Why Financial Institutions Should Think About Antitrust Leniency

While deciding to self-report criminal violations raises significant concerns for any company, and particularly for financial institutions with extensive regulatory oversight, seeking leniency may be the most prudent course when the company has substantial evidence of a criminal antitrust violation.

Antitrust investigations can begin under seemingly innocent circumstances – when a brief exchange of emails between friends at competing companies or a chance meeting by former colleagues at a conference turns into something illegal – an agreement to exchange and use valuable information to fix prices, allocate business, or rig bids. Antitrust violations have occurred in many industries including energy, manufacturing, and transportation, but the financial sectors – where constant movement, networking, and information transfers are key to market-making – are especially at risk for collusion.

Despite this high risk, financial institutions may not have antitrust at the top of their priority list. In this era of enhanced government scrutiny, these institutions navigate through the sea of domestic and international regulators and enforcers. The Antitrust Division of the U.S. Department of Justice (“the Antitrust Division”) is one of many enforcers in this crowd, but unlike others, its Corporate Leniency Program offers a level of clarity and benefits that others do not: If a company qualifies for leniency, neither it nor its cooperating employees will be prosecuted. While deciding to self-report criminal violations raises significant concerns for any company, and particularly for financial institutions with extensive regulatory oversight, seeking leniency may be the most prudent course when the company has substantial evidence of a criminal antitrust violation.

Antitrust Division’s Financial Markets Enforcement

The Antitrust Division is no stranger to financial markets enforcement and has steadily built a track record of cases over the past two decades. Since the mid-1990s, the Antitrust Division has pursued a series of civil cases, including challenges to bank mergers and investigations into collusion by options exchanges and Nasdaq dealers.[1] More recently, the Division drew headlines in criminal prosecutions of financial institutions and their employees relating to municipal bond derivatives, LIBOR, and tax lien auctions.[2] These financial markets investigations have generated charges against more than 75 individuals and companies.[3] Indeed, if anyone questions the Division’s commitment to continued enforcement in financial markets, assistant attorneys general and other officials leading the Antitrust Division have publicly stated that financial markets remain an area of focus,[4] and there is no “exception” for financial institutions in the Division’s criminal enforcement.[5]

Even with this high-profile record of enforcement, the decision by a financial institution to seek leniency if its employees may have violated antitrust laws is far from clear-cut. Despite the considerable benefits of seeking leniency, there are also collateral consequences, including costly cooperation, civil litigation, and exposure to regulators in the U.S. and abroad.

Benefits And Burdens Of Seeking Leniency

The benefits of leniency are significant. The Antitrust Division is the only component of the Department of Justice with an established enforcement policy that offers complete amnesty for criminal violations to the first self-reporting company. As the Department’s United States Attorney’s Manual explains in its section regarding Principles of Federal Prosecution of Business Organizations, the Division “has established a firm policy, understood in the business community, that credit should not be given at the charging stage for a compliance program and that amnesty is available only to the first corporation to make full disclosure to the government.”[6]

Under the Antitrust Division’s Corporate Leniency Program, a company that discovers criminal antitrust violations – price-fixing, bid-rigging, or market allocation – before detection by the Division can seek a “marker” to remain eligible for leniency as it continues its internal investigation of wrongdoing.[7] If a company “perfects” its marker and meets program requirements, it will not be prosecuted and will avoid antitrust fines that can reach hundreds of millions of dollars. Among the requirements are that the company makes a confidential full corporate confession, agrees to cooperate with the Division, and makes efforts to pay restitution to victims. Once leniency is granted to the company, current company employees are shielded from prosecution. In any civil action, the company can seek to reduce treble to single damages under the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (“ACPERA”) [8] – another considerable cost savings.

But there are burdens in seeking leniency. Active cooperation in a government investigation imposes significant costs and business disruption to a company and its executives, and particularly for financial institutions. As a threshold matter, cooperation means proactively compiling and providing information and witnesses to the Division over what can stretch to several years as the Division develops its investigation and prosecutes other members of the conspiracy.[9] Although current employees will not be prosecuted, former employees could become targets, and the prosecution of individuals through trial can be a lengthy process that requires ongoing production of records and other information. Acceptance into the Leniency Program also imposes an obligation to make all reasonable efforts to pay restitution to injured parties,[10] which in some antitrust cases can involve complex econometric analyses. All of this places a heavy burden on the key executives who need to continue operating their business lines while cooperating.

