Confronting Corporate Crime
Remarks prepared for delivery.
Good afternoon. It’s great to be here with so many old friends and colleagues.
New York, of course, was my home for many years, and I miss it. The bagels, mostly. Can’t get a good bagel in D.C.
The Times held a poetry contest a few weeks back and asked folks to submit haikus about the city.
Each haiku had to touch on a trait familiar to the city, such as strangers, solitude, commuting, and, believe it or not, kindness.
My favorite was this:
No man’s an island
Not on the morning F Train
Why, hello armpit.
I’m no poet, but I came up with my own:
Thought I was good but
Preet made the cover of Time
What is life?
For reasons you know all too well, 13 years ago, counterterrorism became the FBI’s top priority. But at the same time, and just when I became U.S. Attorney here, we were confronted with an explosion of corporate wrongdoing, from Enron to HealthSouth to WorldCom. We needed to prioritize our resources to fight both crime and terrorism. Returning now, after almost a decade, I can offer something of a progress report.
Unfortunately, the terrorist threat still looms large. Al Qaeda-central is not the dominant force it once was, but remains bent on death and destruction and our drawdown in Afghanistan offers them an opportunity to rebuild.
And as core al Qaeda has been diminished, its progeny have flourished and become the top threat—al Qaeda in the Arabian Peninsula, al Qaeda in the Islamic Maghreb, al Shabaab, and the Islamic State of Iraq and the Levant, among others. These offshoots are virulent and thriving in the poorly governed or ungoverned spaces in the Middle East and Africa. I wake up every day thinking about them.
I am especially concerned about the opportunity that Syria now offers for those and affiliated groups to attract thousands of fighters and train them. They are coming to Syria in droves from all over the world—including here—but it is the “going” that worries me most. That is, there will be a jihadi diaspora out of Syria at some point, just as there was out of the Afghan war against the Russians in the 1980s. You can draw a line between that terrorist diaspora and 9/11. The Syria outflow, which will be much larger and harder to track, cannot be allowed to follow a similar line to a future tragedy. The FBI and all other parts of our government work on it every day, all day.
And of course, we face homegrown terrorists. These individuals are self-radicalizing, inspired and equipped by the poisonous al Qaeda material on the Internet. They are willing to act alone, which makes them difficult to identify and stop.
So that’s terrorism today.
With regard to criminal threats, those of you who are defense counsel can attest to the fact that business is—fortunately or unfortunately, depending on your perspective—pretty good on your end. Corporate fraud, securities fraud, health care fraud, and mortgage fraud—the list is long.
We in the FBI are determined to do everything we can to prevent a terrorist attack while at the same time safeguarding our economy, our financial systems, and public confidence in the private sector. The American people expect us to do both. They pay us to do both. And I believe that with the resources Congress has given us—which will allow me to hire 2,000 people this year—we should be able to do both.
In recent years, we have changed both our mindset and the way we do business. I inherited from Bob Mueller a national security and law enforcement organization that uses intelligence to prevent and respond to both crime and terrorism. You may have heard our description of the FBI as “threat-based and intelligence-driven.” Let me say a word about what that means.
“Intelligence” is simply “information relevant to decision-making.” Becoming better at gathering useful information for ourselves, for policy makers, and for our partners in law enforcement and the intelligence community is one of our top priorities, not only from a national security perspective but also from the criminal side of the house.
At bottom, being threat-based and intelligence-driven is about becoming more thoughtful about what we work and how we do that work. There was a time when the FBI was criticized—with some justification—for working the inbox; our work was driven by the sources we had and the complaints that happened to come to our door. We too often worked what was directly in front of us, which might be a very different thing from the highest priority problems. That made it harder to see and address new and emerging threats.
Today, we are constantly involved in a process of trying to understand the threats we face in each of our offices here and abroad—what’s out there, what do we see, what might we be missing—both as to criminal and national security. Which of the threats we see should be at the top of our list, given the impact and our capabilities? Which should be lower priorities? And how should that be different in different cities and parts of the country?
We gather intelligence to help us understand and rank those threats, and we try especially to stare hard at what we don’t know—the intelligence “gaps”—so we can try to go fill those gaps and get smarter about the threats we are addressing and those we may need to address.
We do this for national security and criminal threats. We do it at the national level and in each field office, then we compare the national and local views and bang them together to reconcile them and come up with a threat prioritization ranking for each of our 56 field offices.
