How carrots and sticks are being used to enforce individual accountability

It’s getting hot for individual accountability as US regulators hone in on the C-suite. Outside of the financial industry, criminal prosecution is much easier – an individual commits a crime, the police find evidence and arrest them – end of story. But with corporate crime, it is far more difficult to identify the wrongdoing of a single individual in a company that has over, for example, 500 employees.

The precise scale of financial crime is hard to pinpoint but seemingly, in the UK, it could be responsible for tens or thousands of billions of pounds per year. It is a problem that every jurisdiction has to deal with and figure out ways to reduce the losses and protect consumers, investors and stakeholders alike.

We have seen recent developments in how financial crime will be prosecuted, new certification processes, accomplishments in charging those who have acted wrongly and rewards for firms who participate in the deterrence of crime – carrots and sticks to combat financial crime and ensure fairness of systems.

Recent accomplishments in the fight against financial crime

In a recent speech, Assistant Attorney General Kenneth A. Polite said, “our ultimate goal is to prevent corporate crime in the first instance,” as well as stopping investors from being victimised, lessening corruption effects, lessening the swindling of taxpayers and igniting more faith in financial markets. By holding individuals accountable and having effective regulation that incentivises responsible corporate culture, crime could be deterred.

Polite understands that compliance teams have many challenges and believes strong incentives can effectively deter wrongdoing and build effective compliance programmes.  He says, “I have also seen how a strong compliance programme can ward off misconduct and empower ethical employees.”

Stricter regulations have already led to accomplishments in holding those accountable for corruption, bribery, fraud, money laundering and cryptocurrency-related fraud.

In support of the global fight against corruption, as part of Foreign Corrupt Practices Act (FCPA) enforcement, there have been charges against the former Comptroller General of Ecuador and a former Minister of Government of Bolivia for bribery, two former coal company executives for alleged bribery in Egypt and many more.

Regulators are working tirelessly to charge individuals around the world from various industries. Their ongoing cases include retaining forfeited funds to financial crime victims, for which they have already returned over $366 million to 148,000 victims of fraud as part of their work with Western Union and return of over $3.7 billion to 40,000 victims of the Madoff Ponzi scheme.

Nevertheless, despite these wins for individual accountability, “even with all of our important enforcement efforts…we cannot rely exclusively on prosecutions to ensure public safety or good corporate governance.” This is why it is also up to regulators to come up with new and improved ways to combat corporate crime.

Department of Justice vs corporate crime

In October 2021, the DAG formed the Corporate Crime Advisory Group (CCAG) to do exactly that, think of methods to influence businesses to act in a compliant way. These discussions centred around the following:

• How prosecutors should continue to prioritise individual accountability
• How a corporation’s history of misconduct should be considered in determining the appropriate resolution of a corporate case
• The benefits companies can expect from voluntary self-disclosure of misconduct
• How the Department evaluates cooperation provided by a corporation
• How prosecutors will evaluate certain components of a corporation’s compliance programme
• The use of monitors, including their selection and appropriate scope of the monitor’s work

On 15 September, Deputy Attorney General, Lisa Monaco announced that the Department is implementing changes to strengthen how corporate crime is prosecuted.

Monaco concentrated on five key factors that will be considered when evaluating firms that have been charged with misconduct. These factors determine whether an individual or company is charged by the Department of Justice (DoJ). She also discussed how companies will be rewarded for stopping compensation for employees who have committed misconduct.

1. Individual accountability

Last year, there were a few DoJ victories, such as the convictions of Theranos’ Founder and Chief Operating Officer, J.P. Morgan traders for commodities manipulation and the Managing Director of Goldman Sachs for bribery.

However, despite these wins, data still shows a decline in corporate criminal prosecutions. Moving forward, DoJ “will take steps to empower prosecutors, to clear impediments in their way, and to expedite our investigations of individuals.”

In instances where individuals are being questioned, the DoJ would like to see companies coming forward with important evidence faster to help with the prevention and resolution of financial crime. Any delays in producing this information may result in reduced or no corporation credit – all relevant materials about the person in question must be provided to receive credit.

2. History of misconduct

During criminal proceedings, the DoJ will evaluate the company’s history of misconduct, the causes, and whether the same people or management was involved.

10-20% of criminal resolutions for firms are instances where individuals are repeatedly been involved in wrongdoings. However, past actions may not always reflect a company’s current compliance culture, so any previous occurrences will be looked at more lightly.

