Recent media reports suggesting Rolls-Royce’s bribery settlement drove the engineering giant to a record £4.6 billion ($5.7 billion) loss are not factually accurate, and contribute to a misleading narrative that big companies are too fragile to be punished robustly for corruption.
Entries in Enron (8)
Corrupt organizations expect employees to parrot one set of values, while at the same time understanding that the real priority is to subvert these values by paying bribes to win business, or looking the other way when issues arise. This mixed messaging creates a level of ambiguity, which you see clearly in the use of euphemism, code words and metaphors in many corruption cases.
With so much to lose by going to trial, how many organizations and people will plead guilty to white collar crimes they didn't commit? Ellen Podgor (left) of Stetson University College of Law and the White Collar Crime Prof Blog asks that question in her latest essay, "White Collar Innocence: Irrelevant in the High Stakes Risk Game." She looks at three defendants who claimed their innocence at trial but were convicted -- Arthur Andersen LLP, Jamie Olis, and Jeffrey Skilling. And three who pleaded guilty and avoided trials -- KPMG, Gene Foster, and Andrew Fastow. The first group, as everyone knows, got clobbered. The second group, Prof Podgor says with considerable understatement, enjoyed reduced sentences and finite results.
"The pronounced gap between those risking trial and those securing pleas is what raises concerns here," she says. "Some refer to this as a 'trial penalty' while others value the cooperation and support the vastly reduced sentences."
In Olis's case, for example, she points out that the 'trial penalty' paid by the former Dynegy tax executive convicted of accounting fraud resulted in "an initial sentence that was 288 times greater than a non-risk taker and an eventual sentence that was approximately seventy-two times greater than a co-worker who decided not to take the risk of going to trial. [Olis's] boss, who also did not risk trial, received a sentence less than one quarter of what Olis received."
No wonder guilt or innocence doesn't always figure in decisions to fight white collar charges in court. For individuals, the trial penalty can mean sitting in jail for decades (or as long as they survive); for organizations it can mean a corporate death sentence. Plea bargaining, though, removes the risks and limits the damage.
When the amount and quality of law enforcement are just right, when the guilty are usually punished and the innocent usually go free, we call it the "rule of law." Most of us don't think much about the rule of law. We enjoy its benefits and take it for granted, forgetting that it's a rare blessing -- and very fragile. So when the rule of law is out of balance and someone points that out, we should be grateful. Ellen Podgor is someone we're grateful for.
Her essay, "White Collar Innocence: Irrelevant in the High Stakes Risk Game," can be found on SSRN here. It'll be published soon in the Chicago-Kent Law Review.
Companies facing criminal indictment for violating the Foreign Corrupt Practices Act and other federal laws have a sure-fire way to help themselves. They can cooperate. Those found to have “fully cooperated” under the Federal Sentencing Guidelines are entitled to reduced penalties; most of them escape with a deferred or non-prosecution agreement. How does the government measure cooperation? One way has been to look at whether the target agreed to spill the beans on employees by waiving the attorney-client privilege.
The Justice Department claims it has never forcibly stripped an organization of the privilege. That's technically true. As a matter of law only the holder of the privilege can give it up. But it's also true that organizations have routinely waived the privilege because of various inducements. Translation: the DOJ made them offers they couldn't refuse.
Cindy A. Schipani, above, a professor from the University of Michigan's business school (B.A. Michigan State, J.D. University of Chicago) has written an excellent paper (scholarly but readable) on the topic. It's called "The Future of the Attorney-Client Privilege in Corporate Criminal Investigations" (available from SSRN here). Ellen Podgor cited it on the White Collar Crime Prof Blog here.
Prof Schipani traces the history of the waiver as a measure of organizational cooperation. She starts from the Holder Memorandum in 1999 by then-Deputy Attorney General (now AG) Eric Holder, followed by the Thompson Memorandum (2003), the McCallum Memorandum (2005) and the McNulty Memorandum (2006). Each encouraged waiver of the privilege by linking it to some extent to reduced penalties and deferred or non-prosecution agreements. And under the various DOJ guidelines, refusing to waive the privilege became implicitly linked with the threat of indictment, maximum penalties, and corporate ruin.
