When a multinational corporation finds out that some of its tens of thousands of employees, agents and their nasty friends are up to no good under the Foreign Corrupt Practices Act, they open the big money pit in the back of headquarters and throw in tons of cash.  Well, actually they hire lawyers to conduct investigations to prove them guilty as sin and, for good measure, alert the government to prove what good corporate citizens they are.  But it’s the same thing.

Ralph Lauren, the fellow who sells more shirts with a polo pony on them than with the name Lipschitz emblazoned on the breast, found out the hard way that the playbook is a harsh and expensive solution. Via Lawrence Cunningham at Concurring Opinions :

Ralph Lauren Corp.’s mid-level executives discovered that a few line employees in Argentina had bribed local officials. That enabled importing of the company’s clothing products without the necessary paperwork or inspection.  The bribes, paid from 2005 to 2009, ran to $593,000.

A routine internal corporate review of controls and compliance programs by Lauren managers uncovered the employee actions.  The corporate response was swift, a textbook exercise in corporate crisis management.

Crisis management may not be the best way to describe it.  Yes, it’s the “common wisdom,” but that comes from former government prosecutors who have shifted to Biglaw “defense,” which means they hold corporate hands while walking them to the United States Attorneys office to confess, write checks larger than the economies of several small nations and offer their first born.  For substantially larger sums, these specialists tell their charges there is nothing to be done other than kill off employees, concede malfeasance and throw money away, a not-insignificant chunk of it ending up in their hands.

A prompt investigation was conducted, involving translation and examination of documents and interviews of witnesses.  It resulted in dismissal of several employees and recommendations for internal governance reforms that included new reporting protocols and training programs.

Within two weeks of the discovery, Lauren provided the resulting full report  to US federal authorities, including the Securities and Exchange Commission and Department of Justice, accompanied by the documentary record.  (The company then went further: terminating operations in Argentina and conducting a worldwide review of compliance and training programs.)

Who needs the feds when legal advice compels a company to do the government’s job for it, only swifter, better and with more devastating consequences.

For such efforts, the SEC’s enforcement authorities decided to give the company enormous credit and a mere slap on the wrist.  In a non-prosecution agreement, the SEC required Lauren to disgorge the $593,000 plus interest of $142,000. It did not require the company to make any additional changes in controls or governance machinery.

Disgorge is a curious description. The $593,000 is the amount they paid out in bribes, not the amount they took in. Disgorge usually refers to the fruits of crime, but instead refers here to the perverse perspective of our government in keeping American corporations pure as the driven snow while minor warlords elsewhere demand their piece of the pie. Whether it’s money in or out, gained or lost, or even neither existing nor realized, it’s all money the government demands be disgorged.

The DOJ was not content with such a modest federal response. Although it also refrained from imposing governance changes, the DOJ imposed a penalty of $882,000 and required the company to admit to specific allegations (detailed in 16-paragraphs of text).

The problem is that the only enterprise allowed to engage in wanton corporate financial crime is the government.  So the SEC merely doubled (with interest!) Ralph Lauren’s loss. That left nothing for the DOJ to suck up to get its piece of the prize money and demonstrate its omnipotence over a major player in the world of commerce. After all, Ralph did everything the playbook says, and expected to fork over a few suitcases, shake hands and get Clothier of the Year from Washington. Instead, the young but powerful lawyers at DOJ needed their own bite out of the corporation, because the SEC’s piece did them no good.

But these numbers are still rather insignificant for Ralph. You like their shirts and they like to charge a premium for the polo pony, all of which enables them to throw big numbers around over some nonsense that happened in Argentina.

No sizable corporation can assure that no crimes will be committed by its employees or agents. The best we can do is design governance, control systems and training programs to deter and detect. When a system shows leaks, corrective steps are warranted. Ideal steps are best determined by the corporation’s own management, as done here.

They don’t need the headache of penny-ante shenanigans by low-level staff creating corporate problems, and Ralph has far more motivation to quell such antics than anyone else. Clean, solid companies don’t need scandals or indictments.  But collecting the pocket change isn’t enough to appease the kids at Justice.

Government officials rarely know enough about corporate governance or culture to direct corrective steps.  Yet the proliferation of deferred prosecution agreements in the past few years has led them to do so expansively.

Because a bunch of lawyer a couple years out of law school with deep experience warming a seat in a Biglaw library are suddenly endowed with the ability to tell major corporations how to run their companies.

Not to be unfair to the government lawyers honing their corporate skills, this is the job they’ve been given. What makes it work is the dozens of lawyers from dozens of firms who flowed through the DOJ to Biglaw pipeline to be partners without portfolios specializing in facilitating corporate confession and contrition, because that’s what the playbook says they must do.

And if you wonder why that preppy shirt with the polo pony costs so much, at least you can take comfort that looking like a Ralph model (except a few sizes larger) fed the government’s war chest and kept a few nobody employees on the unemployment line.  Isn’t it grand how honestly run major corporations can be with the government’s hand on the wheel?  Because American enterprise will do far better under the control of Justice lawyers than the guys who know how to make and sell shirts, and cleaned up the mess on their own anyway.

Update:  On the applause of how well it went for Ralph Lauren to “cooperate” with the government, proving that it’s better to concede than not, Mike Koehler at  FCPA Professor writes:

When the DOJ (and now the SEC) use resolution vehicles [non-prosecution agreements] that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.

When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.

When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.

And of course, despite all this fabulous cooperation, it could just as easily have gone a very different way, as it has for so many others.  It’s nice to know I’m not the only one who questions the very expensive common wisdom of capitulation.