The Proliferation of N/DPAs and Their Problematic Nature

Posted on by Micaela Jones

Introduction: What is a N/DPA, and What Explains Their Proliferation?

Corporate criminal liability has undergone a dramatic transformation in the past few decades.1 Corporate prosecutions are plummeting in numbers, whereas the use of non and deferred prosecution agreements (“N/DPAs”) has increased dramatically in recent years.2 Today, most publicly held firms that are sanctioned for federal crimes by the Department of Justice or the U.S. Attorney Offices often avoid litigation, instead entering into N/DPAs with federal prosecutors.3 N/DPAs are contractual agreements between corporations and the government.4 Pursuant to these agreements, the government imposes sanctions, such as fines, restitution, or institutional changes; in return, the government agrees not to prosecute or dismisses filed charges if the corporation abides upon the agreed provisions in the agreement.5

Several factors are cited as explanations for the rise in N/DPAs.6 First, prosecutors and corporations have strong incentives to enter N/DPAs and avoid going to trial.7 Prosecutors benefit from the use of N/DPAs because they can avoid bringing expensive and time-consuming lawsuits against well-funded and highly sophisticated corporate defendants.8 Simultaneously, corporations can avoid costly litigation, and the potentially disastrous consequences of being subject to criminal indictment.9 Second, N/DPAs claim to be beneficial to the public interest by preventing unnecessary harm to innocent shareholders, customers, employees and creditors of the corporation.10

Why Are N/DPAs Problematic, and How Do They Violate the Rule of Law?

N/DPAs are problematic for numerous reasons. By establishing the view that certain business organizations are too big to jail, N/DPAs have effectively undermined the legitimacy of the criminal justice system.11 The Justice Department manual for business prosecutions instructs prosecutors to consider using N/DPAs in situations where criminal indictment may result in “disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable.”12 Therefore, companies that enter N/DPAs are often those that have committed serious wrongdoing, but the alleged harmful consequences to society are cited as justification for avoiding criminal indictment.13 As such, prosecutors are insulating serious corporate wrongdoers from the full consequences of their criminal actions.14 Through witnessing large companies escaping the ordinary criminal process, the public perceives the criminal justice system as divided: one criminal justice system for the corporate elite, and one for the rest of the population.15 As a result, N/DPAs result in a loss in faith in the justice system.16

N/DPAs also allow prosecutors to use their discretion to create and impose mandates on firms inconsistent with the rule of law.17 The rule of law requires that individual executive branch actors are not given sufficient authority to restrict the rights of others to achieve personal aims.18 In order to satisfy the rule of law, governments granting discretion to executive branch actors must constrain their authority by limiting the scope of authority granted and require external oversight of decisions.19 In summation, the rule of law requires that limitations on the legal rights of individuals be determined by laws, rather than arbitrary and unconstrained decisions of individual government actors.20

However, under N/DPAs, prosecutors have broad authority to impose mandates as they see fit, and N/DPAs are not subject to ex post oversight.21 The DOJ has placed few ex ante constraints on the scope of prosecutors’ authority to create and impose mandates.22 In addition, prosecutors imposing N/DPA mandates are not limited to enforcing duties created by legislatures and agencies.23 Rather, N/DPAs are utilized to create and impose new duties that differ from those imposed by statute or regulation.24 Further, courts do not exercise jurisdiction over these agreements.25 Judicial regulation of pre-indictment bargaining would be considered an invasion of prosecutorial discretion.26 As such, pre-indictment negotiations are limited to the government and the corporate defendants.27 In addition, prosecutors are not subject to significant ex post oversight.28

As a result of this unequal bargaining between prosecutors and corporations, combined with unfettered prosecutorial discretion, there is grave potential for prosecutorial abuse.29 N/DPAs are primarily problematic because prosecutors not only use them to sanction firms, but also to regulate future conduct of the corporation.30 As such, prosecutors have now expanded their traditional role, demonstrating a shift in prosecutorial focus on ex post punishment to a more ex ante focus on compliance.31 This focus on compliance allows prosecutors to drastically alter the governance of leading public corporations.32 Such corporate governance changes common in N/DPAs include mandating new board members or new management, updated compliance programs, changes in internal controls, or additional self-reporting obligations.33 Due to the lack of a clear mandate for prosecutors executing N/DPAs, agreements may lead to corporations adopting unsuccessful compliance programs and other inefficient programs.34

Do the Alleged Benefits of N/DPAs Justify Their Implementation?

