Tuesday, February 10, 2015

Judge Jed Rakoff Reviews Brandon Garrett's Book on Too Big to Jail: How Prosecutors Compromise with Corporations (2/10/15)

I have previously linked readers to Judge Jed Rakoff's discussion of criminal law issues.  See The Honorable Jed Rakoff on Why Innocent People Plead Guilty (Federal Tax Crimes Blog 11/3/14), here.  Judge Rakoff has just published more comments, this time as a book review.   Jed S. Rakoff, Justice Deferred Is Justice Denied (NY Review of Books 2/19/15), here.  The book he reviews is Brandon L. Garrett's Too Big to Jail: How Prosecutors Compromise with Corporations (Belknap Press/Harvard University Press 2015), here.  Professor Garret, from UVA Law here, is an expert in this area and maintains very helpful databases and related materials on his law school website (including Federal Organizational Prosecution Agreements, here, and Federal Organizational Plea Agreements here.  (He also has written a book on Convicting the Innocent: Where Criminal Prosecutions Go Wrong, with his Data and Materials here.)

Here is an excerpt from the beginning of Judge Rakoff's review to whet your appetite to read the whole review and even the book.
So-called “deferred prosecutions” were developed in the 1930s as a way of helping juvenile offenders. A juvenile who had been charged with a crime would agree with the prosecutor to have his prosecution deferred while he entered a program designed to rehabilitate such offenders. If he successfully completed the program and committed no other crime over the course of a year, the charge would then be dropped. 
The analogy of a Fortune 500 company to a juvenile delinquent is, perhaps, less than obvious. Nonetheless, beginning in the early 1990s and with increasing frequency thereafter, federal prosecutors began entering into “deferred prosecution” agreements with major corporations and large financial institutions. In the typical arrangement, the government agreed to defer prosecuting the company for various federal felonies if the company, in addition to paying a financial penalty, agreed to introduce various “prophylactic” measures designed to prevent future such crimes and to “rehabilitate” the company’s “culture.” The crimes for which prosecution was thus deferred included felony violations of the securities laws, banking laws, antitrust laws, anti-money-laundering laws, food and drug laws, foreign corrupt practices laws, and numerous provisions of the general federal criminal code. 
The intellectual origins of this approach to corporate crime can be traced back at least to the 1980s, when various academics suggested that the best way to deter “crime in the suites” was to foster a culture within companies of acting ethically and responsibly. In practice, this meant encouraging companies not only to provide in-house ethical training but also to enlarge their internal compliance programs, so that responsible behavior would be praised and misconduct policed. The approach found favor not just with some corporations (notably General Electric under the guidance of its then general counsel, Ben Heineman), but also with the US Sentencing Commission, which, in promulgating the Corporate Sentencing Guidelines in 1991, made the overall adequacy of a company’s prior internal compliance programs the most important factor in reducing (by as much as 60 percent) the size of the fine to be imposed on a company found guilty of a federal criminal violation. 
The Department of Justice then went a step further and, in a series of memoranda issued over the succeeding two decades, made the existence or absence of a meaningful internal compliance program an important consideration in determining whether or not to prosecute a company for crimes committed by its employees—the theory being that, if a company had a good compliance program already in place, its employees’ crimes were “aberrational” and not reflective of corporate irresponsibility, whereas the absence of a good compliance program indicated a lax corporate attitude toward crime. 
But the department did not stop there. In the same memoranda (variously known as the “Thompson Memorandum,” the “McCallum Memorandum,” and the “McNulty Memorandum” after the various deputy attorney generals in charge), the department stated that another important factor to be considered in deciding whether to criminally charge a company was any effort taken after the crime was uncovered “to implement an effective corporate compliance program or to improve an existing one.” This led counsel for companies that were otherwise unsuccessful in avoiding prosecution to argue, with ever greater success, that the best response to their alleged misconduct was not to punish them (and their innocent shareholders and employees) but to rehabilitate them by deferring prosecution while they instituted a more rigorous compliance program, upon the successful completion of which the charges would be dropped. 
It took a while for this to catch on, but in recent years deferred prosecution agreements have become commonplace, so that, between 2007 and 2012 (the last year for which data are available), an average of thirty-five deferred prosecution agreements (including so-called “non-prosecution” agreements) were entered into each year. The three common features of most (though not all) of these agreements were the payment of a fine, the introduction of ethical training for employees, and the implementation of new or improved compliance programs, usually described in general terms such as “effective compliance” or “appropriate due diligence.” Going one step further, these three features increasingly became the hallmark of the written plea agreements that the department reached with even those companies that did not receive a deferred prosecution but instead agreed to plead guilty outright.
 Some of the themes covered in the article are:

