Does Voluntary Disclosure of White Collar Crimes Really Help?


Wisconsin Law JournalThe Federal government wields a big stick when it comes to business-related crimes. Violations of the Foreign Corrupt Practices Act (FCPA), fraud in the delivery of health care services or in the receipt of federal money for those services, and other whitecollar crimes can open up companies and their executives to harsh penalties under the United States Sentencing Guidelines.

Companies and executives can get reduced sentences if certain mitigating factors have been identified. One of those mitigating factors is having an effective compliance and ethics function within the company that attempts to prevent fraud and proactively identify criminal activities.

An additional way that companies have sought to mitigate their sentences is through confessing their violations of law to federal prosecutors.

Department of Justice Assistant Attorney General Lanny Breuer and Acting Deputy Attorney General Gary Grindler spoke at a compliance conference about the Department’s ability to give “meaningful credit” when companies self-report and cooperate with the authorities in FCPA investigations. Self-reporting saves the government time, effort and money, as the bulk of the investigative work is often completed by the company itself and on the company’s dime. The government receives a full report of the violation or violations, and is able to proceed with prosecuting the bad actors with far less effort than if the government had to seek out and investigate the crimes themselves.

The government touts this “meaningful credit” in handing down sentences, but the reality about whether or not self-reporting helps mitigate sentences might show something different.

Bruce Hinchey, an attorney completing an LLM in government contracts law at George Washington University Law School, analyzed 40 FCPA cases from 2002 through 2009. He looked at the mathematical relationship between the bribes and the fines, differentiating between the companies that voluntarily disclosed their violations and those that did not.

Hinchey’s study and the results are detailed in his paper “Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements.” His conclusion is that there was no apparent benefit to voluntary disclosure. He found that companies that disclosed an FCPA violation were given a fine of $4.53 for every dollar given as a bribe. Those that did not voluntarily disclose their violation got smaller fines of $3.22 for every dollar given as a bribe.

The companies in this study that did not disclose their FCPA violations paid lower fines than those that did participate in voluntary disclosure. The obvious conclusion is that companies may be better off not voluntarily disclosing their FCPA violations, even though government officials tout mitigation of punishment when companies self-report.

The government is downplaying this study and saying that there are lots of factors that ultimately go into a sentencing decision. Questions have also been raised about companies that self-reported, but ultimately got no punishment. These situations are not factored into the calculation because no information is published about such situations.

The study couldn’t factor in the nuances because the government simply doesn’t make the information available. If additional items could be included in the analysis, the numbers would likely be more reliable.

Notwithstanding the lack of information made available by the government, the numbers as calculated give me pause. I would have expected the fines for companies participating in self-disclosure to be lower than those not disclosing. I would have expected that additional data from the government about the crimes and sentences may have helped refine those numbers and closed the gap somewhat. But the results of this study are completely in the wrong direction, and I question whether any additional data from the government would be enough to reverse that trend. This study suggests, at the very least, that there is little benefit in self-reporting. And there may be no benefit at all.

As a fraud-fighter, I like to see companies that create programs to proactively prevent and detect fraud and white-collar crime. However, such activities are not without a significant cost, and many companies need to be encouraged to do so.

The government uses fear as its incentive to convince executives they should stop violations of federal laws, and proactively report any violations that are found. Yet voluntary disclosure is a serious step for a company to take, and if an apparent tangible benefit cannot be found within the sentencing guidelines, more companies might be willing to roll the dice and hope the government never finds out about their violations. Can you blame them?

Tracy L. Coenen, CPA, CFF, is the president of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. Coenen can be reached at [email protected] or 414-727-2361.

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