Todd Haugh on Deferred Prosecution Discounts

The monetary penalties imposed in major corporate crime cases are consistently discounted below the low end of the fine range calculated pursuant to the Organizational Sentencing Guidelines, sometimes even below the monetary benefits companies received from their wrongdoing. 

Todd Haugh

That’s the finding of a paper titled – DPA Discounts – by Todd Haugh and Mason McCartney. 

The paper finds that the culpability score calculations made pursuant to the guidelines, which are designed to calibrate a company’s ultimate penalty with its level of wrongdoing, are not statistically significant in determining penalties. 

“Instead, it appears a hardened norm has developed at the Department of Justice of giving an almost uniform 25 percent discount off the low end of the fine range regardless of a company’s culpability,” they write. 

“This norm is remarkably consistent despite wide variability in corporate behavior and the likely bargaining positions of prosecutors and corporate defendants. These findings call into question the current oversight of deferred and non prosecution agreements and, ultimately, their use in combating corporate crime, thereby shedding new empirical light on what has become the primary means of holding our most high-profile corporate wrongdoers accountable.”

Todd Haugh is an Associate Professor of Business Law and Ethics at Indiana University’s Kelley School of Business. 

“There is a hardened norm at the Department of Justice that discounts these deferred and non prosecution agreements below the low end of what the calculated guideline fine should be by about 25 percent,” Haugh told Corporate Crime Reporter in an interview last month. “And that doesn’t change much depending on the culpability of the offender.” 

“That finding goes against this idea at play that’s going to get to culpability and it will be reflected in the penalty. It turns out there is almost a standard discount just by entering into one of these agreements.”

“This was a preliminary empirical look at deferred prosecution agreements in the Foreign Corrupt Practices Act (FCPA) context. And we are going to expand that out and see what we find in terms of penalty discounts more broadly.”

How many cases did you look at?

“The overall database had about 600 or so total cases. We focused our look from 2011 on. We chose to look only at FCPA cases.” 

“There were about 75 total FCPA cases, but only 45 of those were deferred prosecution agreements that had enough information where you could pull out that data. Then we added a number of non prosecution agreements. We ended up with a total of 55 pre-trial diversion FCPA agreements we looked at.”

The vast majority of those have to be large firms?

“We didn’t do detailed metrics as to the size of the firm. But just eyeballing the cases and yes, the vast majority are major companies.”

Do you find that the Justice Department cuts more lenient deals with major corporations than with smaller firms?

“I don’t have the data. But anecdotally, when you look at corporate convictions, those are predominantly small companies. The big companies generally tend to get deferred or non prosecution agreements.”

How do you explain the differences?

“If you are a prosecutor facing a large corporation, one of the things you have to think about is – how are the employees, the shareholders going to be impacted? If you have a conviction, there is a possibility at least that that company will be barred from contracting with the government. For a company like Boeing, that would be a consideration as to why they got a deferred prosecution agreement as opposed to a conviction.” 

“That’s one thing. The other, especially for an FCPA case, these are international cases, they are very difficult to make. You need the cooperation of the company. And you have to give incentives to get there. It would be difficult to make many FCPA cases without that. That includes not going after a traditional trial and conviction.”

In your paper, how did you score culpability?

“We used the organizational sentencing guidelines. There is the Justice Department manual that prosecutors use to determine whether or not a company is eligible for a deferred or non prosecution agreement. The prosecutor is also required to look at the Organizational Sentencing Guidelines. Those guidelines have a calculator that looks at culpability. And then there is a multiplier based on other factors.” 

“So we can see the high end of the penalty range and the low end of the penalty range. We then look at how much did the company actually pay and what was the discount given by the Department of Justice below that low end of the fine range.”

Give us a specific example of what you found.

“The sentencing guidelines give the company points in determining the penalty. For example, how much money did the company receive from its wrongdoing. If the company received a lot of money from lots of wrongdoing, then there would be a higher offense level. If you are bribing a public official at a high level, that’s going to give you more points.” 

