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(11 min read)

Business leaders – especially corporate CCOs – face a shifting and unpredictable morass of statutory and regulatory guidelines that threaten personal liability for corporate misdeeds.

Corporate misdeeds have long had a tendency to stoke the fires of popular resentment against business leaders.

Yet, for the better part of a century following the industrial revolution, the public’s blood-lust failed to prompt policymakers to hold corporate executives’ feet to the fire for the wrongs of their enterprises.

Criminal prosecutors and regulatory enforcement agencies instead pursued corporations, leaving to corporate boards the job of disciplining (or not) their C-suite executives.

Today tells a different story. Business leaders – especially corporate CCOs – face a shifting and unpredictable morass of statutory and regulatory guidelines that threaten personal liability for corporate misdeeds. It can be difficult (not to mention nerve-wracking) to predict what the norm will be next.

To know where we’re going, we must understand where we’ve been.

Below, we provide a rapid fire review of the evolution of policymaking, from the laissez-faire attitudes about executive responsibility that dominated most of the 80s and 90s to the more severe policies that loom over executive conduct today.

1980s – Savings and Loan Crisis Exposes the Underbelly of Deregulation

The election of President Ronald Reagan in 1980 ushered in an era of deregulation in financial services.

Legislation passed during this wave of anti-regulatory fervor transformed the historically conservative Savings and Loan (S&L) business in particular; it simultaneously expanded institutional lending authority while easing loan-to-value requirements and reducing regulatory oversight.

Perhaps even more significant than the financial devastation, the Savings and Loan crisis inflicted a lasting civic cost. The public lost trust in policymakers and financial institutions.

The ostensible purpose of deregulating S&Ls was to help them attract capital in order to “grow” their way out of problems caused by a high interest rate environment. S&L deposits soared, but the banks also began making risky, speculative loans.

As the loans defaulted, S&Ls began to founder. Depositors panicked. On the verge of collapse, the industry received a series of federal and state bailouts costing taxpayers hundreds of billions.

Perhaps even more significant than the financial devastation, the S&L crisis inflicted a lasting civic cost.

The public lost trust in policymakers and financial institutions.

High profile scandals involving politicians and investors who reaped millions from the run-up and meltdown only added to the public perception that deregulation had unleashed business leaders’ worst impulses and that they needed to be reigned in.

2002 – Worldcom Wounds the Accounting Industry

The early 2000s subjected the public to another wave of corporate upheaval.

Enron’s meltdown exposed a litany of business malfeasance, from manipulation of energy markets to accounting tactics akin to a game of three-card monty.

The bursting of the dot-com bubble wiped out billions in retirement accounts. Tyco collapsed amidst tales of its CEO’s lavish and gaudy excess.

And then came Worldcom, the largest accounting scandal ever.

Worldcom had grown into a telecommunications giant through debt-fueled acquisitions. As dot-coms shuttered and demand for its services dried up, Worldcom began hemorrhaging money.

To hide the bleeding, its executives began cooking the books with the help of accounting giant Arthur Anderson and with the tacit acquiescence of Wall Street banks and rating agencies.

Americans began to see big firms as being in-cahoots with their corporate clients, no matter the collateral consequences for the public.

When the fraud came to light, Worldcom filed for bankruptcy and its CEO went to jail (joining executives from the aforementioned Enron and Tyco).

The Worldcom scandal inflicted lasting damage on the public’s perception of accounting firms, ratings agencies, and large banks as would-be “honest brokers” who ought to sound an alarm over wrongdoing.

Instead, Americans began to see those firms as being in-cahoots with their corporate clients, no matter the collateral consequences for the public.

Washington responded to the public outcry by passing the Sarbanes-Oxley Act, strengthening disclosure and penalties associated with accounting fraud.

2008-2010 – Financial Crisis Prompts an Over-correction

Deregulated financial commerce, however, continued unabated, with Wall Street capitalizing on a massive run-up in residential real estate values spurred on by an explosion in issuances of derivative financial products.

The financial crisis fueled deep public resentment of Wall Street and of the government’s failure to police bank executives

When the real estate bubble burst, it took financial institutions down with it and put millions of families on the street when they became unable to afford mortgages on overvalued property.

The disaster fueled deep public resentment of Wall Street and of the government’s failure to police bank executives who had received millions in bonuses as borrowers lost their homes.

The most immediate consequence of the financial crisis from a policymaking perspective was passage of the Dodd-Frank Financial Reform Act in 2010, which re-imposed regulatory strictures on financial institutions that might have prevented the bubble and collapse.

Many saw Dodd-Frank as a half-measure that mended the proverbial fence after the horse had already escaped the corral.

