From recent experience in cross-border investigations (especially the Libor investigation in the United States and the United Kingdom), it has become apparent that many of our colleagues overseas in private practice are bewildered by the propensity of American white collar defense lawyers to rush into the Government to disgorge the product of their internal investigations when representing companies. Self-reporting in the United States is now a prerequisite to obtaining full cooperation credit and the mitigation of punishment that goes along with it. See, for example, the recent pronouncements about cooperation by Deputy Attorney General Rod Rosenstein and by James McDonald, Director of Enforcement at the Commodity Futures Trading Commission.[1]
European law enforcement is not premised on the notion that the only clear way to obtain leniency for a business organization is to cooperate, or, indeed, to turn the company in. For many private lawyers in other countries the imperative to cooperate simply does not compute.
This notion that cooperation is the sine qua non of effective advocacy for corporations became entrenched when, around the same time, the Department of Justice promulgated The Principles of Federal Prosecution of Business Organizations and the Securities and Exchange Commission announced the resolution of an investigation of a company called Seaboard Surety. The DOJ set out ten factors for prosecutors to consider with respect to the prosecution of companies including “the corporation’s willingness to cooperate in the investigation of its agents” and “the corporation’s timely and voluntary disclosure of wrongdoing.” U.S Attorney’s Manual section 9-28.300. In the Seaboard Report, the SEC also emphasized cooperation and self-reporting, as later codified in its Enforcement Manual. SEC Enforcement Manual Section 6.1.2.
More recently, law enforcement officials, anxious to improve the effectiveness of their programs, have placed even greater emphasis on the need for companies to rush in to disclose problems they have discovered at the earliest possible time. For example, the Department of Justice has recently amended the United States Attorney’s Manual to create a presumption in favor of a declination in FCPA cases where a Company self-reports, but only a maximum 25 percent fine reduction if it does not self-report yet otherwise cooperates fully. U.S. Attorney’s Manual §9-47.120. Similarly, James McDonald, the CFTC’s Director of Enforcement, stressed in a recent speech that
“The biggest reduction [in fines and penalties] [will be] reserved for those who self-report, fully cooperate, and remediate. We will continue to give substantial credit for cooperation. But all else equal, it will be significantly less than for those companies that self-report the misconduct at the outset.”
This recent focus on self-reporting is a direct response to scholarly analysis like Professor Jennifer Arlen’s persuasive advocacy for a “multi-tiered duty-based sanction” as the best deterrent to corporate crime. Professor Arlen argues that firms should “face higher sanctions if they did not engage in optional ex ante policing or did not self-report detected wrongdoing.”[2]
While the DOJ has made it clear that self-reporting and cooperation are stand-alone factors, they are clearly intertwined and typically rise and fall in tandem. The DOJ’s assessment of a company’s cooperation has always been colored by an evaluation of whether and when a company self-reported. Stellar cooperation will typically be discounted by the DOJ if there was no self-report. Similarly, where average cooperation follows a timely and groundbreaking self-report, the company is likely to get higher marks for cooperation than it deserves.
However, for many of our colleagues in the United Kingdom (to pick an example) this business of extreme cooperation is beyond curious; it runs against their most basic advocacy instincts. For them, the Government is traditionally obliged to root out problems and then defend their decision to prosecute or sue. Only when the law enforcement agency has essentially finished the business of investigating a company does that company need to speak up and explain why there should be no need for punishment.
It is true that as part of its principles-based approach to regulation, the FCA in the United Kingdom requires, pursuant to its Principle Eleven, that companies in the financial industry report problems they have discovered. However, those reports do not typically get made to the FCA’s enforcement staff and do not automatically lead to referrals to enforcement personnel. Nor are they commonly accompanied by a fulsome description of the results of an internal investigation and a brief against employees of the company, as required by the Yates memorandum. Indeed, the approach under the Eleventh Principle is markedly different from that following self-reports to DOJ, the SEC and the CFTC.
To be sure, the powerful influence of American law enforcement in cases like the Libor investigation is slowly changing the more classic approach to these cases in places like the United Kingdom. When, as in Libor, American and British agencies are investigating the same matter, the approach of the Americans tends to dominate. Plainly, if one of the enforcement systems mandates cooperation, that system’s demands win out. So it was that most of the banks in the Libor matter ran into the DOJ and the CFTC to disclose the fruits of their internal investigations. However, by the time those banks awoke to the problems around the setting of Libor it was too late to self-report, because by “self report” American agencies mean the company must be the first to bring the matter to the Government’s attention. Cooperation without that simply will not merit full credit.
Moreover, even if foreign agencies are learning lessons from the American approach, it is worth reflecting on the wisdom of a system that so depends on cooperation and self-reporting. Of course, from the perspective of law enforcement officials it all makes perfect sense; the more you force companies to investigate and report, the wider and more powerful the deterrent effect of the whole system. If deterrence is the only goal, then these latest pronouncements on self-reporting are the logical next step in law enforcement. But should that be the only goal? How healthy is that approach for a system that was founded on a fundamental skepticism of Government and its extraordinary powers, a system that in some sense depends on push back from the citizenry against the Government? Is there a point where the privatization of law enforcement goes too far? The flip side of denying credit when there is no cooperation is punishing companies when they don’t cooperate. Is that the sort of approach law enforcement officials should take?
For example, why should it be impossible for a company to obtain full cooperation credit simply because it did not make the initial report of potential wrongdoing to the Government? There are many cases where the Company simply did not know enough to self-report but went about the business of cooperation with zeal after they were told about the basic problem. Unless the failure to discover and self-report a problem is such a lapse as to justify significant punishment, it seems unfair to deny such companies complete credit, and in the case of the DOJ to offer such companies only a maximum of a 25 percent fine reduction.
To be clear, companies that discover problems but fail to self-report, or those who fail to discover problems because of flawed compliance systems, deserve markedly less credit than firms that do turn themselves in. But denying full credit to those companies that cooperate fully but fail to self-report because, for example, the misconduct was hidden from them promotes law enforcement imperatives over simple fairness. In fact, in those situations 25 percent credit for cooperation without a self-report is a truly minor incentive.
As with so many things in law enforcement, the line drawing can be difficult and, by this short piece, I certainly do not mean to suggest that cooperation should be dropped as an important factor in the process of meting out punishment. Nor would I argue with the analysis behind Professor Arlen’s arguments in favor of rewards for cooperation as an important law enforcement tool. The point is only to ask whether there comes a point where the focus on cooperation and especially on self-reporting goes too far.
Footnotes
[1] Rod Rosenstein, Deputy Attorney General, Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017). James McDonald, Director of Enforcement, CFTC, speech at the NYU Program on Corporate Compliance & Enforcement / Institute for Corporate Governance & Finance: Self-Reporting and Cooperation at the CFTC (Sept. 25, 2017).
[2] Arlen, Jennifer, Corporate Criminal Liability: Theory and Evidence (May 10, 2012), Research Handbook on the Economics of Criminal Law, A. Harel & K. Hylton, eds; Edward Elgar (2012); NYU Law and Economics Research Paper No. 11-25.
Lee S. Richards is partner at Perkins Coie and a founding partner of Richards Kibbe & Orbe LLP. He would like to thank his partner at Perkins Coie, David Massey for his thoughtful comments on his post.
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