Say you run a financial services firm that markets tax shelters to wealthy clients. Although the shelters are aggressive, you firmly believe they’re legal. Indeed, you have sent one of your tax partners to testify before Congress to that effect. The IRS hasn’t challenged the shelters in court, and no court has declared them to be illegal. Nevertheless, the Department of Justice has opened an investigation of your firm for tax fraud and indicted the partner who testified before Congress.
As a responsible executive, what should you do? Instruct corporate counsel to conduct an internal investigation to ensure that no law has been broken? Have the legal department begin to work on the corporation’s defense? Enter into a joint defense agreement with the partner under indictment? Advance the partner’s legal fees in accordance with the company’s policy of supporting employees sued for employment related actions?
Or should you have the corporation accept responsibility for tax fraud, officially declare that several of your tax partners engaged in unlawful conduct, refuse to enter into a joint defense agreement or advance the legal fees of any of these partners, fire those who refuse to cooperate with the government, waive the firm’s attorney‐client and work product privileges, disclose all information that may incriminate your employees to the government, and agree to pay a several hundred million dollar fine? This, surprisingly, is the answer. Under current federal law and Department of Justice policy, it would be irresponsible management to attempt to defend the corporation or its employees.
The Thompson Memorandum spells out DOJ policy regarding indictments of corporations; and the federal Organizational Sentencing Guidelines determine the size of the corporation’s fine if convicted. Both consider how thoroughly the corporation monitors the behavior of its employees through its compliance program, and whether the corporation is willing to “cooperate” with the government. That’s the rub — because cooperation is defined in terms of “the corporation’s willingness to identify the culprits within the corporation, … to make witnesses available; to disclose the complete results of its internal investigations; and to waive attorney‐client and work product privileges.” Retaining suspected employees without sanction, advancing their legal fees and entering into joint defense agreements with them is evidence of lack of cooperation.
The Arthur Andersen case showed that an indictment can itself be a corporate death sentence. And corporations which do survive to stand trial can face potentially ruinous fines if convicted. Responsible managers will therefore do all they can to avoid either. But under the memorandum and the guidelines, the only way to avoid corporate indictment and reduce the firm’s financial exposure is to help the government prosecute your firm’s employees.
This situation confronts ethical business people with many difficult dilemmas. For example, most corporations solicit sensitive information from their employees by promising to keep communications made through employee “hotlines,” or pursuant to the firm’s attorney‐client privilege, confidential. But whenever such communications suggests possible criminal activity within the firm, the corporation must disclose it to the government or risk indictment and increased fines. The responsible manager must then chose between protecting the corporation and reducing its promise of confidentiality to a fraud.
Worse, conscientious managers cannot escape the dilemma by refusing to make a promise of confidentiality that they know they will have to breach. For by doing so, they would willingly forgo one of the most effective means of monitoring employee conduct. And under the Thompson Memorandum and guidelines, this would constitute a failure to have an effective compliance program, which would itself increase the firm’s exposure to indictment and enhanced penalties.
Similarly, managers who believe that they are ethically bound to respect their employees’ privacy must somehow square this obligation with the injunction to engage in sufficient “monitoring and auditing to detect criminal conduct.”
Finally, the minimal demands of justice seem to require that employees be accorded a modicum of due process and not be subjected to adverse action in the absence of adequate evidence of guilt. But both the Thompson Memorandum and the guidelines require that a corporation accept responsibility for criminal conduct to be regarded as cooperating. Since corporations act only through their employees, accepting responsibility means declaring that its employees violated the law. How can managers give their employees a presumption of innocence while simultaneously declaring them guilty? How can they ensure that their employees receive due process while firing them if they choose to mount a defense, refusing to advance their attorney’s fees, and becoming part of the government’s prosecution team?
By coercing businesses into enlisting as deputy law enforcement agents, the government has decided to prosecute its war on white collar crime in a way that pits corporations against their own employees. This may make prosecutors’ jobs easier, but it is a poor way to encourage more ethical corporate behavior. Despite what DOJ may think, there is more to ethics than helping its prosecutors collect scalps.
Incidentally, my initial hypothetical is not a fanciful one. KPMG recently agreed to pay $456 million to avoid indictment for marketing tax shelters that have never been shown to be illegal. It also waived its attorney‐client and work product privileges and is helping the government prosecute 17 of its former employees, including a tax partner it sent to testify before Congress. This help includes providing the government with all incriminating evidence in its possession and firing and refusing to advance the attorney’s fees of employees who defend themselves rather than cooperate with prosecutors. It also includes agreeing not to retain employees who say anything inconsistent with the indicted employees’ guilt, something that neatly precludes the accused from obtaining defense witnesses.
Legally, KPMG is on good grounds in taking these actions. Ethically, the case is considerably less clear.