When a company accepts a deferred prosecution agreement to resolve a criminal investigation, one requirement is that it cannot backtrack on an admission of guilt. Standard Chartered learned the hard way that prosecutors take these agreements quite seriously when an executive tries to soft-pedal any corporate wrongdoing.
Earlier this year, John Peace, the chairman of Standard Chartered’s board, spoke at a news conference announcing the bank’s quarterly earnings. He was asked whether any employees would be held responsible for violations of United States laws restricting financial dealings with Iran and other countries that led to settlements with federal and state authorities costing the bank about $667 million. He responded, “We had no willful act to avoid sanctions; you know, mistakes are made â€" clerical errors â€" and we talked about last year a number of transactions which clearly were clerical errors or mistakes that were made.â€
There is just one big problem with attributing violations to mere “clerical errors.†The deferred prosecution agreement with the Justice Department specifically provides that no one at Standard Chartered can make “any public statement contradicting the acceptance of responsibility†in the settlement. And the statement of facts accompanying the agreement says that the bank “knowingly and willfully engaged in this criminal conduct,†something far beyond mere mistakes.
To make matters worse, the agreement provides that a public statement like Mr. Peace’s is a “willful and material breach†of the agreement, which permits the Justice Department to reinstate the charges and pursue a criminal prosecution. If that were to happen, the bank’s admission of wrongdoing could be used in a trial, which means it would have little defense to the charges.
It has not yet happened that a company entering into a deferred prosecution agreement has been found to have breached it, although a couple have come close.
Bristol-Myers Squibb settled charges over accounting fraud based on “channel stuffing†in 2005, but during the term of its agreement the government began investigating it for possible antitrust violations. Such agreements always prohibit a company from engaging in criminal conduct during its term, so Bristol-Myers faced the prospect of a renewed prosecution. The Justice Department instead permitted the company to plead guilty to making a false statement and pay the maximum fine of $1 million fine in a separate case without finding a violation of the agreement.
Another company, Wright Medical Technology, was investigated for improper payments to doctors shortly after it entered into a deferred prosecution agreement involving similar conduct. Rather than find a breach, prosecutors agreed to extend the term of the agreement for another year.
It was unlikely Mr. Peace’s comments would have triggered a full-scale prosecution. But that does not mean prosecutors were willing to allow this to pass quietly, either.
The deferred prosecution agreement permits Standard Chartered to “cure†any violation before there is a finding of a breach. Thus, Mr. Peace issued a retraction two weeks later, stating that his comments were “both legally and factually incorrect†and that Standard Chartered accepts responsibility “for past knowing and willful criminal conduct in violating U.S. economic sanctions laws and regulations.â€
That was not enough for the government, however, because it went a step further to send a public message about how displeased it was. As reported in The Financial Times, the United States government required Mr. Peace, along with Standard Chartered’s chief executive, Peter Sands, and finance director, Richard Meddings, to come to a meeting in Washington with senior Justice Department officials and the Manhattan district attorney, Cyrus R. Vance Jr., whose office participated in the settlement. One can almost imagine the three executives waiting for the meeting to start like miscreant schoolboys sitting outside the principal’s office, shuffling their feet before an expected tongue-lashing.
The Justice Department’s goal was not just to humiliate Standard Chartered, although it probably succeeded in doing so. More important is that the warning this meeting sent to other companies that want to accept settlements in which criminal charges are waived.
Deferred prosecution agreements have become a standard means for resolving a wide range of cases involving corporate misconduct. Even in recent resolutions with global banks over manipulation of the London interbank offered rate, or Libor, in which there were guilty pleas, the parent company has entered into such an agreement while only a foreign subsidiary actually admits to the criminal charges, so the consequences are minimized.
The Justice Department has taken a fair amount of criticism for using these agreements, but they are unlikely to disappear. Eric H. Holder Jr., the attorney general, recently acknowledged that there were some institutions that had become so large that a criminal prosecution of the organization might be impossible because of the risks it would present to the financial system.
So prosecutors could hardly allow a comment like Mr. Peace’s to pass with a simple retraction and apology. Otherwise, deferred prosecution agreements would be even less of a deterrent to future misconduct.
Instead, the message to executives at other companies â€" most important, the banks caught up in criminal investigations â€" is that they will pay a public price if their executives try to backtrack on an admission of guilt. Shaming appears to be one of the tools the government is willing to use against executives to give credence to deferred prosecution agreements.