1. The inadequacies of the current system of deferred prosecution agreements and related devices that may not adequately address the systemic issues.

2. The role of the system of criminally punishing corporations, including the role of corporate culture.

The book review concludes:
In the end, Garrett concludes that, when it comes to criminal violations involving corporations, “neither individuals nor corporations should be left off the hook.” One might argue that the two should not be equated and that the prosecution of high-level individuals for high-level crimes is a far more appropriate use of the criminal law than prosecution of the companies that served as their fields of operation. But the broader point, which Garrett argues eloquently, is that for the past decade or more, as a result of the shift from prosecuting high-level individuals to entering into “cosmetic” prosecution agreements with their companies, the punishment and deterrence of corporate crime has, for all the government’s rhetoric, effectively been reduced.


  1. this rant is unfortunately about tax policy and not tax crimes !

  2. Individual Returns Ambrosi Donahue Congdon knows the latest regulations that help with individual and sole proprietor tax returns so you don’t have to worry when tax deadlines arrive. We offer strategic tax planning services and employ a proactive service approach to help you avoid unexpected surprises.

  3. It seems to me the obvious solution to the "audit lottery" problem is to reduce the complexity of the tax code. Because of the ridiculous complexity of the tax code, there are many gray areas. Corporate attorneys who play the audit lottery are exploiting this complexity. They know that the tax code is so complex in some areas that even most IRS employees don't fully understand it. Also the tax code is not always clear. They risk going into gray areas because they can take a partially defensible position if they get audited. Because they have a defense they don't need to worry about being criminally charged. The potential civil fraud penalty is a risk that is worth taking.
    If the tax code were simpler then there wouldn't be many(hopefully any) grey areas. What is the difference between civil tax fraud and criminal tax fraud? Basically, it is whether you went into a grey area(civil) or a black area(criminal).

  4. ZH provided some more detail on these victims of HSBC who have lost their natural right to financial privacy:


    What I find interesting here, once again, is the dog that didn't bark. Why do we never see American PEP's (Politically Exposed Persons) on these lists? All this Expat tax lawsuit kerfuffle and never any American PEP's? What, does the media have a computerized US PEP filter? Boris Johnson is the closest we get, or possibly Rangel or Geitner. But in general the media would have us believe that the US elite never would sink so low as to become one of Jack's beloved "tax criminals". Could it be that it is political hacks like Lois Lerner who run the IRS for the benefit of those who really hold power in this county and not only do they persecute any threat to their hegemony but they also provide immunity to those who ally themselves to their state?

  5. The idea of prosecuting or convicting a corporation is absurd. It is basically legal sophistry. It is like prosecuting a gun for murder. A corporation isn't capable of deciding to commit a crime. It's an imagined reality. It doesn't exist except for on paper. The only being that can commit a crime is a human. If an employee committed a crime to enrich a corporation then prosecute the employee and take back the ill gotten gains from the corporation.
    The DOJ made a big deal out of getting a criminal conviction out of the Credit Suisse case. Of course that is a joke but the DOJ made it sound like it was significant. Smoke and mirrors is all it is.
    The legal system lost contact with common sense a long time ago.

  6. Foreign Compliance and FBAR
    Amnesty services on helpfortax.com. We are business consulting firm located in
    Dallas, TX. We have expertise team in foreign compliance, FBAR Amnesty.

    Foreign Compliance

  7. The second superseding indictment and also the proof introduced at trial established that the co-conspirators ready false individual taxation returns that failed to disclose the clients’ foreign money accounts nor report the financial gain attained from those accounts.

    Accounting and Tax Service


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.