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New Report on Prosecutorial Regulation of Corporations

| May 16, 2012

Low level criminal cases against individual defendants can sometimes be dismissed in lieu of a fine, or due to community service performed prior to the trial date, usually as recognition that the individual defendant’s debt to society has been paid and a trial is unnecessary. This standard practice is substantially expanded when federal prosecutors file charges against corporations involved in finance, health care, and other multi-billion dollar industries and enter into an agreement before trial, as detailed in a new report from the Manhattan Institute.

These agreements, named deferred prosecution or non-prosecution agreements, are entered into following the filing of criminal charges, and used by the corporations to avoid trial and the attendant collateral effects that can severely hamper business. They are also used by prosecutors to exact penalties without the cost and risk of proving their case before judge or jury.

After the U.S. Department of Justice files charges against a corporation, frequently for a violation of the Foreign Corrupt Practices Act, fraud, or antitrust law, the two sides to the criminal case come together under an agreement that usually involves two key aspects: a substantial fine and sometimes continuing prosecutorial oversight of the corporation.

The fines can be crippling: over $5 billion in 2009, $4 billion the year after that. But a far more onerous component of deferred or non-prosecution agreements is the prosecutorial regulation of the corporations involved, both at the time of the criminal case and often for some time into the future. The oversight can broadly encompass sales and compensation practices, merger and acquisition decisions, implementation of corporate monitors who report to prosecutors, and even ouster of corporate executives.

There have been over 200 such agreements in the last decade, and even include seven of Fortune magazine’s top 100 largest U.S. businesses.

As the Manhattan Institute points out, the problem with these agreements is not necessarily the underlying regulation—regulation of corporations is an important function of criminal laws when truly fraudulent behavior has taken place—but that these agreements evade judicial oversight and have significant economic impacts on the corporation. Further, companies fearful of negative publicity with a criminal trial, stunting of business growth, or ineligibility for federal contracts may forgo the risk of trial and enter into these agreements even if guilt is disputed.

These agreements could be a more efficient component of the criminal justice and regulatory system with a modicum of judicial oversight, and with a less broad scope, both in terms of the conduct for which such agreements may be used and in the long-term prosecutorial control over a private company.

The report, “The Shadow Regulatory State:  The Rise of Deferred Prosecution Agreements,” by James R. Copland, is available here.

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