Wanted, Dead Or Alive

What do we think, a friend asked a few days ago, about paying FCPA whistleblowers 10 to 30 percent of amounts recovered through SEC and DOJ enforcement actions? That idea is part of a financial reform bill introduced last month by Christopher Dodd, chairman of the Senate Banking Committee. It’s well covered in Corporate Compliance Insights, with links to the bill itself.

We’re in favor of enforcing the FCPA. And we generally admire the job the DOJ and SEC are doing to fight global public corruption — and to enlist allies in the fight. But we have serious concerns about Senator Dodd’s proposal. We explained our thinking to a Washington policy maker two months ago. Whether our comments made it to Senator Dodd’s ear, we don’t know.

Here’s what we said. Under current U.S. law and the way it’s applied to white collar criminal cases, including the FCPA, corporate defendants cannot defend themselves if any employee committed an offense. The legal doctrine of respondeat superior makes corporations vicariously liable for crimes committed by employees at any level acting within the scope of their employment, even for actions in direct violation of company policy. This strict liability leaves organizations defenseless — completely naked when threatened with criminal prosecution.

What do companies accused of FCPA violations do? Instead of mounting a futile and potentially catastrophic defense (remember Arthur Andersen?), they settle. The corporations — legal fictions that cannot think, plan, speak, chew bubblegum, or act apart from their people — are “punished” with financial penalties, ultimately paid by completely innocent shareholders. Sometimes, though not always, people from the company are prosecuted as well. But their financial penalties are tiny compared to those paid by the corporations, and on which the whistleblower rewards would be based.

To make matters worse, a settling company may feel pressured to disclose to prosecutors documents and records about employees, usually without the employees’ consent. Those records may even include the employees’ conversations with the company’s lawyers. The employees lose what they thought was the attorney-client privilege, and their right against self incrimination is history.

So let’s rephrase the question: Should a whistleblower be rewarded for information leading to the government’s extraction of money from a defenseless corporation through a coerced settlement that tramples its employees’ expectation of legal privilege and 5th Amendment rights?

Whistleblower rewards would be great if respondeat superior were reformed. If corporations were given the chance to defend themselves, given the chance to prove they tried to prevent bribery but one or more employees went off the rails anyway. That would end shot-gun settlements. Corporate defendants could then make a reasoned decision — go to trial or seek settlement. And with those on the losing end of a prosecution presumably guilty in a real sense of the crimes committed by their employees, punishing the companies would make more sense.

Under current U.S. law, however, FCPA whistleblower rewards are likely to hurt companies that act in good faith to prevent corruption and employees whose rights are stripped away.

The criminal justice system has a wheel loose and it’s called respondeat superior. Let’s fix it before we drive any faster.