“You get a total point score which sets your base fine level. That’s an initial reference point as to how serious the offense is. Then there is a culpability score. That is based on – how big is the organization, did they cooperate – things like that. You then multiply that base offense level by your culpability score and it gives you a range.” 

In the Vimpelcom case, for example, the range was somewhere between $836 million and $1.6 billion. The base fine amount was about $520 million. But the final penalty imposed was $460 million. It was 45 percent below the bottom fine range. And it was lower than the base amount.” 

“Vimpelcom got a 45 percent discount off the low end of the range. That’s a massive discount.” 

Why would a judge approve such a deal if it violates the guidelines?

“Here’s the thing. The guidelines only apply if there is a conviction. The Justice Department manual tells prosecutors to calculate the guidelines range to make a determination as to the penalty.”

“Our paper finds that there is this norm of just giving discounts. The judge could say – I think this is too low, or there should be a higher penalty. But judges have tried to put their foot in the door of these agreements and the appellate courts have said no.” 

“Essentially, these are private agreements between the Department of Justice and the companies.” 

What is the Justice Department’s explanation?

“I think what they will say is – we have to incentivize companies to come forward, enter into these agreements. They will then come in and they will help us make cases against individuals. And then they are going to agree to make compliance improvements. They are going to improve themselves internally. And in order for us to do that, we have to give the companies that discount off the low end of the penalty range.”

“I understand that argument. But what the paper points out is that it seems as if that 25 percent discount is sort of table stakes.”

“We are arguing for more nuance. Sometimes you have to get cooperation from a company because you wouldn’t have a strong hand as a prosecutor. And so you might have to give them a pretty high discount. And you have to weigh many factors. But roughly you would expect that there might be a discount, but you would still fall within the guidelines range.”

“That’s just not happening. Some companies are getting huge discounts, but the vast majority are getting a straight 25 percent. And again, this is only FCPA cases. We are looking at other cases, but I think the answer will be – generally yes.”

“In the FCPA cases, about 30 percent of the cases we looked at put the overall penalty beneath the base fine amount. That’s below the benefit that the company got from the crime. That means it makes economic sense to commit crime.” 

What percentage of the cases you looked at had penalties below the base fine amount?

“In eleven agreements, they are within the range. In sixteen of the 46 agreements – 35 percent of the cases – the total penalty is lower than the base fine itself.”

What number of the cases got the 25 percent discount?

“In eighty percent of the cases they are getting a discount that is less than the lower end of the range. Those discounts cluster around the 25 percent mark.”

You also point out that in the recent revisions in FCPA policy, they are offering larger discounts for cooperation. Isn’t that part of the explanation?

“The FCPA Pilot program said – we are going to give 25 percent discounts to get companies to cooperate. That’s probably why you have this cluster around 25 percent. Now you are seeing the Justice Department moving toward higher discounts – up to 50 percent or higher discounts. Our concern is – will that be the new norm?”

What indication is there that the Department is moving toward a 50 percent discount?

“New policies that emerged earlier last year that looked at the FCPA’s Pilot Program and said – we are going to consider larger discounts in these cases – instead of just 25 percent, they are considering moving toward 50 percent discounts or even higher.”

What should the Department do?

“The Department should go back to the guidelines. Let’s get a fine range and then let’s make some determinations within that fine range. Is the company taking steps to improve its culture? The Department would keep the penalties within the sentencing range.”

“What’s happening now is the Department calculates the range and then starts giving discounts off the low end of the range. Now it’s very rare for a company to get penalized within the range, let alone above the range. That is totally different from any other area of federal sentencing policy.”

“And the result is you will get a headline saying – the company is going to pay $2 billion. That’s a huge number. But when you actually look at what the guideline says the fine range should be, you see that the $2 billion is at the low end of the range or below the low end of the range.”

[For the complete q/a format Interview with Todd Haugh, 38 Corporate Crime Reporter 26(13), June 24, 2024, print edition only.]

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