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Corruption and the private sector
Partial blackouts A less common but thought-provoking option to enhance the enforcement toolbox is a ‘partial blackout’. Depending on the nature of a corporate entity and the extent of its malfeasance, it may be possible simply to ‘black out’ a corrupted component while the organisation as a whole confronts its compliance problems. Under a partial blackout, certain business lines or units of a corporation are mandatorily suspended for a period of time.14 A partial blackout is less interventionist than a corporate monitorship. It assumes that a corporation can identify and solve its own problems. Partial blackouts can be very effective in providing the motivation for this, and in dispelling the notion that a corporation can simply buy its way out of a problem. In addition, the uncertainty and stigma associated with a partial blackout can have a broad impact not only on the corporation’s overall bottom line but also on its relationships with business partners, customers, lenders and investors. This puts pressure directly on management to address and resolve compliance problems.15
Smarter enforcement to catalyse corporate integrity Conventional enforcement is generally an acute, isolated event in the larger life of a corporation. With regard to compliance, enforcement serves the purpose of concentrating the mind on a problem. On the other hand, an enforcement action is very unlikely to create or foster a real culture of compliance. The spectre of sanctions can be useful, but people obey the law for reasons that have at least as much to do with reputation, credibility, business relationships and personal values. Enforcement is more likely to be effective when it leverages the full range of regulatory, social and reputational factors that actually drive corporate culture and action. When it comes to corporate corruption, what does it mean to have the tools truly match the goals? Corporate corruption is rarely just a matter of individual bad apples, though most of the time there will be an individual element along with the institutional one. One must also respond at the organisational level to the forces that made the wrongdoing possible. Sometimes this is a matter of ensuring that appropriate compliance structures are in place, as a DPA or reform undertaking can do. Sometimes it is a matter of increasing management’s accountability and sense of urgency, as the partial blackout can do. Sometimes the pressure of internal culture is such that nothing short of the close intervention of a monitorship will stand a chance of forcing real change. The latest generation of enforcement officials recognises that they cannot force meaningful internal change on an organisation, but through tools like these they may be in a good position to catalyse and support it.
14 See, e.g., In the Matter of Ernst & Young LLP, File no. 3-10933. Ernst & Young was prohibited from taking on any new audit clients for a period of six months. 15 US Internal Revenue Service, ‘KPMG to Pay $456 Million for Criminal Violations’, press release, 29 August 2005. Partial blackouts can be combined with traditional sanctions. In 2005 auditing firm KPMG entered into a deferred prosecution agreement that included permanently terminating two tax practices, appointing an independent monitor, developing a compliance and ethics programme and paying US$456 million in fines, restitution and penalties.