ryan1234

Department of Coercion

by John Hasnas


John Hasnas teaches ethics and law at Georgetown University's McDonough School of Business and is the author of Trapped: When Acting Ethically is Against the Law.

Added to cato.org on March 14, 2006


This article appeared in the Wall Street Journal, March 11, 2006.

"Say you run a financial services firm that markets tax shelters to wealthy clients. Although the shelters are aggressive, you firmly believe they're legal. Indeed, you have sent one of your tax partners to testify before Congress to that effect. The IRS hasn't challenged the shelters in court, and no court has declared them to be illegal. Nevertheless, the Department of Justice has opened an investigation of your firm for tax fraud and indicted the partner who testified before Congress.
As a responsible executive, what should you do? Instruct corporate counsel to conduct an internal investigation to ensure that no law has been broken? Have the legal department begin to work on the corporation's defense? Enter into a joint defense agreement with the partner under indictment? Advance the partner's legal fees in accordance with the company's policy of supporting employees sued for employment related actions?

Or should you have the corporation accept responsibility for tax fraud, officially declare that several of your tax partners engaged in unlawful conduct, refuse to enter into a joint defense agreement or advance the legal fees of any of these partners, fire those who refuse to cooperate with the government, waive the firm's attorney-client and work product privileges, disclose all information that may incriminate your employees to the government, and agree to pay a several hundred million dollar fine? This, surprisingly, is the answer. Under current federal law and Department of Justice policy, it would be irresponsible management to attempt to defend the corporation or its employees. ........

.....most corporations solicit sensitive information from their employees by promising to keep communications made through employee "hotlines," or pursuant to the firm's attorney-client privilege, confidential. But whenever such communications suggests possible criminal activity within the firm, the corporation must disclose it to the government or risk indictment and increased fines. The responsible manager must then chose between protecting the corporation and reducing its promise of confidentiality to a fraud.

Worse, conscientious managers cannot escape the dilemma by refusing to make a promise of confidentiality that they know they will have to breach. For by doing so, they would willingly forgo one of the most effective means of monitoring employee conduct. And under the Thompson Memorandum and guidelines, this would constitute a failure to have an effective compliance program, which would itself increase the firm's exposure to indictment and enhanced penalties.
Similarly, managers who believe that they are ethically bound to respect their employees' privacy must somehow square this obligation with the injunction to engage in sufficient "monitoring and auditing to detect criminal conduct."

Finally, the minimal demands of justice seem to require that employees be accorded a modicum of due process and not be subjected to adverse action in the absence of adequate evidence of guilt. But both the Thompson Memorandum and the guidelines require that a corporation accept responsibility for criminal conduct to be regarded as cooperating. Since corporations act only through their employees, accepting responsibility means declaring that its employees violated the law. How can managers give their employees a presumption of innocence while simultaneously declaring them guilty? How can they ensure that their employees receive due process while firing them if they choose to mount a defense, refusing to advance their attorney's fees, and becoming part of the government's prosecution team? ...."