And then the problem is that a firm that doesn’t report can be confident that they may not get caught. Even with whistleblowing, you need investigators to look into the whistleblower’s complaint. And if you don’t have an adequate investigative team, you won’t do that. And you may not have one if you rely on firms to fund most of the investigations.”
“So, it may undercut our ability to induce firms to self report.”
“While there is a lot of self reporting, particularly in the FCPA area, there are many instances where outside counsel will advise firms not to self report because they know the government is unlikely to detect and therefore it’s probably not worth it.”
“The second concern with relying too much on private investigations is that it can affect the types of crimes that prosecutors focus on because it gets very tempting to bring the cases that have been handed to the prosecutor in a basket, all wrapped up.”
“Corporations now are not only using private investigators to investigate potential wrongdoing by their own employees, they also are using them to investigate and build cases against other firms.”
“The firm then brings the fully investigated case to a prosecutor, all wrapped up with a bow. Firms are trying to encourage prosecutors to pursue criminal convictions, instead of relying on civil actions for example for intellectual property violations because defendant companies can avoid the full bite of a civil action by declaring bankruptcy and reforming under a new name. Individuals cannot use bankruptcy to avoid punishment when facing a prison term for criminal violations of intellectual property laws or antitrust laws.”
“There are many benefits of this approach. But we should be concerned that it will cause prosecutors to focus on the cases of interest to well funded commercial interests, because these firms can afford to pay to investigate their own cases, thereby guaranteeing prosecutors easy convictions.”
“But we have to ask whether we want our prosecutorial decisions determined by who has the money to do their own investigations.”
“If I were to go down my list of the most important crimes, I would put securities fraud, health care fraud and environmental crimes ahead of many intellectual property violations. Those are commercial cases. I’m more inclined to let those firms take care of themselves. There is some worry about private resources dictating prosecutorial direction.”
“And then finally, we do need to think more carefully about the intersection of private investigations and individual rights. Many of the rights we have in the Constitution against illegal searches, our Fifth Amendment rights against self incrimination, are premised on the idea that the investigator will be an arm of the government and therefore individuals can assert their rights against the government.”
“But employees don’t have Fifth or Fourth Amendment rights against their own firm. We are having investigations done privately outside the scope of these protections. And we need to give more attention to the implications of that for individual rights.”
Is Arlen bothered at all by the big white collar defense firms teaming up with the Justice Department and moving against individual executives when in many of these cases you have a corporate culture of looking the other way?
“I believe strongly that we cannot deter corporate crime unless we impose liability on the individuals responsible. It is really important that firms cooperate to make sure individuals pay,” Arlen says.
“Nevertheless it’s very important that the right individuals pay. And that the government prosecutors insist that they get evidence not just on who physically caused the crime, but who was responsible for the crime.”
“And those responsible typically are higher up in management. And I do have concerns that we are not doing a good enough job to make sure that the managers responsible pay.”
“We also need to do a better job of looking at the structure of compensation and promotion policies to see if they are encouraging the crimes. Many firms have adopted high powered incentives in part in response to agitation on the corporate governance side about the need to make sure that people’s salaries reflect outcomes.”
“But many of these high powered incentives that firms have adopted encourage people to either work really hard, or if there is no other way to make your numbers, commit crimes. They face getting fired otherwise.”
“We need to look at the degree to which firms are backing employees into a corner so that they may feel forced to commit crimes to save their jobs.”
“If the civil penalty is large enough and properly structured, it would deter crime. Prosecutors could do a better job using DPAs and NPAs to fully inform the public and the shareholders about who was responsible and the causes of the crime, any deficiencies in the compliance programs, any deficiencies in the responses with individuals being named and the compensation and promotion structures so that shareholders will have an incentive to take a look and agitate for change. That way, the outside members of the board will get the signal that they better either change things or have a good explanation as to why the prosecutors are wrong.”
“Prosecutors are not giving shareholders the information they need to pressure for changes within the firm.”
Arlen is currently working on an analysis of deferred and non prosecution agreements with Marcel Kahan at NYU School of Law.
In September, NYU School of Law will be launching a new program in Corporate Compliance and Enforcement. Arlen will be the director.
“The purpose of the program is to both deepen our understanding of corporate criminal enforcement and guide policy,” she says. “We plan to do that by helping to obtain data and information about corporate enforcement practices. We also want to hold conferences that bring academics, judges, prosecutors and policymakers together to talk about the proper structure of corporate criminal enforcement.”
“We want to take a hard look at when, if ever, the Securities and Exchange Commission (SEC) should be entering into neither admit nor deny settlements.”
“The idea is that in the area of corporate crime, you can do a lot of reform without ever changing a single law. Most of what is happening in the area is the result of enforcement policy.”
“In theory, you could get a lot of good reform by making sure you get the most important people in the room for an in depth conversation about what should be the goals and the best way to achieve those goals.”
[For the complete q/a format transcript of the Interview with Jennifer Arlen, see 27 Corporate Crime Reporter 27(11), July 8, 2013, print edition only.]