How serious that threat was became clear, Prof Schipani says, in May 2002. Arthur Andersen LLP was charged with obstruction of justice for shredding documents related to its audit of Enron. The jury convicted Andersen and the Fifth Circuit affirmed. Prof Schipani says,
The indictment and subsequent conviction . . . devastated the firm’s reputation. Moreover, because the SEC does not allow convicted felons to audit public companies, the firm agreed to surrender its Certified Public Accounting licenses and its right to practice before the SEC, which effectively put what was once a “big five” accounting firm out of the business. Numerous Andersen clients deserted the firm, as did many partners and personnel, and Andersen was obliged to sell off profitable components of its business. In the aftermath, nearly 28,000 U.S. Andersen employees lost their jobs.Although the Supreme Court reversed Andersen’s conviction in 2005 -- holding that the trial court’s jury instruction was faulty -- the firm was already gone.
By 2006, Prof Schipani says, most in-house and outside counsel were convinced that a "culture of waiver" permeated the DOJ and SEC. And they were right. "Nearly 80% of the [deferred or non-prosecution agreements] entered into before June, 2006 reportedly include waiver of privilege," she says. "One would imagine the percentage to be significantly lower if corporations believed waiver to be optional and inconsequential."
In August 2008, under heavy flak, the DOJ issued the so-called 2008 Guidelines. They purported to restore the privilege by removing consideration of a waiver from the evaluation of an organization's cooperation. Did anything change?
Prof Schipani says it's still too early to tell. But, she warns,
The 2008 Guidelines remain ambiguous regarding whether disclosure of internal investigation reports or interview memoranda prepared by attorneys may be required in order for a firm to receive credit for cooperation. If a corporation is deemed to have failed to timely disclose the relevant facts “for whatever reasons,” the guidelines instruct prosecutors not to give cooperation credit.Her conclusion: Even if the DOJ does not make official demands for waivers, "corporations under governmental investigations may still feel pressure to voluntarily waive the privilege, particularly relating to factual work product."
View the "2008 Guidelines" in the U.S. Attorney’s Manual 9-28.000 / Principles of Federal Prosecution of Business Organizations here and USAM 9-28.710 on attorney-client and work-product protections here.
Read prior posts about the attorney-client privilege here.
No one blames the New York Times Company. If the only way it can save its flagship New York Times is to shut down the Boston Globe, then the owner's choice is easy. And no one blames the management at the Globe either. The paper hasn't been badly run; it's just become very unprofitable over the past decade -- like most other big-city newspapers in the United States.
Where this story touches our regular topic is in the field of journalism. Real journalism -- "breakthrough journalism," as Martin Baron, the Globe's editor, calls it. It's part of what keeps our institutions open and democratic. It protects all of us, all the time, even if we never think about it. Like the Washington Post's Watergate stories, starting in June 1972 with Five Held in Plot to Bug Democratic Offices Here (and eventually leading all the way to enactment of the Foreign Corrupt Practices Act). Like the Wall Street Journal's crystal-ball reporting in 2001 about the effects of deregulating the energy industry (think Enron and the California power shortages). And the Globe's own stories -- over 1,000 of them -- about sexual abuse in the Catholic Church.
But as the Globe's Baron also said last week, breakthrough journalism doesn't come cheap. It can be "shockingly expensive," he said, meaning it's now clear that declining ad revenues at newspapers won't support that kind of journalism anymore. Yet it's also true that a lot of the news we need originates from the newspapers and then shows up on TV, radio and in cyberspace.
Can the dailies save themselves by exploiting the internet? It's not that simple, as the Globe's case shows. In February, for example, the Globe had 5.7 million unique visitors on its website, Boston.com. "No other site in Boston or New England," Baron said, "comes anywhere close. Among the newspaper websites in the top 10, ours came in second to the New York Times in the time people spent on our site, ahead of the Wall Street Journal, the Los Angeles Times, USA Today, and the Washington Post." Yet the Globe is losing money faster than ever.