Although N/DPAs give prosecutors more authority and flexibility to combat corporate crime, that feasibility alone does not justify their implementation.35 There is little evidence supporting the conclusion that N/DPAs are beneficial to the corporation, the government, or public welfare.36

Primarily, there is no evidence that N/DPAs succeed in rehabilitating corporations.37 Rather, N/DPAs do not prevent corporations from breaking the law again.38 As of September 2019, the Department of Justice has brought federal criminal enforcement actions against thirty-eight corporations after entering N/DPAs with them.39 The majority of these repeat offenders received at least one additional N/DPA after previously receiving one, and most have pleaded guilty to later crimes.40 In total, the number of N/DPAs entered into with repeat offenders amount to fifteen percent of the N/DPAs the DOJ has entered into since 1992.41 In addition, roughly a third of repeat offenders were subject to subsequent criminal enforcement before the expiration of a previous N/DPA.42

Prosecutors are not punishing corporations for violating their agreements.43 Instead, prosecutors are ignoring apparent and obvious violations, including corporations being subject to subsequent federal criminal enforcement before the expiration of their N/DPAs.44 Out of 772 N/DPAs, on only seven occasions has the Department of Justice held a corporation accountable for violating their N/DPAs.45 In addition, the biggest corporations tend to receive the most lenience from the government.46 Out of thirty-eight repeat offenders, thirty-six are major corporations on the Forbes Global 2000 list of the largest publicly traded corporations in the world.47 The fact that larger corporations are found to be repeat offenders may be due to the nature of their massive size, and accordingly, they are subject to heightened public and government scrutiny. Nevertheless, the fact that these large corporations are consistently repeat offenders without receiving appropriate repurcissions is extremely problematic. The large scale of these corporations means that their repeated misconduct has the potential to cause catastrophic harm to millions of innocent people.

Additionally, there is no empirical evidence that the collateral consequences of corporate criminal liability are as distastrous as initially claimed.48 As noted above, prosecutors have been instructed to consider several factors when considering whether to prosecute a corporation. One of these factors is the collateral consequences of criminally indicting a corporation.49 The aftermath of Arthur Andersen, an accounting firm that was convicted in 2002 of obstruction of justice for shredding documents related to its audit of Enron, left the impression on both the business community and the federal government that the collateral consequences of criminal indictment can be fatal.50 As a result, the government began reducing criminal prosecutions, and focused their attention on the implementation of N/DPAs.51 However, research has subsequently revealed that corporate prosecutions almost never lead to business failures.52

Granted, prosecution can lead to other collateral consequences besides business failures such as stigma of conviction, and job losses.53 Unfortunately, because N/DPAs diminish these collateral consequences, they effectively have a weaker deterrent value.54

How Should We Combat the Proliferation of N/DPAs?

The overarching goals of targeting corporate crime are to prevent corporate wrongdoing and facilitate compliance. Therefore, enforcement measures need to effectively carry out these goals. Determining how best to punish a corporation for wrongdoing is no easy feat. It may be hard to strike an appropriate balance between deterring corporate misconduct while at the same time preventing harm to innocent parties. In addition, corporations are not individuals, and as such they are not influenced in the same ways that individuals are. Accordingly, recidivism and rehabilitation may not easily apply to the corporate form.

Due to the problematic nature of N/DPAs, and because they do not carry the benefits they promise, the government should cease entering N/DPAs.55 However, the Department of Justice is unlikely to abandon the use of N/DPAs, as they are simply too attractive from a resource management perspective.56 Even amid the COVID-19 pandemic, the use of N/DPAs by the Department of Justice has remained constant.57

Nevertheless, there are policy solutions that can begin to curtail the reliance on N/DPAs.58 The Department of Justice should cease entering N/DPAs with repeat offenders.59 Along with this, Congress should enact legislation that promotes greater transparency.60 Specifically, the public should be aware of the collateral consequences considered when prosecutors are entering into N/DPAs.61 If the threat to financial stability of the United States was a factor that the prosecution considered, then the public should be aware of it.62 In addition, the public should be aware of the compliance measures that corporations are required to maintain as a result of entering into N/DPAs.63 Lastly, and most importantly, N/DPAs should be treated more like guilty pleas.64 Guilty pleas clearly label criminal corporate behavior as criminal, therefore better expressing the function and aims of criminal law.65 Guilty pleas also allow for more judicial oversight which helps instill and promote the rule of law.66

To conclude, the dramatic rise in N/DPAs is extremely problematic because N/DPAs violate the rule of law, and do not carry their purported benefits. As such, prosecutors and the Department of Justice should curtail their reliance on N/DPAs.