It also imposed the so-called “Volcker Rule” that required finance industry CEOs to certify their firms’ compliance with the law’s prescriptions (although the rule didn’t take effect until 2015).

Many saw Dodd-Frank as a half-measure that mended the proverbial fence after the horse had already escaped the corral. Financial institutions chafed at what they viewed as over-zealous and unnecessary guardrails on their industry.

The public, in contrast, wanted to see a bank executive go to jail and grew ever-more outraged when none did.

2013 – SEC Enforcer Ceresney Signals Focus on Individual Prosecution

Regulators took notice of the simmering public anger.

In a speech that put corporate executives on high alert, then Co-Director of the SEC’s Division of Enforcement Andrew Ceresney told attendees at the 2013 International Conference on the Foreign Corrupt Practices Act that “[a] core principle of any strong enforcement program is to pursue culpable individuals wherever possible” and lauded the “great deterrent value” of individual prosecutions.

The SEC, he said, explores “whether an action against an individual is appropriate” in every case it brings against a company.

2015 – Yates Memo Signals DOJ’s Prioritization of Business Leader Prosecutions

To address criticism of the Department of Justice’s own lack of individual prosecutions stemming from the financial crisis, then-Assistant Attorney General Sally Yates issued a now-famous memo to all Department AAGs and United States Attorneys in September 2015 directing them to prioritize holding individual business leaders accountable for corporate wrongdoing.

Yates made clear that as an explicit condition of receiving credit for cooperating with law enforcement investigations into their misdeeds, corporations would need to disclose the names of all individuals within the corporation involved in criminal or civil misconduct.

2016 – The UK Joins the Crusade for Individual Accountability

Moves toward holding financial executives personally responsible for corporate wrongdoing were not limited to the United States.

In Britain, Parliament passed the Senior Managers & Certification Regime, which imposed personal accountability for financial services firms’ misdeeds onto senior management and even certain non-executive employees.

2017 – DOJ’s FCPA Enforcement Policy Echoes Yates Memo in Targeting Compliance Professionals

Four years after Andrew Ceresney spoke at the annual Foreign Corrupt Practices Act conference, Deputy Attorney General Rod Rosenstein announced a new FCPA enforcement policy that ratcheted up the risk for corporate CCOs.

Rosenstein didn’t mince words about who would bear the brunt of the new policy, predicting it would “enhance our ability to identify and punish culpable individuals.”

In essence, the new policy provided that so long as corporations voluntarily disclosed the nature and extent of an FCPA violation, including the names of individuals involved in it, prosecutors would likely decline prosecution of the corporation.

Rosenstein didn’t mince words about who would bear the brunt of the new policy, predicting it would “enhance our ability to identify and punish culpable individuals.”

2018 – Trump Administration Reforms Seemingly Ease Pressure on Other Executives

While the Trump administration has dialed up the pressure on compliance professionals in the context of the FCPA, it has simultaneously eased tensions for other leaders of financial firms.

New DOJ policy requires disclosure only of those “substantially involved in or responsible for” criminal conduct and to identify all wrondoing by individuals in civil matters.

Last year, the administration loosened some of the Dodd-Frank regulations that had bedeviled small and mid-sized banks and financial firms, and DAG Rosenstein announced modifications to the “Yates Memo” policy of requiring corporations to name all individuals involved in misconduct.

New DOJ policy instead requires disclosure only of those “substantially involved in or responsible for” criminal conduct and to identify all wrondoing by individuals in civil matters.

The Net Result of Evolution: Some Individual Accountability, Lots of Uncertainty

So, what are the consequences of the steady march (until recently) toward holding executives and compliance professionals personally accountable?

In some cases, compliance officers and other executives have endured significant personal hardship.

In 2017, Thomas Haider, the former CCO of Moneygram, settled a long-running dispute with FinCEN by agreeing to pay a $250,000 fine holding him responsible for his firm’s anti-money laundering compliance failures (he had initially been fined $1 million).

Meanwhile, two former State Street Global Advisors executives endured years of fighting with the SEC after being blamed for the firm having misled investors during the financial crisis, before being exonerated by an appeals court.

The battle left both men in professional and financial ruin. 

CCOs see these as cautionary tales and worry about the uncertainty of not knowing how the next case might turn out.

How are they to balance the rollback of the Yates Memo policies with the aggressively individual-focused FCPA enforcement regime?

What will happen to these rules in a new administration?

These are unanswerable questions, and so for now a financial CCO’s best strategy is to allocate resources to a smart, efficient, and effective compliance program demonstrating the firm’s, and his or her own, diligence and commitment to following the rules, whatever they may be.

 

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