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Legal Blackmail?


The continued multimillion-dollar out of court settlements between the oversight authorities and the corporations they are supposed to control for corporate wrongdoings are out of control. The settlements have become unprecedented in both size and scope, because they undermine the authorities commitment to protecting the society from serious fraud and enforcing individual responsibility.



Porbunderwalla Kersi
Porbunderwalla Kersi
The settlements are incomplete completion of serious corporate fraud. The numbers are alarming and undemocratic. Instead the settlement proposal should be first valid when appraised by a judiciary body. Based on the facts of the case, the conditions for the settlement should be tested for fair, reasonable and adequate public interest. First after the legal ruling is issued, the settlement can be made valid.

Currently only proposed settlements that include a permanent injunction against further wrongdoing by the defendants are subject to approval from a federal judge. Thereby the oversight authorities even use the judiciary as a rubber stamp to approve executive-branch enforcement cases.

Loss of licenses to operate
Until companies risk their license to operate, it will be the same old story of allowing companies to settle charges of wrongdoing while denying that they had done anything wrong.

A multinational corporation is caught with its hand in the cookie jar. The company lawyers get together to discuss a strategy on how to downplay the deception of the law and extinguish any inflammatory indictment that may be on the horizon.

The 3 point strategy they come up can be summed up in one word. Denial;

- First they expressly deny the allegations set forth in the complaint

- Then they say that the company will re-examine its procedures and practice if anything had gone wrong and ensure that it will be corrected and not happen in the future.

- Finally an agreement is reached for settlement purposes only. The accord normally starts with the sentence: The resolution does not constitute an admission by any party that the law has been violated. That is as good as a denial. Mission accomplished.

Embarrassing hearings
Lately there has been a series of settlements that allow the defrauding company to deny any criminal charges it was agreeing to settle. The denial undermines the intent of the mandate as well as the Oversight body or the Commission’s authority to ensure that the laws are being obeyed and justice is being done.

This week could have been as disastrous a week for Standard Chartered Bank had it not been for a $ 430m in settlement, as last week was for HSBC for financing of terrorism and other criminal activities where analysts estimate settlement to be up to $1bn in fines. Earlier settlements were GlaxoSmithKline who agreed to plead guilty to criminal charges and pay $3 billion in fines. Despite the payment, GSK expressly denied that it had engaged in any wrongful conduct (1) . In May 2012 it was Abbott Laboratories that settled for $1.6 billion. The list is quite long if we take the settlements from another cash cow called The Foreign Corrupt Practices Act. French oil giant Total first rejected 'out-of-court settlement solutions'. However the company has reserved €316 million after settlement discussions.

Comply with rapid settlement
The settlement gives the Oversight authorities a notable scalp, not to mention a considerable financial boost while the corporate culprits avoid censure, remove a big source of uncertainty and the operations remains intact (2).

It would indeed help the accountability and transparency aspect of the settlement if the authorities disclosed how the settlement figure of $340m as is the case for StandardChartered Bank was reached, so that other companies do not need to guess.

Extracting payments through threats is usually seen as extortion. That a government agency might be the one playing this role is rightly a concern to the whole industry. Where and when does the settlement billions stop (3)?

The reasons for changing the current procedures based on Good Governance and compliance mandates are many:

- The settlements can invite denials of liability in every fraud case in the future.
- There is a need for a more standard settlement policy that is democratically approved and which ban a company that settles a case from denying that it committed the acts in question.
- The SEC has recently stated that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations (4).
- We need to avoid a public misimpression that the commission obtains settlements when it lacks reason to believe that the alleged conduct occurred.
- The carefully worded statements in the settlements can be misused for future settlements
- The settlement extracts money from the shareholders but imposes no consequences on the people in charge.
- Management later complain that because they were faced with incendiary charges by a critical regulator, and the potential loss of its licence, management felt it had no choice but to pay up.
- When companies and individuals to settle without admitting any wrongdoing undermines the authority and scrutiny by the courts.
- Bankers and financial institutes have failed the general public miserably, yet these same people walk away with huge financial windfalls... no wonder groups like Occupy Wall Street start sprouting up.

No international public company wants to be engaged in an unequal infight with the authorities. Harris Corp did it in 1990. (Harris allegedly used an agent to pay $23,000 to a Colombian official for a telecommunications contract). Harris Corp was acquitted.

Why have international public companies avoided FCPA court battles since 1990?
- The daily headlines are awful to the company’s reputation.
- The company would be badly wounded or maybe dead (Arthur Andersen was acquitted).
- Settling is relatively easy -the Department of Justice (DoJ) offers a deferred or non-prosecution agreement to all companies that cooperate (since 1990).
- BAE stopped stonewalling and settled with the DOJ for $400 million (ruins the daily life for the company's executives at U.S. airports)
- Fighting is futile if an employee or agent has already been found guilty. The doctrine of Respondeat superior (let the master answer) means that an employer is responsible for the actions of employees performed within the course of their employment.

Therefore a reasonable action could be that all settlements have later to be approved by a federal judge. As in the case of an SEC settlement with Citigroup last year, where the judge refused to accept the settlement because the policy of allowing a company to neither admit nor deny allegations gave the court no basis on which to judge whether the settlement was in the public interest.

On the other hand any court battle in the USA brings an overflow of inquiry attention that endangers the company’s stock price, years of litigation and aggrieved shareholders, customers, lenders, and other stakeholders. So settlement under the current circumstances is the only alternative.

It’s a pity that the authorities are so closely associated and tied to the wrong-doers results in the fact that nobody takes ownership or responsibility and without any decisive action to dole out the appropriate punishments.

This does, however, create consultancy opportunities and need for more compliance and even more regulation.

(1) New York Times
(2) http://www.europa-gov.us/
(3) The Economist
(4) New York Times. Letting Companies Settle While Denying Guilt Reconsidered by F.T.C.

Kersi Porbunderwalla is the founder and CEO of Riskability®, Copenhagen Compliance® and Copenhagen Charter®.
 
After his early retirement from ExxonMobil, Kersi has been involved in several Global Good Governance, Risk Management and Compliance (GRC) Projects for multinationals like IBM, Shell, BP, Volvo and others.
He continues to implement GRC journeys for a variety of clients to develop custom tailored GRC folder that includes methodologies, roadmaps, and specific solutions to assignments, training and certification.
Kersi conducts workshops, seminars and conferences that focus on developing and implementing GRC applications & frameworks into operational environments.
He is a consultant, instructor, researcher, commentator and practitioner on 4 continents.
 

Lundi 1 Octobre 2012
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