Self reporting should benefit companies and governments – but the reality is that the policy just isn't delivering, argues Massimo Mantovani and Amar Sarwal

Let's say your teenage son returns home one day, walks past you and says: "I just robbed a bank." Then he continues upstairs into his bedroom and shuts the door.

What do you do? You would probably ask him a lot of questions. Maybe his comment was a joke. Or if he did rob a bank, maybe he was forced by someone else to break the law. If so, he should immediately report it to the police.

If he actually robbed a bank without mitigation, you would counsel him on the most honorable course of action. You would tell him that he needs to speak with a good lawyer and then he must still go to the police.

But let's toy with reality a bit. Let's say that you live in an alternate universe where certain outcomes were almost guaranteed:

• If your son voluntarily goes to the police, his punishment will be greater than if the police catch him independently. He would be sentenced to five years in jail if he were caught but seven years if he turns himself in

• If your son voluntarily goes to the police, he will likely be punished multiple times for the same crime. But if the police catch him independently it is more likely that only one court will try his case and send him to jail

• And in this alternate universe, anything your son says to you or you say to him will be turned over to the police.

In that universe, you are better off staying downstairs, hoping this is one of your son's practical jokes.

But this scenario is the exact situation faced today by in-house lawyers around the world. It is the unintended and unfortunate consequence of misplaced national regulatory policies, broad international treaties and a fundamental misunderstanding of what in-house lawyers do.

The admirable goal of self-reporting

Lawyers that work inside companies are the first line of defence for law, compliance and ethics. When our clients present us with a quandary or confession our job is to represent the company and respect the law. And in carrying out our job there should be no conflict. The company's best interest should coincide with a choice to uphold the law.

This overlap of corporate self-interest and the law forms the basis of every self-reporting system. And the benefits of a well-designed self-reporting mechanism are obvious: individuals and companies can efficiently address illegal acts, avoid or reduce their penalty, and then leave their sordid past behind. 

In return, the government enjoys the benefit of discovery, investigation, confession and punishment at relatively little taxpayer expense. 

Self-reporting started in earnest in the US in 1984, when the federal sentencing guidelines and statutes offered hope that a company would face a lower sanction with a voluntary confession.

In Europe, the fervour of self-reporting has only recently blossomed, spurred by the establishment of leniency guidelines for competition law violations. Since implementation of this leniency system, fines recovered by the European Commission and member states have surged.

And for the first time in the UK, the British Parliament is set to bring in rules to establish a true deferred prosecution agreement alternative for corporations, which would further push companies to self-reporting.

With so many opportunities and benefits, self-reporting systems should encourage compliance, with clear and consistent guidelines that reward companies who take the moral high ground. But something has gone horribly wrong.

The utopia of efficient self-reporting has transformed into a dystopia of aggravated fines, multiple prosecutions and discouragement of clear legal advice.

Penitent companies are punished more

The financial incentive for self-reporting has diminished markedly. In the world of FCPA (the US Foreign Corrupt Practices Act), two separate studies have shown that companies that self-report do not enjoy statistically lower fines than those that wait silently to be caught and prosecuted.

In fact, the data suggests that the penitent companies are punished more than companies that are caught red-handed.

These surveys reveal an obvious flaw in current self-reporting systems. Governments follow the fines of least resistance. When a potential defendant leads his own investigation there is little work to be done by the authorities. 

It is easy money. Whereas if a company does not self-report an illegal act, the government must go to the significant trouble and expense of launching an investigation, prosecuting the defendant and then defending any trial victory on appeal.

This uncomfortable problem can be partially corrected by establishing a specific, meaningful processes for voluntary disclosure and guaranteed reductions in fines in return for a substantive confession. 

But even in countries where reductions are set by statute, self-reporting companies still face disproportionate fines because they must disclose all untoward acts. In unfair contrast, the uncooperative defendant facing an investigation only pays for what the government can discover and prove.

