Corporate Accountability Through Compliance

Following a decade of deregulation, defense industry procurement scandals, and savings and loan crisis, corporate malfeasance captured the attention of the American public in the early 1990s. In response to these scandals and increasing prosecution of corporations, the US Sentencing Commission enacted federal sentencing guidelines for organizations in November 1991. The guidelines articulated that an “Effective Compliance and Ethics Program” would “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”

A decade later, the dire need for such organizational culture continued to be highlighted in a string of corporate scandals that included Enron, Arthur Andersen, WorldCom, and Tyco. As a response to these scandals, companies developed their compliance functions to prevent and detect misconduct before the misconduct grew into scandals that would devastate investors and employees.

The financial imperative for corporate compliance became pronounced in 2008, when Siemens AG paid record-setting global penalties of $1.6 billion for its internal controls failures that enabled bribes around the world. In its charging document, the United States Department of Justice specifically cited Siemens’ lack of senior management commitment, inadequate compliance resources and training, and the insufficiency of financial controls. The Siemens case made it clear that the Department of Justice expected more than “paper programs” when it came to corporate compliance.

The Siemens prosecution was led by the Fraud Section in the Criminal Division of the Department of Justice, which prosecutes corporate crimes in the area of foreign corruption, securities and financial fraud, and healthcare fraud. In 2015, the Fraud Section took the focus on corporate compliance to a new level when it created the role of a Compliance Counsel Expert. I was the first person to serve in that role.

In explaining his rationale for the creation of this role, Andrew Weissmann, the Chief of the Fraud Section, stated that one of the goals for ”this increased emphasis on compliance” was the desire to reduce corporate crime: “One important way to do that is to empower a robust compliance function within organizations. We can play a big role in fostering that development.”[1]

The financial incentive for companies to enhance their compliance functions has only heightened since Siemens. In 2016, the Fraud Section brought fifteen corporate resolutions (deferred and non-prosecution agreements) and total resolution amounts of $7.8 billion payable to U.S. and foreign authorities. These include cases such as the prosecution of a major U.S. hospital chain for paying kickbacks in exchange for patient referrals ($513 million of criminal and civil claims); deferred prosecution of the world’s sixth-largest telecommunications company for conspiracy to bribe in Uzbekistan ($800 million of global fines and disgorgement); guilty plea of a Volkswagen engineer that led to the January 2017 Volkswagen corporate plea for using a defeat device to cheat on emissions tests ($4.3 billion in criminal and civil penalties).

In determining whether to bring charges against, or to negotiate pleas or other agreements with, corporations, Department of Justice prosecutors are required to consider specific factors listed in The Principles of Federal Prosecution of Business Organizations in the United States Attorney’s Manual. These factors include “the existence and effectiveness of the corporation’s pre-existing compliance program” and the corporation’s remedial efforts “to implement an effective corporate compliance program or to improve an existing one.” As the Fraud Section’s Compliance Counsel Expert, I assisted and advised the prosecutors in their consideration of these two specific factors.

During my tenure as the Compliance Counsel Expert, I participated in the evaluation of approximately 50 corporate compliance programs as part of case resolution process, and in monitoring approximately 30 compliance programs – through either self-reporting or monitorships – after the companies had resolved their cases. My time at the Fraud Section also saw the imposition of 15 monitorships on companies as part of their resolution, a significant increase from prior comparable periods.

I worked with the monitors to ensure the corporations complied with their compliance commitment under the resolution agreements. To further articulate the Fraud Section’s expectation of corporate compliance programs, I assisted the Fraud Section in publishing the “Evaluation of Corporate Compliance Programs” in February 2017 (“Evaluation Questions”), making public questions Fraud Section prosecutors might ask in evaluating companies’ compliance programs.

The impact of the Fraud Section’s leadership in pursuing corporate accountability and elevating corporate self-governance cannot be overstated. The Fraud Section has brought about some of the largest fines and penalties for corporate crimes. Having sat at the table in the resolution of these cases, I saw how compliance programs affected everything from the types of resolutions, to the amount of penalties, to whether corporate monitors are imposed. Corporations are on notice that not only are they expected to self-govern through their compliance programs, but that the effectiveness of such programs would be expertly examined should they find themselves before the Fraud Section.

Furthermore, the Evaluation Questions have set a new standard for how compliance programs would be examined. Based on inquiries from and discussions with foreign authorities on the Evaluation Questions, it appears that this standard is gaining global interest. Soon companies might face similar questions on the effectiveness of their compliance programs whether they interact with officials in the U.S., Brazil or Indonesia.

While only time will tell whether corporate prosecutions will continue in a robust manner under the current administration, the tide that has been started by the Fraud Section has already spread around the globe. In the spring of 2016, Andrew Weissmann presented to the OECD on the use of the Evaluation Questions.

In the summer of 2016, I met with general counsels from top Chinese state-owned enterprises who came to the US to study corporate compliance. In the spring of 2017, I fielded questions on the Evaluation Questions and monitorships to Indonesian authorities who came to the U.S. to study corporate criminal liability.

These are but a few examples that illustrate the growing, worldwide, expectation for corporate accountability and effective self-governance through compliance. The only question is whether the U.S. Department of Justice, and my successor Compliance Counsel Expert, will be empowered to continue to lead this movement.

[1] “DOJ’s Andrew Weissmann and Hui Chen Talk Corporate Compliance in Exclusive Interview”, February 1, 2016. https://connects.ethics.org/blogs/laura-jacobus/2016/02/01/doj-interview

Hui Chen is the former Compliance Counsel Expert at the Fraud Section in the Criminal Division of the Department of Justice. She currently works as a freelance ethics and compliance speaker, consultant, and writer. She can be reached at www.HuiChenEthics.com.

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