All this is unsettling -- and for good reason. While newsrooms everywhere are shrinking or disappearing, no one knows what will happen to the professional journalism that's being displaced. In a brilliant and disturbing essay called Newspapers and Thinking the Unthinkable, Clay Shirky says it's not exaggerating to compare the transition we're in now with the 1500s, when the invention and spread of the printing press changed everything. He says revolutions like the one caused then by the printing press and now by the internet are chaotic. The ground shifts and institutions are undermined. Describing the 1500s, Shirky says:
The Bible was translated into local languages; was this an educational boon or the work of the devil? Erotic novels appeared, prompting the same set of questions. Copies of Aristotle and Galen circulated widely, but direct encounter with the relevant texts revealed that the two sources clashed, tarnishing faith in the Ancients. As novelty spread, old institutions seemed exhausted while new ones seemed untrustworthy; as a result, people almost literally didn’t know what to think. If you can’t trust Aristotle, who can you trust?And that's what's happening now. The old stuff, Shirky says, "gets broken faster than the new stuff is put in its place." So no one today knows how our news will be reported and delivered tomorrow.
But we know this: in a democracy, journalism matters. It's the eyes and ears of the people, and sometimes their voice. To paraphrase the media critic Robert McChesney, journalism is how we make sure elections are fair and honest, how we monitor the government's use of its powers to make war and prosecute citizens, and how we keep public and private institutions from being overwhelmed by unchecked corruption.
Some are saying the old newspapers deserve to die. As businesses, that may be true. But what about journalism itself? Where will it go after the papers are gone?
If you love studying the U.S. corporate and personal tax ramifications of the Foreign Corrupt Practices Act -- and who doesn't? -- here's news about something special. It's an article called "Is This Bribe Deductible? Tax Implications of the U.S. Foreign Corrupt Practices Act." The twenty-page piece appears in Tax Notes International (December 17, 2007, p. 1171). Its author is New York City lawyer and CPA Selva Ozelli of RIA - Thomson, the well known publisher of tax and accounting materials.
Ms. Ozelli says a comprehensive study of the FCPA's U.S. tax implications was needed. She cites the surge in prosecutions -- 400 percent since 2000, with more than fifty additional investigations under way in 2006. The article covers in detail the ways American companies and their foreign subsidiaries can lose deductibility of payments that violate the FCPA. She also explains the more alarming risk of potential criminal consequences -- including RICO charges -- based on tax evasion:
"The increased global anticorruption scrutiny is subjecting multinational companies to a blizzard of simultaneous or sequential multijurisdictional FCPA investigations that are more aggressive than at any other time since the statute’s enactment, resulting in larger fines. These investigations may also shed light on a U.S. multinational company’s tax evasion if the income that is financing improper payments is excluded from a company’s taxable income, or on the mischaracterized improper payments that can run into the hundreds of millions of dollars are deducted legally for tax purposes under the OECD convention but illegally under U.S. tax laws. Such findings may potentially subject a company to civil or criminal penalties under U.S. and foreign tax laws, penalties under the Racketeer Influenced and Corrupt Organizations Act (RICO) that now applies to a taxpayer that has deprived a foreign government of tax revenue, and potential private FCPA civil claims made under the civil provisions of RICO."
In language that echoes back to the tactics used to put Al Capone out of business, Ms. Ozelli navigates the important distinctions among the burdens of proof in three settings -- an IRS challenge of deductibility, an allegation of fraud leading to tax evasion, and a criminal FCPA prosecution. She says:
"For the disallowance of a deduction . . . no conviction under the FCPA is necessary — the relevant criteria is whether the improper payment violates the FCPA. The IRS, however, has the burden of proving fraud . . . by showing that the company knew its return was false when it made it and intended to evade paying the proper tax by making a false return. The fraud, whether as to deficiencies or for additions to tax (that is, fraud penalties), must be proven by clear and convincing evidence. A mere preponderance of the evidence will not suffice. Because this is a lesser burden than proving guilt beyond a reasonable doubt, which must be established in a criminal case, a company may be found not guilty in a criminal bribery case and still lose the deduction if the IRS is able to meet the lesser burden in the tax case."