Pay again and again… and again

The second twist in this bizarre world of self-reporting is the real threat of multiple prosecutions. Corporate lawyers in the US have faced this reality for years: a settlement with the Department of Justice often comes with tag-along claims from a variety of eager state attorneys general.

Like the federal government, states follow the easy money. Why bother engaging in a legal battle with a big company when an alternative source of income walks in voluntarily? Once the company issues its confession, it becomes fodder for all to use.

The low-hanging fruit of follow-on government claims, however, extends well beyond the states. Private plaintiff lawyers make the same calculations and use the same self-reported evidence.

In these scenarios, the cost and distraction of private follow-on litigation for a confessing company can quickly eclipse any statutory fine.

Europe has now seemingly adopted the American model of riding the coat-tails of others' self-reported cases. In a recent example the French competition authorities began proceedings against a German company that had self-reported an antitrust violation to the European Commission.

The defendant had dutifully self-reported its violations in Brussels only to face a separate and substantial fine in Paris for the same infraction. 

Europe and the US are not the only fronts where companies risk redundant prosecutions and penalties. Nigeria, in particular, has demanded fines when companies dutifully self-report the corruption and bribery that is endemic in that country.

Now when a company considers reporting foreign bribery or corruption in the US or Europe, they have to assume that other countries will pile on even more fines as punishment for honest reporting. 

Punished when they ask for help

If you want someone to follow the rules, tell them the rules. And if you want someone to turn himself in when he break the rules, make sure he gets good legal advice.

Unfortunately, in this distorted world of self-reporting, company executives may never get the counsel or encouragement they need to do the right thing. This counterproductive scenario is partly the result of a decades-long attack on legal professional privilege.

Legal privilege is the single most powerful tool to encourage compliance and self-reporting. Privilege allows a company employee to speak freely, without fear that the words can be used against him in prosecution or civil claims.

It is a necessary requirement for open conversation with a lawyer and allows that lawyer to also speak freely and offer the best advice possible.

But privilege is under attack. And the impact on compliance and self-reporting is substantial. In the US, corporations still live with lingering pressure to waive attorney-client privilege when under investigation or even when they self-report violations.

Much of Europe limits legal professional privilege for in-house counsel. In France, Germany, Italy and a number of other countries, the privilege simply does not exist for lawyers working inside the company. But in-house lawyers are the single most powerful advocates of legal compliance.

They are the ones who educate and train executives about the intricate and conflicting details of the law.  And they are the ones who stop illegal practice and counsel a corporation to confess when appropriate. Without protecting legal professional privilege for in-house lawyers, the entire process of self-reporting is neutralised before it can even start.

Saving self-reporting

The issues described above – substantial disincentives to self-reporting – are intentionally provocative. An effective self-reporting mechanism is possible and necessary to fight corruption and corporate crime.

But if government really wants companies to report violations voluntarily, it must improve the framework and reduce the disincentives.

First, we must make the benefit of self-reporting clear and consistent from the beginning. Fines and penalties against companies that act ethically should rest well below the fines for those that hide and obfuscate their infractions.

Second, we must end jurisdictional overlaps to reduce the stream of follow-on claims from other governments and private entities. If companies present a confession, we must protect them from them from opportunistic duplicate claims. 

And finally, we must empower in-house lawyers to help their corporate clients do the right thing. We must re-establish and protect legal professional privilege for in-house counsel. When we ignore the privilege of internal legal communication, we undermine our  best ally in upholding the law.  

There is not one law or governmental body that can address all these concerns. But if we do not improve the self-defeating approach to self-reporting that exists today, then we must resign ourselves to a system that does not encourage ethical behaviour. Good companies strive to do the right thing and they shouldn't be punished for trying.

This article was inspired by an Association of Corporate Counsel (ACC) roundtable discussion in September 2012, co-chaired by Massimo Mantovani, general counsel and EVP of Eni. Amar Sarwal is VP and chief legal strategist for the ACC. The views in this article belong to the authors. 

 

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