Categories: Book reviews, corruption

Punishing corporate crime: Review of Brandon Garrett’s Too Big To Jail

Professor Garrett has written an important book about a topic – corporate crime – that may not be a top concern of the ordinary person, but is arguably as important a topic as the type of crime (those against the person) that ordinary people do care about.  For instance, in Britain fraud on its own costs the country an estimated £73 billion per year.

Garrett (p.2) aims to “show what really happens when prosecutors pursue corporate criminals”, and to encourage “more public attention to the problem of punishing corporate crime”.  His basic sources are two databases – one of corporate convictions in the US and one of deferred prosecution or non-prosecution agreements in the US with corporates.

Garrett argues that “prosecutors fail to effectively punish the most serious corporate crimes.  Still more troubling is that not enough is known about how to hold complex organisations accountable” because prosecutors often settle cases without transparency.  This is particularly troubling, for, as Garrett points out (p.224) “U.S. prosecutors are simply more powerful than most prosecutors elsewhere in the world.  They possess extraordinarily wide discretion, and the adversarial system in the United States creates an unusually prosecution-friendly dynamic by placing great discretion in the hands of prosecutors – which also gives corporations more to gain by cooperating”.  So, if the situation is problematic in the US, it is reasonable to conclude it is much worse elsewhere, and that corporate criminality is not punished as much as it ought to be even in OECD countries.

Why does Garrett think enforcement of corporate criminal offences is too lenient?  He points out:

  • Most of the deferred or non-prosecution agreements (which allow a company to avoid a conviction) struck in the US between 2001 and 2012 were publicly listed on the US stock exchange (i.e. big companies). [p47]
  • Although most of the deferred or non-prosecution agreements (63%) required the company concerned to create a compliance programme, only 25 per cent of these programmes had an independent monitor overseeing them, and even fewer had to evaluate how effective the compliance programmes were. [p48]
  • The fines paid by companies entering a deferred or non-prosecution agreement averaged just 0.04 per cent of market capitalisation. [p70]
  • The average length of deferred or non-prosecution agreements is two years and three months, leading Garrett to ask “can prosecutors effectively supervise the reform of a major corporation in just over two years, particulalry if not required to audit the effectiveness of its reforms?” [p75]
  • “Companies receiving deferred prosecution and non-prosecution agreements typically do not have employees prosecuted”. [p80]

This it seems to me is compelling evidence in support of Garrett’s argument that, in an age where prosecutors in the US have favoured deferred prosecution and non-prosecution agreements over prosecutions, companies largely get away with crime with light punishments and without seriously having to implement effective reforms.  However, this does not bode well for Britain, which announced in 2012 deferred prosecution agreements would be permitted by law, and which were introduced in Schedule 17 of the Crime and Courts Act 2013.

Throughout the book Garrett brings out carefully the various dilemmas involved in prosecuting companies, which differs greatly from the task of prosecuting ordinary individuals:

  • Companies cannot be jailed, begging the question what is the appropriate punishment.
  • “Collateral damage” is a real problem.  Most crimes committed by big corporates will happen without the knowledge of most employees (for example the BAE case), and it is often unfair to penalise shareholders, most of whom, operating as they do via various financial institutions, can have no knowledge of what goes on inside big corporates, and have no power to do anything about it even if they did.
  • Big corporates have huge resources, and thus present a much greater enforcement challenge compared to individuals.  Important cases can cost many millions, and drag on for a long time.  Garrett’s description of the Arthur Andersen and KPMG cases are excellent examples.

So what is the answer?  Well, employees working within a corporation are powerfully constrained by what they can do because of the structure and culture of the corporation, which plainly can sometimes encourage employees to take actions which amount to corporate crime.  So, although collateral damage is a real problem, and although corporates are difficult to prosecute because they have the resources to fight the prosecutors all the way, Garrett convincingly argues action against corporations is necessary to change the context within which employees act.  This ought to reduce the likelihood of further crimes being committed, and increase the chances of them being detected.

Employees are those who take the decisions or actions which lead to corporate crime.  Yet Garrett shows (p.96) that most deferred or non-prosecution agreements do not result in prosecutions of employees.  And, there are many problems in doing so, from getting the evidence in the first place (which has to be documentary as there are rarely independent witnesses) to, in complex corporate structures, establishing who knew what, when and who had responsibility.  So the idea that deferred or non-prosecution agreements will encourage corporations to surrender their errant employees, who will then be convicted, is not borne out by the US experience.  Indeed in the nearly 100 prosecutions for violations of the Foreign Corrupt Practices Act (FCPA) in the last decade, fewer than 30 involved employee prosecutions.  And only 10 of the companies (in 63 cases – see p.296) entering into deferred or non-prosecution agreements for FCPA violations had employees prosecuted.

Garrett ends with some recommendations which are (p.286):

  1. Prosecutors should aim to convict companies, except where there are serious collateral damage issues, rather than use deferred or non-prosecution agreements.
  2. Any deferred or non-prosecution agreements should be supervised by a judge, so that there is proper independent oversight.
  3. Prosecutors should insist on detailed structural reforms of corporations, supervised independently by prosecutors, regulators or monitors.
  4. Fines should be a deterrent, mitigated only by voluntary self-reporting, and carefully documented efforts to create compliance.  Sentences for repeat offenders should increase in severity.
  5. There should be far more transparency about corporate crime, including release of prosecution agreements, how fines are calculated and publicly available progress reports describing compliance.

These recommendations make a lot of sense, though they show just how far there is to go for there to be minimal enforcement of the law as regards big corporates, even in a leading country like the US.  In particular, although there are legitimate collateral damage issues (except in the most egregious cases it would seem unfair for a corporation to be effectively sentenced to death) debarment and much heavier fines could be used more often.

In the BAE case, for example, the company was fined just over 1.5 per cent of its 2010 military revenues for its convictions in the US and Britain.  But debarment in the US and Britain would have been appropriate, given the nature and extent of the crimes.  In 2010 BAE (BAE Annual Report 2011, p.121) had £4.3 billion of sales in Britain, and £10.1 billion in the US, around 65 per cent of its total sales.  Around 56 per cent of its revenue was from “long-term contracts” (not further defined).  Had BAE experienced debarment in the US and or Britain for a limited period, this would have inflicted a grievous, but not fatal, blow to the company.  This (along with the threat of more serious treatment for any future similar offence) would, surely, have been far more of a long-term deterrent to the company than what happened.  Bad PR aside the convictions harmed BAE very little, giving the company (or its employees) no serious incentive to avoid dubious practices in future.

It might be argued that such punishment will deter corporate self-reporting.  I am not sure that is true.  It could easily have the opposite effect, especially if self-reporting was rewarded by more lenient punishment along with heavily supervised corporate reform.  But plainly the prosecutors need to be given sufficient resources so that they are a match for corporations, just as they are a match for individuals committing ordinary crimes.  As Sue Hawley has recently pointed out “the [Serious Fraud Office’s] budget was cut by £20 million between 2008 and 2014. It now has to apply to the Treasury for ‘blockbuster’ funding on a case by case basis, seriously compromising its independence”.  Garrett argues (p.267) the Securities and Exchange Commission in the US is under-staffed with an inadequate budget.  Without proper funding, big corporates will not fear prosecutors, and this will limit their ability to secure convictions or even deferred or non-prosecution agreements.  And this means big corporate crime will flourish, with all its damaging impacts on the public interest both in Britain and elsewhere.

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