The internal corporate investigation is now an integral component of corporate compliance. Corporations invest considerable resources in identifying and explaining wrongdoing. Government prosecutors and regulators, in turn, rely upon and strongly encourage these information-generating activities. This chapter argues that the corporate investigation’s greatest challenges stem from familiar problems of individual and entity-level efforts to evade detection. As employees take steps to conceal their misbehavior, corporate actors must navigate a difficult relationship between government enforcers on the one hand and corporate employees on the other. Mediating these relationships would be difficult enough under any circumstance, but a vexatious deficiency of trust between corporate actors and government enforcers causes corporate actors to cling ever more intently to legal doctrines such as the corporate attorney-client privilege, while simultaneously conducting more intensive, intrusive and expensive investigations. The chapter concludes by noting two developments: the Department of Justice’s latest attempt to secure cooperation from corporate defendants in identifying culpable employees (the so-called “Yates Memo”), and the increasing emphasis on workplace privacy. These two developments will place even greater pressure on the corporate investigator as she attempts to reassure the corporation’s employees and regulators that each side can in fact trust the corporation to investigate itself thoroughly yet fairly.
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Stephen J. Choi and A.C. Pritchard
This chapter reviews the existing empirical literature relating to government enforcement of the securities laws, particularly by the Securities and Exchange Commission (SEC), including comparative work, assessment of the impact of enforcement, and analysis of enforcement patterns. It also identifies particularly promising areas for future research. Little work has been done to date exploring the incentives faced by attorneys who conduct investigations on behalf of the SEC and how those incentives shape enforcement decisions. This chapter offers preliminary evidence on the career paths of SEC lawyers and how those career choices might influence the enforcement actions brought by the SEC.
Tom R. Tyler
This chapter reviews the effectiveness of deterrence, in and of itself as well as relative to the influence of consensual models of regulation that rely upon legitimacy to motivate compliance. The law governing corporate criminal enforcement, and the law and economics scholarship designed to inform it, treats deterrence as the primary goal and coercion through threatened sanctions as the most effective tool to achieve this goal. Yet the available evidence on the causes of misconduct suggests that although people do respond to threatened sanctions, the influence of coercion is often overstated relative to its actual influence upon law-related behavior. In addition consensual approaches have been found to be more effective than is commonly supposed. Taken together these findings suggest the desirability of developing a broader approach to corporate regulation using both coercive and consensual models of regulation. Given the strength of the findings for consensual models, the persistence of coercive models as the dominant and even exclusive approach to corporate crime is striking. That dominance suggests the importance of focusing on the psychological attractions of coercion to people in positions of authority. It is suggested that those in authority are attracted to this approach not only because of evidence that it can be effective but also due to the psychological benefits it affords them.
Kevin E. Davis
Economic analyses of law enforcement generally focus on situations in which law is enforced by a single public agency, in a single jurisdiction, which faithfully follows its announced enforcement strategy. This does not reflect the reality of enforcement aimed at corporate crime, which commonly involves multiple agencies, often based in different jurisdictions, and which adjust their enforcement strategy in response to prior misconduct. This chapter will discuss the analysis of multijurisdictional law enforcement, with particular reference to cases concerning foreign bribery. The premise is that this kind of interaction can be modelled as a dynamic multi-player game in which the players include both enforcement agencies and firms. In principle, this kind of analysis can be used to formulate testable hypotheses about outcomes of interactions between regulators and firms. Unfortunately, opportunities to evaluate these kinds of hypotheses empirically are limited because many aspects of the structure of the game are difficult to observe, and firms’ misconduct and regulators’ enforcement activities typically are only observable when they result in formal sanctions. The chapter concludes with a discussion of some of the challenges inherent in normative analysis of the outcomes of multi-jurisdictional law enforcement games.