In short, we try to look out beyond our inbox to assess what the dangers are, what’s being done about them, and, given that and our resources, what we should spend time on.
So what are some of the things in the white-collar crime arena that we are seeing and deciding to spend time on?
With mortgage fraud, we’re seeing foreclosure rescue companies preying on distressed homeowners and criminals who target senior citizens with the lure of reverse mortgages.
We see money laundering becoming more complex as our country has gotten better at tracking it. Criminals are buying anonymous pre-paid credit cards. They’re transferring money via virtual currency, in countries with no regulation. And they’re using smaller institutions to inject money into the banking system to avoid the controls of larger entities.
And as the demand for health benefits goes up, so do the losses from health care fraud. We’re talking billions of dollars, every year.
Health care fraud runs the gamut, from one-person schemes to criminal enterprises and corporate-level frauds.
In the securities markets, we are targeting micro-cap market manipulation, insider trading, investment fraud, and accounting fraud.
To find and stop these criminals, we need every tool we’ve got.
We need intelligence, not only to spot emerging trends but to dissect these schemes and to stop them before they do more damage.
We need the technology to collect, analyze, and share high volumes of electronic evidence, rapidly and efficiently. We need high-level forensic accounting and analysis. And we need to be able to move at a moment’s notice, with “rapid response” teams.
And, of course, we need the same “bread and butter” investigative techniques we’ve used for decades—conducting surveillance and interviews, running court-ordered wiretaps and undercover operations, and cultivating sources.
Today, we have more than 1,300 agents working roughly 10,700 white-collar crime cases. The number of corporate fraud cases we investigate has increased by roughly 65 percent since 2008.
The agents and analysts who work these cases do some of the most complicated, hardest, and ultimately significant work we do for the American public. I’m not going to brag about our work—that’s what the U.S. Attorneys are supposed to do—but I hope you know many of our cases.
And as I also hope you know, our work is a team effort, as it has long been in the white-collar area. We’re working closely with our partners in the SEC, the Financial Crimes Enforcement Network, and in the United States Attorneys Offices, among others. And I have no favorite U.S. Attorney’s offices.
We have agents and analysts embedded with the SEC and the Commodity Futures Trading Commission. Together, we can identify trends quickly and open criminal investigations when necessary.
Our white-collar work gets a lot of attention—some positive, some not so much. Questions we hear again and again: How come we haven’t seen more high-level financial execs brought to justice? Is the government being aggressive enough?
My first reaction on hearing that is to notice how little things change. I can remember 12 years ago, when I was U.S. Attorney, people asking me the same questions, demanding to know why more “corporate pirates” weren’t locked up. All over the country I would be asked, “Why aren’t Bernie Ebbers and Ken Lay in jail?”
Well, I have two reactions to today’s same set of questions. And the reactions haven’t changed:
First, I would argue that there have been some very strong cases, with significant results.
Second, I would invite folks to try to understand our work better. What you will find—and even some folks who did this work years ago may have forgotten—is that these cases are very difficult to make. And I think that’s the way it should be.
You don’t want to live in a country where I can go lock people up because they “musta” done something wrong or because they “had to know” what was going on. Or because folks think they know both what and who “caused the financial crisis.”
You want to live in a country where, before we can take someone’s liberty and destroy their lives with criminal charges, we are held to the highest standard—a “beyond a reasonable doubt to a jury of 12 who must agree unanimously” standard. Public outcry or scathing newspaper columns don’t help us meet that burden—only facts do.
The challenge is that in corporate fraud cases, we have to examine the contents of someone’s mind. My obligation as a prosecutor was to prove not that people engaged in a financial transaction that went south…not that they contributed to some enormous meltdown…but that when they did the things they did, they knew they were engaged in conduct that was criminal in nature.
Unlike a drug case—which is about connecting people to a transaction—in nearly every white-collar case, it is clear who was involved in the transactions; the question is, “What were they thinking?”
Stupidity is not a crime. Risky behavior isn’t a crime, no matter how many innocent people got hurt by that stupidity, greed, or recklessness. In this country, we put people in jail when we prove they knew they were doing something criminally wrong. That’s hard, but it’s right.
To be fair, I should add that our work is assisted, enormously, by what I have long thought was the 20th century’s greatest gift to law enforcement—e-mail. It is an eternal medium through which people offer amazing perspectives on their mental state.
