November 9, 2016

Reforming the DOJ's Corporate Settlement Bonanza

Michael Wilt

Former Senior Policy Writer and Editor

Nita Ghei

Director of Policy Editing
Summary

Any of these modest reforms would be an improvement over the current ad hoc system and would be a step toward a more accountable and transparent DOJ.

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A change in administration in Washington is the time to address the growing bipartisan disapproval of the Department of Justice’s (DOJ) corporate settlement practices. These settlements often involve fines in the billions of dollars and can subject corporations to extensive government oversight. The next president and attorney general have the opportunity to set a new path in the DOJ’s enforcement priorities, focus on enforcing the law as it is written and hold the DOJ to a greater level of accountability and scrutiny by the public.

The DOJ uses what are called “non-prosecution agreements” and “deferred prosecution agreements” in resolving cases instead of criminal trials. There are very few restrictions on what the DOJ and the corporate defendant can agree to when settling, and courts have little to no oversight of these agreements. These agreements can sometimes lead to fine amounts that may be substantially different from what may have been imposed by a court. Consequently, criticism of these settlements has spanned the spectrum, from free market legal expert Richard Epstein, who described them as reading “like the confessions of a Stalinist purge trial of corporations,” to Sen. Elizabeth Warren (D-Mass.), who believes they are a ”get out of jail free card.”

The DOJ’s current practice gives businesses little certainty about what to expect. Holding the government and defendants to transparent, well-established legal standards is essential for businesses and Americans generally. Businesses benefit from greater certainty in the operating environment. Greater transparency and unambiguous rules will also make it easier for Americans to judge whether a corporation or individual has been punished appropriately for a transgression, or if someone has been granted a privilege.

In civil cases, particularly in the years following the financial crisis, several DOJ agreements included “consumer relief” provisions requiring banks to send donations to specified non-profits. Notable among these banks were Bank of America and Citigroup, which were required to donate to housing counseling agencies and other non-profits.

Donations to non-profit organizations—some with political agendas—can qualify as consumer relief. These donations are not conditioned on a requirement that the money be directed to consumers actually harmed during the financial crisis. Similar donations show up in criminal settlements with Gibson Guitar and British Petroleum, both of which were required to donate to the National Fish and Wildlife Foundation. Back in 2005, then-U.S. Attorney Chris Christie required a pharmaceutical company to donate to his law school alma mater to endow a chair in ethics.

These provisions are problematic in that they do not direct the so-called consumer relief to consumers actually harmed. Instead, the DOJ specifies organizations of its choosing to be beneficiaries. At best, these arrangements may accomplish nothing more than what the banks would have done anyway in the normal course of business, such as modifying existing loans.

Rather than engaging in ad hoc penalty distribution to favored charities, the DOJ ought to look to existing law. The law generally provides that penalties go to the U.S. Treasury and sometimes allows it to be used to compensate people who were actually harmed by a corporation’s violation of the law. The DOJ does not need to create yet another layer of penalties directing funds at unharmed persons and nonprofits for “consumer relief” purposes.

Congress has held multiple hearings on this issue and is considering enacting a law to prohibit these donations. Perhaps in response to congressional concerns, the DOJ has refrained from entering agreements with non-profit donation terms in recent months. But there is no constraint restricting such agreements in the future.

The DOJ could bind itself by publicly pledging that all future out-of-court corporate criminal settlements will adhere to the U.S. Sentencing Guidelines. Under such a scenario, the DOJ would prepare an analysis detailing how a corporation violated the law, which laws it violated, and how such violations justify the fines that the company agrees to pay. Alternatively, the DOJ could end its practice of out-of-court settlements in criminal cases entirely, and indict businesses—or, better yet, individuals—who violate the law. The next attorney general should also prohibit consumer relief provisions entirely in civil cases. If a corporation has violated the law, then it should pay penalties as required in the laws it violated, not direct them to the coffers of whatever nonprofit has won the prosecutor’s favor.

Any of these modest reforms would be an improvement over the current ad hoc system and would be a step toward a more accountable and transparent DOJ.