In a recent article in the DealB%k of New York Times, Peter J. Henning (Professor at Wayne State University Law School) discusses the very interesting issue of government fines for corporate misbehavior. (Peter J. Henning: “For Settlements, Companies Sketch Contours of a Black Box”. February 18, 2014.)
Next to pointing to the fact that reserves in corporate balance sheets provide interesting insights into fines and/or settlements, Henning also refers to some of the structural problems in the current system of settlement. He quotes the NGO Better Markets that filed a law suite against the US Department of Justice’s settlement with JP Morgan Chase that claimed: “In effect, the DOJ acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any check on its authority or actions, even though the amount is the largest in the 237 year history of the United States.”
History provides some powerful lessons about the value and importance of the segregation of power. And there is certainly no good reason, why this system shouldn’t be applied to settlements for all sorts of corporate misbehavior (e.g. corruption, tax evasion, manipulation of interest rates, cartels etc.). But in addition to Henning’s correct observations and comments, the cases that he mentions also allow for the discussion of some of the possible root causes for the violation of this fundamental principle.
According to standard thinking, a fine should be determined as a function of (a) the profit that was gained on basis of the misbehavior and (b) the likeliness of getting caught plus a certain premium. Clearly the problem is to determine the likeliness of getting caught. Assuming that the dark figures can be quite high for some sorts of violations, the discovery of a single case could demand a enormously high fine.
And this is exactly why governments and government agencies suddenly might have an interest in not being too specific and explicit about fines and settlements: In many cases – including many of those mentioned by Henning like JP Morgan Chase, Avon or BNP Paribas – the government find themselves in the position of having to fine companies that are of national significance in terms of workplaces, tax income, domestic investments etc. And suddenly they are faced with a clear conflict of interest: Imposing really high fines might possibly harm (or possibly even kill) national champions which in turn could harm governments and societies.
Quite a few cases of really high corporate fines have been imposed on “foreign” companies (such as Microsoft in the European Union or Siemens in the US). In such cases governments might also be much more willing to disclose details of the process and fine.
In order to prevent this special form protectionism, governments will need to come to harmonization, i.e. to supra-national agreements on how to deal with corporate fines.