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From Banking and Finance Law Daily, January 9, 2014

Bill would require disclosures in settlements over corporate wrongdoing

By J. Preston Carter, J.D., LL.M.

A bipartisan measure introduced in the Senate would increase transparency around settlements reached by federal enforcement agencies. Introduced by Sens. Elizabeth Warren (D-Mass) and Tom Coburn (R-Okla), The Truth in Settlements Act would require more accessible and detailed disclosures about these settlement agreements to allow the public to hold regulators accountable for the true value of these deals.

Background. Federal agencies are charged with holding companies and individuals accountable when they break the law, and their investigations regularly end in settlement agreements rather than public trials. According to the Senators, when federal agencies close investigations and settle cases, they often tout the dollar amount obtained from the offender, but in many cases that amount is misleading because of tax deductions and other "credits" built into the settlement that reduce the settlement's true value. In addition, because these agreements are deemed confidential, major details or even the fact of a settlement are sometimes not available to the public, Warren and Coburn maintained.

"When government agencies reach settlements with companies that break the law, they should disclose the terms of those deals to the public," said Warren. "Anytime an agency decides that an enforcement action is needed, but it is not willing to go to court, that agency should be willing to disclose the key terms and conditions of the agreement. Increased transparency will shut down backroom deal-making and ensure that Congress, citizens, and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest."

"Taxpayers deserve to know the settlement details corporations arrange with the government, and the best place for Congress to start is with policies that enhance transparency," Coburn said. "Since agencies are not currently required to disclose the financial structure of government settlements, too often the true value of those settlements is not known because often companies are allowed to deduct part of the payment."

Truth in Settlements Act. The Truth in Settlements Act demands specificity and transparency in all federal agency settlements that include over $1 million in payments. The measure is intended to ensure that relevant details and terms of non-confidential settlements are publicized truthfully, and that the process by which settlements are deemed confidential is assessed and monitored. As outlined in a fact sheet provided by the Senators, the measure:

  • requires federal agencies to explain, in written public statements that reference the settlement amount, whether any portion of that amount is potentially tax deductible or includes the cost of “credits” for routine conduct;

  • requires federal agencies to post basic information about settlements over $1 million on their websites, and provide copies of such settlements as well;

  • requires companies that settle with enforcement agencies to state in their SEC filings whether they have deducted any settlement payments from their taxes;

  • requires federal agencies to explain why they deemed a settlement confidential;

  • requires federal agencies to report annual aggregate statistics on confidential settlements; and

  • directs the GAO to conduct a study to examine the confidentiality issue and make legislative and administrative recommendations for reform.

Public Citizen applauds. “True justice takes place in a public court,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division. “Settlements may be struck by cronies in the back room.” The organization’s press release, which applauded the measure, noted that on Jan. 7, 2013, the Department of Justice settled a mammoth case with JPMorgan Chase & Co. involving mortgage fraud and its failure to detect the massive Madoff Ponzi scheme operating within its own bank (see Jan. 7, 2013, Banking and Finance Law Daily).

“There is an urgent need for transparency regarding why the Justice Department continues to use deferred prosecution agreements to address criminal activity at megabanks as it did with HSBC and just this week with JPMorgan,” according to Amit Narang, regulatory policy advocate for Public Citizen’s Congress Watch division. “The Justice Department owes the public an explanation as to why JPMorgan and other megabanks receive only slaps on the wrists instead of being held accountable for their criminal actions in court.”

Public Citizen stated that it hopes to work with Warren, Coburn, and other allies to increase disclosure, especially when enforcement agencies reduce penalties for megabanks based on fears that prosecuting them would jeopardize the financial system.

U.S. Pirg approves. While federal law forbids companies from deducting public fines and penalties from their taxes, U.S. Public Interest Research Group (U.S. Pirg) stated, companies that resolve charges through a legal settlement typically manage to deduct the penalties as a tax write-off unless specifically forbidden from doing so. In essence, companies are allowed to receive a tax break for their wrongdoing without the public ever knowing it. The consumer group noted that the bill comes on the heels of a year of record-breaking settlements in Wall Street and other industries. It added that the details of many of the past year’s settlements remain undisclosed to the public.

“The fact that these two Senators who so often disagree came together on this bill shows a broad consensus that governmental deal making over corporate misdeeds should happen in full view of the public,” said Francisco Enriquez, U.S. PIRG Tax and Budget Program Associate. “Americans deserve truth in advertising from the federal agencies that work on their behalf. The public should know how much settlements are worth and whether they include hidden subsidies or sweeteners that taxpayers must ultimately foot the bill for.”

Companies: JPMorgan Chase & Co.; Public Citizen; U.S. Public Interest Research Group

MainStory: TopStory EnforcementActions

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