In other words, once a company lands in FCPA trouble, its problems may multiply. Knowingly filing tax returns that mischaracterized illegal payments abroad as deductible expenses can lead to criminal charges. In a footnote -- one of 117 that gird the text -- Ms. Ozelli makes a passing reference to the current investigations involving the dozen oil and gas service companies implicated in the Vetco / Panalpina affair. Those companies allegedly reimbursed Panalpina for customs clearance and permitting expenses that have now come under FCPA scrutiny. An addendum to the article lists all the currently-known FCPA investigations, the countries involved, and potential multi-jurisdictional enforcement aspects.
Recounting the scandals involving Enron, Tyco, Global Crossing, Refco, and Hollinger, Ms. Ozelli warns of the personal tax implications inherent in the misuse of company funds. She says that "while scrutinizing corporate records for FCPA violations, special attention should be placed on transactions that divert corporate funds that excessively benefit the executive since it might result in charges of both corporate and personal tax evasion." It's not a stretch to imagine an executive reaping a compensation windfall by pumping up corporate earnings via bribes to foreign officials.
There's lots more meat in this article -- which manages to combine fine scholarship with practical advice. Those counseling corporations and executives on the importance of FCPA compliance -- and the implications of potential non-compliance -- will be happy to have Ms. Ozelli's work product. As of today, the article is available exclusively from Tax Notes International (which is by subscription only here). We're hoping it will soon see wider (and free) circulation. It's a bona fide contribution to an aspect of the FCPA that deserves more attention.
One consistent measure of a compliance culture is executive responsibility. In the case of Enron's CEO, Jeffrey Skilling, there was little evidence of that. True, he was obligated to comply with the Foreign Corrupt Practices Act. But remarkably, his January 1, 1996 Employment Agreement might have allowed him to be convicted under the FCPA and still keep his job. How? By his own declaration that he had no personal knowledge of or involvement in the crime -- the same defense he later bet on and lost at his federal trial for conspiracy, securities fraud, wire fraud and insider trading.
Fellow executives Rebecca Mark, Kenneth Rice and Joseph Sutton lacked Mr. Skilling's sui generis right to declare themselves innocent. Upon an FCPA offense, however, their employment agreements, like his, allowed the board to decide that if they'd acted in good faith after all, they could remain employed by Enron (never mind the mens rea element of a federal criminal conviction under the FCPA).
Mr. Skilling's Employment Agreement said in part:
Employee shall at all times comply with United States laws applicable to Employee's actions on behalf of Employer, including specifically, without limitation, the United States Foreign Corrupt Practices Act, generally codified in 15 USC 78 (FCPA), as the FCPA may hereafter be amended, and/or its successor statutes. If Employee pleads guilty to or nolo contendere or admits civil or criminal liability under the FCPA, or if a court finds that Employee has personal civil or criminal liability under the FCPA, or if a court finds that Employee personally committed an action resulting in any Enron entity having civil or criminal liability or responsibility under the FCPA with knowledge of the activities giving rise to such liability or knowledge of facts from which Employee should have reasonably inferred the activities giving rise to liability had occurred or were likely to occur, such action or finding shall constitute "cause" for termination under this Agreement unless (i) such action or finding was based on the activities of others and Employee had no personal involvement or knowledge of such activities, or (ii) Employer's Board of Directors or Enron's management committee (or, if there is no Enron management committee, the highest applicable level of Enron management) determines that the actions found to be in violation of the FCPA were taken in good faith and in compliance with all applicable policies of Employer and Enron.
View Jeffrey Skilling's Employment Agreement Here.