If it’s found that the same employees are responsible for wrongdoing, then the DoJ believes that it highlights weaknesses in compliance systems.

3. Voluntary self-disclosures

The DoJ expects that morally sound companies will step up and own up to mistakes – this will be rewarded by the DoJ and is the easiest way for companies to avoid guilty pleas.

Every department should incentivise voluntary self-disclosures and the DoJ not seek a guilty plea if the firm has cooperated. Cooperation does demonstrate that a firm, most likely, has an effective compliance system in place and is not afraid to prove this.

As recent cases have shown, voluntary self-disclosure can save firms millions in fines and avoid reputational damage from guilty pleas as well as reduce the risks of suspension.

4. Independent compliance monitors

The DoJ will be releasing new guidance for prosecutors on identifying the need for a monitor, how to select a monitor, and how to oversee the monitor’s work.

A monitor refers to a person appointed by the DoJ to assess the effectiveness of compliance systems. The DoJ will monitor the monitor to ensure they stay on task.

5. Corporate culture

Firms have been incorporating clawback provisions and the removal of compensation to deter individual financial crime, as well as ways of holding them accountable. With proper penalties in place, it should discourage employees from partaking in any criminal activities and create a compliant environment.

Prosecutors will look at the company’s compliance programmes by evaluating the compensation system’s reward and financial sanctions on management.

The Chief Compliance Officer Certification

In March 2022, a new certification process was developed to ensure that senior leaders and companies have the correct compliance systems in place. This is where both the Chief Executive Officer (CEO) and Chief Compliance Officer (COO) have to sign a certificate that verifies that the company’s compliance programme is “reasonably designed, implemented to detect and prevent violations of the laws.”  

If the certification process is not used, “the department will take notice,” and it’s always best to be on the same side as regulators. Assistant Attorney General Polite noted that the certifications and resources are there to empower compliance professionals to make the right decisions. He added that compliance officers should “embrace it, knowing full well that stronger, more empowered compliance voices are exactly what we need.”

CFTC says no to no-fault settlements

In a recent press release, the Commodity Futures Trading Commission (CFTC) announced that no-fault settlement has led to individuals neither admitting nor denying wrongdoings and that the CFTC should stop offering no-fault settlements consistently. This is to increase enforcement accountability and transparency at firms.

The Statement of Commissioner, Christy Goldsmith Romero, has said she does “not support allowing these defendants to settle without admitting their illegal conduct” and calls for greater accountability and transparency.

She said, “The CFTC should be willing to require more settling defendants to admit their wrongdoing and take more cases to trial when defendants are not willing to do so.”

Instead, the CFTC advocates for firms to use the Heightened Enforcement Accountability Transparency (HEAT) test, designed to require individuals to admit where they have gone wrong in settlements. This test would “identify those cases calling for greater public accountability and transparency—where the CFTC should send a message about the paramount importance and strength of our enforcement programme.” The HEAT test would be applied for CFTC settlements that include:

• Egregious conduct;
• The presence of a criminal scheme;
• Significant harm to investors, market participants, and/or market integrity;
• A recidivist defendant;
• Obstruction, lying, or concealment during an examination or investigation conducted by the CFTC or other federal agency; or
• The need to send a pronounced message about particular conduct or practices.

The CFTC’s use of the HEAT test will provide greater transparency as it becomes standard practice.

CUBE Comment

It’s good to see regulators taking individual accountability seriously – all financial crime starts with a person and it should be deterred at a personal level.

Recent convictions against former Wall Street traders prove that tighter regulations are helping to squeeze out the wrongdoers in the industry. And that regulators are committed to combatting financial crime. Greater deterrence and rewards – carrots and sticks – also influence firms to clean up their acts and implement effective compliance programmes.

After Watergate, where President Richard Nixon was involved in a political scandal, Attorney General Edward Levi was tasked to “restore the Department’s institutional credibility and rebuild corporate enforcement programme.” Levi advised that prosecutors needed to put up a stronger fight against “white collared crime.” Deputy Attorney General, Lisa Monaco, believes that “these words are as true now as they were then.”

Through individual accountability, financial crime can be prevented or at least, punished.

The buck stops with you. Invest in regulatory technology to solve compliance gaps and ensure watertight systems are in place.