  1. Jennifer Arlen, Prosecuting Beyond the Rule of Law: Corporate Mandates Imposed Through Deferred Prosecution Agreements, 8 J. Legal Analysis 191 (2016). ↩

  2. Rick Claypool, Soft on Corporate Crime: Justice Department Refuses to Prosecute Corporate Lawbreakers, Fails to Deter Repeat Offenders, Pub. Citizen (Sept. 26, 2019), https://www.citizen.org/article/soft-on-corporate-crime-deferred-and-non-prosecution-repeat-offender-report/. ↩

  3. Arlen, supra note 1, at 192. ↩

  4. Wulf A. Kaal & Timothy A. Lacine, The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance: Evidence from 1993-2013, 70 Bus. Law. 1, 3 (2014). ↩

  5. Id. ↩

  6. Id. ↩

  7. Id. ↩

  8. Id. ↩

  9. Id. at 4. ↩

  10. Gordon Bourjaily, Note, DPA DOA: How and Why Congress Should Bar the Use of Deferred and Non-Prosecution Agreements in Corporate Criminal Prosecutions, 52 Harv. J. on Legis. 543 (2015). ↩

  11. Id. at 549. ↩

  12. Claypool, supra note 2. ↩

  13. Bourjaily, supra note 10, at 549. ↩

  14. Id. ↩

  15. Id. at 553. ↩

  16. Id. at 554. ↩

  17. Arlen, supra note 1, at 191. ↩

  18. Id. ↩

  19. Id. ↩

  20. Id. at 192. ↩

  21. Id. ↩

  22. Id. ↩

  23. Id. at 194. ↩

  24. Id. ↩

  25. Bourjaily, supra note 10, at 547. ↩

  26. Id. ↩

  27. Id. ↩

  28. Arlen, supra note 1, at 192. ↩

  29. Kaal & Lacine, supra note 4, at 5. ↩

  30. Arlen, supra note 1, at 192. ↩

  31. Kaal & Lacine, supra note 4, at 2. ↩

  32. Id. at 1. ↩

  33. Id. at 2. ↩

  34. Id. at 5. ↩

  35. Bourjaily, supra note 10, at 559. ↩

  36. Id. at 2. ↩

  37. Id. ↩

  38. Claypool, supra note 2. ↩

  39. Id. ↩

  40. Id. ↩

  41. Id. ↩

  42. Id. ↩

  43. Id. ↩

  44. Id. ↩

  45. Id. ↩

  46. Id. ↩

  47. Id. ↩

  48. Bourjaily, supra note 10, at 544. ↩

  49. Claypool, supra note 2. ↩

  50. Bourjaily, supra note 10 at 545-46. ↩

  51. Id. at 546. ↩

  52. Claypool, supra note 2. ↩

  53. Gabriel Markoff, Arthur Andersen and the Myth of the Corporate Death Penalty: Corporate Criminal Convictions in the Twenty-First Century, 15 U. Pa. J. Bus. L. 797, 801 (2013). ↩

  54. Id. ↩

  55. Bourjaily, supra note 10, at 560. ↩

  56. Id. ↩

  57. 2020 Year-End Update on Corporate Non-Prosecution Agreement and Deferred Prosecution Agreements, Gibson Dunn (Jan. 19, 2021), https://www.gibsondunn.com/2020-year-end-update-on-corporate-non-prosecution-agreements-and-deferred-prosecution-agreements/. ↩

  58. Claypool, supra note 2. ↩

  59. Id. ↩

  60. Id. ↩

  61. Id. ↩

  62. Id. ↩

  63. Id. ↩

  64. Id. ↩

  65. Bourjaily, supra note 10, at 559. ↩

  66. Id. at 567. ↩

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