Brandon L. Garrett
This chapter focuses on the role of individual prosecutions in corporate actions. In only about one-third of those federal deferred or non-prosecution agreements with organizations, including some of the highest profile corporate criminal cases of recent years, were any officers or employees prosecuted. What explains this pattern? This chapter proceeds as follows. Section 2 describes the HSBC case, introducing practical and procedural obstacles that arise in cases involving both organizations and employees. Section 3 describes data on individual prosecutions in corporate cases. It further explores why prosecutors so frequently do not or cannot prosecute individuals in corporate cases, why they so often achieve limited success when they do. The chapter concludes by describing alternative means to deter individual behavior and what significance this has for the approach to corporate prosecutions more generally.
Geoffrey P. Miller
Tests for “effective” compliance programs take the form of lists specifying required elements in varying level of detail. From an economic perspective, an effective compliance program can be defined more fundamentally as the set of policies and procedures that a rational, profit-maximizing firm would establish if it faced an expected sanction equal to the social cost of violations. This chapter explores the idea and several of its extensions and qualifications.
Cindy R. Alexander and Jennifer Arlen
Critics of deferred prosecution agreements claim they undermine deterrence by lowering the cost to firms from reputational damage or stigma resulting from a criminal settlement. We evaluate the claim that the choice of a DPA, instead of a guilty plea, reduces the cost to corporations of reputational damage from a criminal settlement, holding constant other factors such as the identity of the offender and offense magnitude. Criminal settlements cause firms to sustain costs from reputational damage when they cause the release of information that leads interested outsiders—e.g., customers and suppliers—to anticipate an enhanced risk of harm from future dealings with the firm. DPAs could lower the cost of reputational damage if the use of a DPA, instead of a plea, would lead interested outsiders to anticipate a lesser risk of harm from future misconduct, holding all else constant. We consider and reject three potential channels through which the choice of settlement form could plausibly alter the qualitative information about the risk of future misconduct that reaches interested outsiders: direct revelation, prosecutorial selection, and managerial selection. We then turn to the effect of DPAs on the ability of federal agencies to protect their interests by excluding or delicensing firms whose criminal settlement reveals they present an enhanced risk of causing future harm to the agencies’ interests that is best addressed by exclusion instead of mandated reforms. We conclude that agencies may be better able to serve their interests as interested outsiders when prosecutors employ DPAs, rather than pleas, because DPAs leave many agencies free to use permissive exclusion and thus enable them to exclude when, but only when, appropriate.
Samuel W. Buell
Because of their leverage over employees, corporate managers are prime targets for incentives to control corporate crime, even when managers do not themselves commit crimes. Moreover, the collective actions of corporate management—producing what is sometimes referred to as corporate culture—can be the cause of corporate crime, not just a locus of the failure to control it. Because civil liability and private compensation arrangements have limited effects on management behavior—and because the problem is, after all, crime—criminal law is often expected to intervene. This chapter offers a functional explanation for corporate criminal liability: individual criminal liability cannot effectively address the relationship between senior managers and corporate crime but corporate criminal liability can, at least in part. Thus the practice of corporate criminal liability has grown and will continue to do so, at least in the absence of major restructuring of criminal law.
Tina Søreide and Susan Rose-Ackerman
Fighting corruption requires careful analyses of its underlying causes and consequences. This chapter provides an economic analysis of corruption as a trade in decisions that should not be for sale. The size of the bribe and the consequences of corruption are functions of the bargaining powers of those involved. We suggest ways to re-organize decision-making procedures to reduce the risks of corruption but stress the difficulty of breaking up entrenched collusive environments. Furthermore, even if corruption in a public institution is well recognized, it may not be possible to identify individual offenders. The question then is whether one should sanction the entire public body. Like private entities, public institutions can be encouraged to self-police and self-report (for example upon information from a whistleblower) if such steps will reduce the extent of some penalty. However, the criminal and administrative monetary sanctions applied to private sector entities are a poor fit for state institutions with on-going responsibilities to the citizenry. We propose non-monetary penalties, including intensified external monitoring, reorganization of authority, disqualification of leaders, and the removal of service provision responsibilities.