And today’s investigators and prosecutors have texting, which is even better at offering a window into the brain, including of the seemingly brainless. I didn’t really have that tool so much 12 years ago.
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Of course, hard as it is, we have to investigate these cases aggressively for a number of reasons. In many cases we find serious, knowing, wrongdoing for which people must be held accountable and punished severely.
That’s about individual accountability, but it is also important because general deterrence works in the white-collar context. Very few people commit accounting fraud or health care fraud or insider trading inflamed by passion or high on crack. People tend to reflect before they commit these crimes, and in that reflection is an opportunity to change behavior through fear of arrest and prosecution.
And beyond personal accountability and general deterrence, there is a third interest that drives us—public faith in the justice system. Despite what our mothers may have told us, in the justice system we should care what other people think of us. Public confidence is a key pillar of our criminal justice system. We must worry when we hear cynicism about the fairness of that system, and corrosive notions like “the rich and powerful can act with impunity.”
That doesn’t mean we bring cases we shouldn’t. But it means we must do the hard work to bring the right cases and make sure folks hear about them.
There has also been much talk lately about the concept of “too big to jail.” This both frustrates me and confuses me a bit.
Much of that talk is rooted in what seems a popular misconception—that corporations are something other than a legal construct; that corporations can commit crimes, be handcuffed, and go jail. I have two thoughts about that.
First, only individual humans actually commit criminal acts. Companies may be responsible for those acts in a legal sense, but no company in my experience ever committed a crime without individual humans who work there first committing a crime. Our focus as investigators should be to find the bad people, assemble a case against them, and then help the prosecutors make assessments about the organization in which they work.
Second—and I would have thought this was so obvious that it didn’t need to be said—a corporation can’t go to jail. A corporation is a concept, a legal construct, not something that can be put in an orange jumpsuit. I think people know this, but when I read about whether certain companies are “too big to jail,” I wonder. You can’t jail a legal concept. You can’t take a company’s liberty.
But that doesn’t mean you can’t prosecute that legal construct—that corporation—because it has assets that can be taken through prosecution and sometimes prosecution can change behavior in important ways. Holding institutions accountable can lead to structural and operational change, to a change in priorities or policy.
No individual or company is immune from prosecution merely because of size, or influence on the economy. No individual or company is above the law.
And if I can just add a footnote: Anybody who thinks FBI agents shy away from going after either people or companies because they are too prominent or two large, doesn’t know the FBI.
Among those who understand that all prosecutors can take from a company is money, a common refrain is this: Even a multi-billion-dollar fine doesn’t make these executives sweat. Where is the deterrent effect in big fines and deferred prosecution agreements?
I have some personal perspective that may be useful here. I spent the eight years before this job in the private sector and I know for a fact that even what people deride as “mere” civil settlements or deferred prosecutions have an enormous impact on private entities, and there is a powerful deterrent effect.
Because the board, the shareholders, and the employees are nearly always people who care deeply about this behavior and the fines and the publicity and are mortified by all of it and passionately wish to avoid a repeat of the experience. In ways that are sometimes difficult to see from outside, there is a powerful deterrent impact even from “mere deferred prosecution agreements.”
But as I said, there are times when both individuals and the entities in which they work need to be prosecuted. And as the Department of Justice always has, in criminal cases of all kinds, it will consider the collateral consequences of a prosecution. I have done it in my career in deciding how to treat two defendant parents with children—how do we hold the parents accountable and minimize the damage to innocent kids? That’s what a just system does.
And in the white-collar context, surely all the folks fired up about the need to “jail” more corporations haven’t forgotten the impact on tens of thousands of innocent people from the collapse of Arthur Andersen after its prosecution. That doesn’t mean we don’t do it; it means that we do it thoughtfully and with an eye toward achieving justice broadly.
Criminal prosecutions, deferred prosecutions, non-prosecution agreements, and civil enforcement actions—these are all tools in our toolbox. And we must be able to use all of them where appropriate, and where it makes sense.
But we also shouldn’t kid ourselves. We have to use our tools and bring these cases because bad people need to be held accountable, and those considering turning bad need to be frightened, and the public needs to be reassured that our system is fair to all.
But, just as we can’t arrest our way to a healthy urban neighborhood, we can’t deter our way to healthy corporate and market culture.
