Soft commodity prices, divergent monetary policies across major economies, high unemployment rates and weak world trade have all conspired to slow down global economic recovery over the past seven years. Consequently, governments have had to cut spending as future revenues remain uncertain. This has led governments to look for new sources of revenues. One unconventional source of revenue that governments have pursued has been fines and settlements levied by regulatory authorities for corporate malfeasance.
The purpose of this paper is to show that governments are becoming increasingly more aggressive in investigating and punishing corporate malfeasance. This has resulted in larger and more frequent fines which now account for a significant portion of government revenue. This paper examines recent fines that have been levied by regulatory agencies for violations of any of the seven 'corporate sins' of: corruption and bribery, money-laundering, sanctions-breaking, conspiracy, tax evasion, misuse of client property, and mistreatment of customers.
To avoid stiff fines, corporations must remain ever vigilant and maintain robust compliance programs. Furthermore, many of the 'corporate sins' discussed in this paper can result in claims against directors and officers directly. Recent cases have given regulators more experience in prosecuting directors and officers and growing international cooperation has provided regulators with greater access to information to assist in their prosecutions. Consequently, directors, officers and their insurers should think critically about their business operations to ensure that they have not committed, or are about to commit, any 'corporate sins.'
Part I – Increasing Regulatory Aggressiveness
The global financial crisis wreaked havoc on world economies. During the crisis and the ensuing recession, governments deployed large fiscal packages to stimulate their economy leading to dramatic increases in public indebtedness. In the U.S. and U.K. alone, governments sunk U.S. $7 trillion into financial institutions.1 Governments are now faced with paying down the debt incurred during the crisis in addition to challenges from an uneven economic recovery and obstacles such as aging populations or declining commodity prices. As such, governments have turned to new and innovative methods to raise funds including prosecuting civil actions more frequently than ever before, levying larger and more frequent fines for corporate malfeasance, and creating incentive programs for corporate whistleblowers.2
Rising Regulatory Aggressiveness
Since the financial crisis of 2009, there has been a clear trend towards larger fines for corporate malfeasance. As can be seen from the below sample of major fines in the U.S., since 2012, U.S. regulators have been able to levy over $10 billion of fines annually from only five cases a year.
Total: $11.067 billion
Johnson and Johnson
SAC Capital Royal
Bank of Scotland
Total: $19.51 billion
|2014-2015||Bank of America
Total: $30.122 billion
Furthermore, governments have taken proactive steps to support increasing regulatory aggressiveness by enacting tougher legislation on white collar crime and awarding broader investigatory and penalty powers to regulatory agencies. For example, the U.K. enacted its own version of the Foreign Corrupt Practices Act ("FCPA"), the UK Bribery Act, which came into effect on July 1, 2011. Additionally, in April 2013, the U.K. overhauled its financial regulatory system by separating the Financial Services Authority ("FSA") into the Prudential Regulation Authority and Financial Conduct Authority in order to have better oversight over market conduct in the financial services industry and prudential regulation of financial institutions. Similarly, the U.S. enacted the Foreign Account Tax Compliance Act ("FATCA") to grant the Internal Revenue Service ("IRS") broader investigatory powers in pursuing tax evaders.
Evidence of U.S. government's aggressiveness can be seen by how the U.S. deployed the False Claims Act in 2014 to recover an all-time record of $5.69 billion (and an aggregate recovery since 2009 of $22.75 billion)4, the lifting of the three year hiring freeze at the U.S. Attorney's Office in 2014,5 and comments by the chairwoman of the SEC in 2013 that certain defendants will no longer be allowed to settle actions without admitting or denying wrongdoing. Additionally, U.S. regulatory agencies are employing increasingly more aggressive tactics in their investigations, which were previously reserved for pursuing organized crime and sophisticated narcotics cases. For example, the investigation into senior Petro-Tiger executives for FCPA violations led to the general counsel wearing a wire to record future conversations.6
Lastly, as corporations become increasingly global, regulators have begun to cooperate on an international scale. The LIBOR scandal prompted regulators to work together to investigate the depth of the benchmark manipulation. This led to the discovery of manipulation of other benchmark rates including foreign exchange rates. Another area where regulators are working together is in cross-border tax enforcement. This has been facilitated by the recent U.S. enactment of the FATCA.
Overall, it has become apparent that there is a clear trend towards increasing regulatory aggressiveness and larger penalties for violations of 'corporate sins'.
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* This paper is an update to "seven corporate sins as a source of government revenue and economic stimulus" by Frank Palmay and Candice Chan-Glasgow (April 2013).
1 Augusto Lopez-Claros, "Policy Research Working Paper 6805 - Fiscal Challenges after the Global Financial Crisis – A Survey of Key Issues" The World Bank Development Economics Global Indicators Group (March 2014).
2 Gary S Licenberg and Ariel A Neuman, "United States: white-collar criminal defence" GIR Insight (September 2014).
3 Please note that this fine was split between U.S. and UK regulators.
4 Office of Public Affairs, "Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014" Department of Justice (November 20, 2014).
5 Supra, note 4.
6 John F. Savarese, "White Collar and Regulatory Enforcement: What to Expect in 2015" Harvard Law School Forum on Corporate Governance and Financial Regulation (February 5, 2015).
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2015