Overcriminalization of Corporate Conduct: What You Need to Know to Be Prepared
Throughout the last decade, companies and executives have faced ever-increasing penalties, corporate and personal indictments, third-party oversight of business operations, and loss of reputation. Investigations and prosecutions have risen as more jurisdictions are expanding the scope of the crimes attributable to corporations. Moreover, every time a financial crisis occur s the public and the legislature perceive that corporations have played a role in its origin; thus, immediate, severe responses are delivered by both of them. Recently it appears that no matter the evidence of law-abiding behavior by a good cor porate citizen, the corporation will be considered guilty if a member of its organization commits a crime that benefits the corporation.
There has been a rise in cases involving the Foreign Corrupt Practices Act (of concern for corporations with overseas operations), as well as the False Claims Act (such as prosecutions resulting from the off-label promotion of pharmaceuticals). Not only has the Department of Justice investigated these crimes, but also the Federal Drug Administration, the Office of Foreign Assets Control, the Securities and Exchange Commission, and the Federal Trade Commission, as well as numerous state Attorney Generals, have launched independent investigations. The result is increased scrutiny on an industry or a particular company, which strains corporate resources and interferes with business operations. Recent investigations have involved the oil and gas, pharmaceutical and insurance industries, as well as freight forwarders and those involved in the mortgage and banking industry. There has also been a surge in prosecutions for environmental crimes. Individuals have been prosecuted even after following the advice of their counsel, while companies have been ordered to produce records not otherwise discoverable. In addition, given substantial financial incentives, more investigations are initiated as the result of whistleblowers reporting perceived criminal conduct to government officials.
“Overcriminalization” describes this trend to use criminal law to punish every mistake and coerce corporations into conforming corporate behavior, as opposed to making proper use of readily available civil penalties. Many criminal laws make it possible for the government to convict a person even if he has acted without criminal intent, and sentences and fines have skyrocketed as the government continues to go after the deep pockets of corporations. There are, however, proactive steps a corporation can take in order to mitigate criminal liability and lessen the impact of a government investigation.
The development and activation of a thorough compliance and ethics program can often lessen the impact of a government investigation and protect the company from increased penalties. Given that the government does not need any level of proof to justify looking at a company and there is no warning before an investigation is initiated or a search warrant issued, it is important to establish internal protocols and designate individuals who can ensure a company-wide understanding of and compliance with the company’s standards and procedures. Accordingly, before the government “knocks,” a company should:
- establish an effective compliance and ethics program;
- establish standards and procedures to prevent and detect criminal conduct;
- designate a compliance officer;
- be a good corporate citizen;
- designate a point person for government investigations;
- prepare contact information for company counsel and senior management;
- ensure that employees understand their rights;
- prepare a list of pre-qualified attorneys for individual employees;
- prepare handouts for employees regarding the handling of government interviews and requests; and
- consider establishing a corporate committee to review issues related to compliance and ethics.
Bear in mind, it is not enough to have a well-written compliance program sitting on a shelf. It should be meaningful. Therefore, the compliance program should be 1) adequately funded and staffed; 2) clearly communicated to all employees at all levels; 3) applied to all employees and all situations (no special exceptions); 4) enforced; 5) periodically assessed for effectiveness; and 6) steps should be taken to ensure that all executives and employees actually know the policies (through training programs, periodic assessments, or the distribution of manuals followed by written certification of each employee’s review thereof). In taking these steps, a corporation should also maintain a proper governance structure that includes an effective board process, allocation of board responsibility to separate committees, and maintaining board objectivity as to management. It is also important to divide the compliance duties. Larger companies should strive to have a compliance officer separate and apart from in-house counsel. This individual should be invested in the continued development of the compliance program and with ensuring company-wide conformity with the program.
A “head in the sand” approach is unacceptable as the consequences of noncompliance can be quite harsh for companies and their executives. Based on recent events, it seems inevitable that someone within the corporate structure will take action contrary to company policy and ethics. The company, however, can significantly minimize the impact of any threat of impropriety with an effective compliance program in place. Setting the proper “tone at the top” is essential to accomplishing this. Senior management and executives must send the message about the importance of ethics, integrity and compliance, and they should require continual management reassessment of controls (financial and disclosure) as well as regulatory compliance procedures.
With the proper protocols in place, a corporation will be prepared to respond to any search warrant, grand jury subpoena, request for informal interviews of employees or investigative demand from a government agency. Remember, when facing any of these government tactics, do not panic. This type of investigation or request is always about pressure, and no one does well under pressure. Therefore, keeping the following list handy will help avoid confusion and prevent unnecessary disclosure if the government “knocks:”
- don’t panic;
- call outside counsel;
- get the identification of all agents and government attorneys;
- identify the primary point of contact;
- carefully review any search warrants, affidavits or document requests;
- dismiss non-essential employees for the day (if you can);
- do not consent to a search;
- do not consent to interviews;
- do not agree to expand the scope of a search;
- carefully monitor any search—make sure to preserve any privilege;
- cooperate with agents during the search, but do not aid the government’s case;
- request copies of all documents seized;
- obtain the agent’s inventory of records seized; and
- create a detailed list of all items seized.
It is important to remain polite and to express a willingness to cooperate, but do not be persuaded to answer questions and do not be intimidated by persistent investigators. Be prepared by establishing an effective compliance program.