Our job in law enforcement is to create the incentives and the space for the leaders in private enterprise to grow healthy cultures. People talk like they understand that. Executives spend a lot of time talking about corporate culture. Companies have codes of conduct, with words like “integrity” and “values,” and “doing the right thing, even if it’s not the easy thing.”
The best definition of culture that I have heard is “the way things are really done around here no matter what they tell you in training.” I think that’s right.
I have lived in Richmond, Virginia and New York. I have driven in both places. I have explained to my children that the same driving laws and the same driver training apply in both places. But you would never know that from driving in both places.
In Richmond, people sit quietly at green lights waiting for the elderly driver to notice the light has changed. And if they don’t notice the first green light, they surely will notice the next one. We’ll wait.
New York is different. I had to teach my wife that if she is looking to change lanes on the highway and sees an opening, the last thing she should do is use her blinker. It is a sign of weakness. In fact, she shouldn’t even turn her head because they will see that. Check the mirror with furtive eyes, then make your move.
The driving laws are the same. The driving training is the same. Culture is the way things are done no matter what they tell you in training.
Which is why thinking you can train your way to a healthy culture is foolish. A laminated card with your corporate values on it is absolutely necessary, but not nearly sufficient.
And what makes it harder is that, not only can’t you train culture, you can’t even see it. It’s like air—all around you and essential, but largely invisible. The good news is that you can smell it, you can feel it. Without even looking at road signs or license plates, you can tell when you are driving in Richmond or New York.
When you step into a stinky corporate culture, you can smell it the moment you walk in the door. And a recent survey confirms that there is plenty to smell in the financial sector.
Of 250 financial industry insiders from dozens of companies—traders, investment bankers, portfolio managers, hedge fund professionals, analysts, and advisers alike—23 percent said they had “observed or had firsthand knowledge of wrongdoing in the workplace.”
Twenty-four percent said they would engage in insider trading to make $10 million if they could get away with it.
Fifteen percent said they doubted that their leadership would turn to the authorities upon learning of a crime by a top performer.
Now, there are good people out there doing good work—more good people than not. And ethical concerns are hardly limited to the financial sector or even corporate America.
But, as hard as it is, we need to find a way to create cultures in which people are comfortable with the idea of saying, “That doesn’t seem right.”
Getting folks to raise red flags is tough. There’s a natural tendency to look the other way, to “go along to get along,” as the saying goes. We all have responsibilities and expectations, bills to pay, kids to raise.
One of the great weaknesses of the human condition is our tendency to surrender individual moral authority to the group. And if the boss is perceived, in any way, as uninterested in such things, the surrender is accelerated. The hands stay down.
So how do you foster a culture of honesty and openness? It has to start with an appreciation of what healthy culture is and that you can’t explicitly train your way to it. Instead, it is about a board picking good, ethical leaders, who, in turn, insist upon picking good ethical underlings. It is about the board and those ethical leaders shaping the culture by their actions, which must include removing compromised leaders and recognizing and celebrating ethical conduct to shape the culture.
It is about those responsible asking not just about the results but “How are we obtaining these results?” “Are we doing the right things in the right way?” It is about those leaders asking outsiders to take a sniff and tell them how the place smells.
Corporate fraud investigations emphasize the need for those outside noses—independent board members, auditors, monitors, and outside counsel. We do that because those outsiders can help drive cultural change by picking good people and holding them accountable. And by celebrating people who raise their hand and call out bad behavior. By calling out stinkiness.
Many of you are defense counsel. It’s your responsibility to advocate on behalf of your clients. I get that. I have done that. But it is also your job to steer your clients in the right direction, before we ever enter the picture, by helping them shape a healthy culture.
You can help create strong compliance practices. You can encourage self-reporting and transparency. You can advise boards on the vital importance of understanding culture. You have the power to guide corporate leaders on the right course. You can help create a culture of integrity, honesty, and fair dealing.
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We at the FBI are going to keep doing this work because we simply must.
We will try to think well about how crimes and criminals are changing and adapt our approach quickly.
We will work with the U.S. Attorneys to bring the right cases in the right way, to send messages of both personal and general deterrence and to reassure the public that the system is fair.
And we hope through that work we create the conditions—the space—for good people to create and foster healthy cultures that carry your institutions in a direction where our paths never need cross.
Thank you for having me here today.