NYU Law Professor Jennifer Arlen on Turning Corporate Criminals into Corporate Cops

NYU Law Professor Jennifer Arlen likes the idea of turning corporate criminals into corporate cops.

Jennifer Arlen
NYU School of Law

And she’s written a new law review article explaining the idea. It’s called – Corporate Criminal Enforcement in the United States: Using Negotiated Settlements to Turn Potential Corporate Criminals into Corporate Cops.

Arlen would rely heavily on deferred and non prosecution agreements to induce corporations to police themselves.

“Negotiated settlements are likely the most effective way to implement the type of multi-tiered corporate liability regime that is needed in order to effectively deter misconduct by publicly held firms and other firms whose owners are not directly involved in management,” Arlen writes. “Corporate liability can best deter corporate crime by inducing firms to effective steps to monitor and detect misconduct, investigate suspicious activities, self-report any violations detected, and fully cooperate with authorities to bring wrongdoers to justice. To do this, corporate liability for misconduct must be less severe if the firm self-reported and cooperated than if it did not.”

“As criminal law tends to impose ruinous collateral sanctions, governments seeking to induce firms to take actions that increase their likelihood of being sanctioned – such as self-reporting and cooperation – generally must employ alternatives to formal conviction – such as deferred and non-prosecution agreements – to sanction firms that take these beneficial actions. A system that alters the form of corporate liability in return for self-reporting and/or cooperation is often best accomplished through negotiated settlements because these facilitate an ongoing real time exchange between the firm and the prosecutor about the scope of self-reporting and the level of cooperation required and the likely benefits to the firm. Because negotiated settlements permit a this type of more nuanced approach to corporate criminal resolutions, negotiated settlements are more effective vehicles for deterring corporate crime.”

Arlen questions whether there is a real deterrent difference between a convicted corporate criminal and a corporate criminal that enters into a deferred or non prosecution agreement.

“I’m actually working on a piece titled — Does Conviction Matter?” Arlen told Corporate Crime Reporter in an interview last week.  “It’s a theoretical piece that asks — is there a difference, in terms of corporate reputation, between convicting and deferred prosecutions? I don’t think there is.”

“I don’t think you lose anything when you say — we convict firms that refuse to self report and don’t cooperate. We use deferred prosecutions with or without monitors for firms in the middle. And we use non prosecutions or declinations for firms that had fabulous compliance programs, self-report, cooperate and do everything right, except the crime still happens. We make sure they don’t keep the profits.”

“If you had a multi-tiered system where we all know which category of firm goes into which bucket, you will know if you see a deferred prosecution agreement, it’s this kind of firm, if you see a conviction, it’s this kind of firm. We don’t have that yet. If we did have that, then the system would be better. When you heard conviction, it would tell you something about the firm. It would have meaning.”

To your question – do convictions matter? You say now – no. But you want convictions to matter.

“I want a conviction to matter,” Arlen said.

And you would change the guidance so it would matter?

“But you can’t change the guidance without changing the rules at some agencies for collateral consequences.”

You would get rid of a permanent ban for a felony conviction by pharmaceutical companies?

“Yes. And I would give more power to do targeted exclusion. Let’s say the firm has an opioid division that is doing terrible things. Exclude the opioid division. And then we don’t have to worry about the fact that the opioid division is part of a firm that makes incredibly important cancer treatments.”

“You want to target the financial harm at the division in the firm that did the crime. I want conviction to matter. And I want it to signal that this firm didn’t just have an employee commit a crime. But senior management was involved in the decisions and decided to side with the wrong guys.”

One split we spoke about was corporate convictions versus deferred and non prosecution agreements. Another split is – go after the individuals versus go after the corporation because the individuals are only responding to the incentives put forth by the corporate culture.

“I agree with that – individuals are responding to the incentives. You have to hold individuals accountable. But it’s vitally important that we deal with the corporate culture. The way to do that is not to punish every firm to the maximum — whether it had a good corporate culture or not.”

How would you deal with senior management?

“On the one hand, many people think it would be inappropriate to expand out responsible corporate officer liability so that every CEO would risk conviction if a crime is committed by anyone under their supervision. That would be too extreme.”

“On the other hand, it doesn’t feel right if corporations committed crimes that boosted profits and bonus pay and then when the news comes out, senior executives get to keep all of that bonus pay. The firm gets hit with the penalty. A number of countries are grappling with how do we take the right approach. The UK is doing some interesting things in this area.”

“We need to ask why we want corporate criminal liability,” Arlen says. “And if we want it to deter, then we need to recognize that for the set of firms where the owners of the firm and the senior managers are not implicated in the crime, we need a system that rewards them if they are trying to stop it.”

“If we do what some people have suggested — to apply the full weight of the law against any corporation whenever we catch them — then corporations will completely stop cooperating, they will never self report and we will have fewer cases against the individual wrongdoers than we have now. And we don’t have enough now. We will have less deterrence.”

There seems to be a split on the question of individual versus corporate criminal liability. You seem to be saying – you can’t hold a company liable for these lower level individual crimes.

“I don’t say that. A split makes it sound like there are two positions. There are some who appear to take the position that a corporation is a unified person with a unified will. And therefore if the corporation committed the crime, you should just convict them without asking too many more questions about it. And they don’t discuss the fact that the corporation will have committed a crime if any one of the employees commits a crime – no matter what else the rest of them were trying to do.”

“There are others who go to the other side –  these crimes are about individuals. The corporation has nothing to do with it. We should just go after the individuals and leave the corporation alone. Or we should only go after the corporation if it had a bad compliance program. I don’t agree with either of those positions.”

“Crimes are committed by individuals. They do so because of the set of incentives that the corporation controls. The corporation doesn’t always know that it has done things to incentivize the individual criminals. But the reason people commit crimes often comes directly out of the compensation and promotion policies of the firms. They do so in desperation.”

In your paper, you raise the case of Wells Fargo.

“And some of the bribery cases are those types of cases. The corporation could have said that your bonus turns on closing the deal. If at some point in the deal, the only way to get it done is to bribe, here is where you go within the firm to discuss if there is an end run. Go to these people. And if you lose the deal because you couldn’t finalize the deal without bribery, your salary will still be fine. We won’t punish you for refusing to bribe.”

“Corporations could do that. I’m sure some do. I don’t take the view that corporations have nothing to do with it.”

“I differ from both extremes. I want the corporation to feel extra heat if it detects and doesn’t self report or if it doesn’t cooperate in a way needed to get evidence against individuals. But I also want it to get rewarded if it does cooperate. I want it to get something in between being convicted and just let off the hook. I see deferred and non prosecution agreements as a way to do that.”

There is this point of view that we should deal with big corporate cases with guilty pleas.

“I see their point of view, but disagree with it. I focus strongly on deterrence. Corporate crime is so important that it is vital that we do things to make sure fewer of them happen. When they do happen, they can cause enormous international harms. The focus has to be on deterrence. If you come out of a more criminal justice orientation, you might have more of a retributive focus. This crime has happened. Criminal law is about punishment. We don’t need to look at how we achieve overall deterrence. We should just convict.”

“I take a different view. We need to focus on how we deter this. You can’t do that with the resources we devote to criminal prosecutions unless you get the corporations on the side of the government.”

What about devoting sufficient resources?

“I don’t believe we will ever do that. I see no time in our history that we have done that. And I don’t know that it would make sense anyway. We have to ask what do we gain by convicting every single corporation for every crime no matter who does it.”

[For the complete q/a format Interview with Jennifer Arlen, see 31 Corporate Crime Reporter 25(12), June 19, 2017, print edition only.]

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