While any company must evaluate the burdens of seeking leniency, financial institutions have unique concerns when it comes to self-reporting any kind of misconduct. They must also gauge the reaction of regulators, and the civil litigation and public relations consequences of self-reporting. Putting aside antitrust enforcement, these institutions already face numerous reporting requirements to the SEC, CFTC, OCC, FDIC, FINRA, and Federal Reserve, not to mention foreign banking regulators, and need to evaluate whether self-reporting a possible criminal violation will cause a ripple effect in other enforcers and regulators levying sanctions in the form of civil penalties and injunctive relief.

Seeking Leniency May Be The Best Way To Mitigate Harm

When there is substantial evidence of wrongdoing within the financial institution, seeking leniency is usually the right decision, despite the burdens and collateral consequences, because the clarity offered by the Antitrust Division is elsewhere hard to find. A company self-reporting a violation of other laws (i.e., the Foreign Corrupt Practices Act or money laundering statutes) has no assurance of whether it or its employees will be prosecuted for the actions it is reporting – that decision is dependent on prosecutorial discretion. In contrast, the Antitrust Division’s Corporate Leniency Program has clear and transparent terms regarding what a company must do in order to avoid being charged criminally for an antitrust violation.

Further, seeking leniency may also be the best risk management strategy in a world where it is becoming less likely that violations will go undetected. The Antitrust Division and its counterparts here and abroad have increasingly sophisticated investigative tools to detect misconduct, and other co-conspirators may have the same incentives to be first in the door to avail themselves of leniency. Through consensual monitoring, surveillance, and other investigative approaches,[11] the Division and other enforcement agencies can gain a comprehensive understanding of how and when competitors are colluding. Financial institutions may be particularly exposed given their extensive regulatory and record retention policies relating to taping of employee telephone lines, and back-up of chats, email, and other workplace communications.

Public announcements also reflect enhanced scrutiny and coordination by the Antitrust Division with the SEC, CFTC, OCC, IRS, state authorities, and financial regulators abroad,[12] via the Financial Fraud Enforcement Task Force and more informal means. Coordination means that companies can expect not only that enforcers will engage in extensive information-sharing, but also that antitrust investigations will involve many more interested agencies. Indeed, in the past months, following announcements of cases in the LIBOR investigation, international competition enforcers announced more probes of financial institutions for price-fixing and other antitrust violations.[13]

Financial institutions can expect that the spotlight will continue to shine on them. Antitrust investigations here and abroad come at a time of continuing public outcry demanding that high-level executives be brought to justice and held accountable for market failures years ago,[14] and members of Congress continue to push the Department of Justice, as well as conduct probes themselves, into financial fraud.[15] Against this backdrop, being “second in the door” may literally cost the company hundreds of millions of dollars. Indeed, the Antitrust Division has exceeded $1 billion in total annual criminal fines twice in the past decade.[16]

Finally, many regulators expect that clear violations of law – whether antitrust or fraud – will be reported.[17] There may therefore be fewer and fewer scenarios in which financial institutions can escape scrutiny by bearing down, keeping quiet, and waiting for a storm to blow over. Among the most significant concerns in seeking leniency may be that regulators will not credit self-reporting, but rather will use the company’s confidential admission to seek enforcement. However, where there is substantial evidence of a violation, it is a high-risk strategy not to consider seeking leniency, in particular if one or more agencies may come across the violation themselves. Moreover, as regulators continue to develop their own self-reporting programs, there will be more opportunities for institutions to advocate that they deserve lesser penalties and other relief for seeking to come forward to multiple agencies.

All of these concerns need to be factored into the decision of whether to seek leniency. When there is significant evidence of a violation and there are independent regulatory obligations to self-report criminal wrongdoing, the decision to seek leniency is easier. In closer cases, when the facts discovered are not clear cut and self-reporting to regulators might not be required, the company faces a more difficult calculus than companies in other industries. On the one hand, self-reporting might expose the institution to regulatory investigations or sanctions. On the other hand, failing to self-report raises a significant risk that the Antitrust Division will uncover the violation itself or that another company will be the first in the door. Even in the closer cases, however, financial institutions must carefully consider that the consequences of the wrong decision could be dire – and mean hundreds of millions of dollars in criminal fines and civil damages without the ability to seek de-trebling under ACPERA – as leniency and the opportunity to seek de-trebling are only available to the first company in the door. Given this background, although many companies have an incentive to seek a leniency marker as soon as they learn of potentially troublesome (albeit incomplete) facts – even if they have not confirmed any definitive criminal wrongdoing – financial institutions, given their extensive regulatory oversight, may need to take more time to complete an internal investigation and determine whether in fact there was wrongdoing and how serious or widespread the conduct was. Where the internal investigation yields inconclusive information about the nature of the conduct, such institutions may decide to wait to see if further developments make the case for leniency more appealing.