Governance Civil Justice
May 5th, 2012 3 Minute Read Report by James R. Copland

The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements

Over the last decade, a novel form of federal government regulation has emerged, prompted not by new congressional legislation or administrative agency action but rather by aggressive assertion of prosecutorial authority over business. Without any actual criminal trials and little to no judicial supervision, government attorneys in the U.S. Department of Justice have pressured corporations to pay significant fines, to modify business practices, and even to sack top management.

The Justice Department and various U.S. Attorneys’ offices have entered into more than 200 “deferred prosecution” or “non-prosecution” agreements (DPAs and NPAs) in the last ten years. Seven of the 100 largest U.S. businesses, as ranked by Fortune magazine, are currently operating under the supervision of federal prosecutors.

The widespread use of DPAs and NPAs followed shortly in the wake of the federal government’s May 6, 2002, indictment of the large accounting firm Arthur Andersen. The U.S. Supreme Court ultimately set aside Andersen’s conviction in 2005, but the firm had long since collapsed—throwing tens of thousands of Americans out of work.

Many businesses can ill afford to fight a criminal investigation: criminal inquiries place significant pressure on stock prices and can impair companies’ ability to obtain credit, and businesses in some industries can be debarred from government contracting or denied government licenses upon an indictment or conviction. Precisely because companies cannot afford to face trial and because DPAs and NPAs enable prosecutors to punish perceived corporate wrongdoing without going to trial or facing the specter of an Andersen-like collapse, these tools have become increasingly commonplace.

In the process, the Justice Department has emerged as a shadow business regulator. Since 2005, federal prosecutors have entered into 20 or more such agreements annually, with a peak of 41 in 2007 and 40 in 2010. Financial and health-care companies are particularly sensitive to government licensing and contracting. Finance companies have been involved in 18 federal DPAs and NPAs since 2009, and health-care companies have entered into 11 such agreements over that period. The finance companies alone have a collective market capitalization exceeding $690 billion, with over $20 trillion in assets under management.

Fines and penalties levied under federal DPAs and NPAs have exceeded $3 billion in each of the last three years. Moreover, in reaching and enforcing these agreements, prosecutors have had sometimes sweeping impacts on business practices, variously pressuring companies:

  • To change long-standing sales and compensation practices;
  • To restrict or modify consulting, contracting, and merger decisions;
  • To implement onerous compliance and reporting programs;
  • To appoint corporate monitors who report to prosecutors, with broad discretion over business decisions; and
  • To oust executives or directors.

Once under a DPA or an NPA, company leadership has little ability to object to prosecutorial demands: the agreements typically state that determinations as to whether a company is in breach are the prosecutor’s alone and are beyond judicial review. To explicate further how these agreements work in practice, this report explores the details of recent DPAs and NPAs reached between federal prosecutors and four companies: MetLife, Johnson & Johnson, Wright Medical Technology, and Tenaris S.A.

The process whereby federal prosecutors enter into DPAs and NPAs lacks transparency and judicial oversight, and the broad sweep of these arrangements imposes a little-appreciated regulatory burden with real economic impact. To improve transparency and oversight, to maintain appropriate incentives for companies to comply with the law, and to rein in the shadow regulation of business by federal prosecutors, Congress should:

  • Restrict the application of criminal law against corporations to serious predicate offenses by major officials;
  • Reexamine the severity of statutory consequences flowing from a criminal indictment, such as debarment;
  • Limit the use of DPAs that preclude a judicial role in reviewing agreement terms, selecting corporate monitors, or determining whether management has breached the agreement;
  • Insist that DPAs and NPAs carefully consider preexisting corporate compliance programs as a mitigating factor to encourage better business self-policing; and
  • Narrow the scope of agreement terms available under DPAs and NPAs to limit potential economic disruption.



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