The Yates Memo and the law of unintended consequences

In the world of finance, the law of unintended consequences is and always has been a driving force in shaping economic policy

The law of unintended consequences states that the actions of people, and especially of government, always have effects that are unintended. For example, in an effort to protect the threatened Northern Spotted Owl in the 90s, Judge William Dwyer issued a ruling that greatly reduced commercial logging activity in the national forests of the Pacific Northwest.

Dwyer saved the owl, but there were multiple unintended consequences as a result. Aberdeen, Washington (near the Pacific coastline) used to be a logger’s paradise, but after Dwyer’s decision, the logging industry moved elsewhere. As a community, Aberdeen was decimated and its residents, the former loggers, are now barely hovering above the poverty line. The Aberdeen consequence was not likely what Dwyer had intended with his decision.

In the world of finance, the law of unintended consequences is and always has been a driving force in shaping economic policy. Even the best intentioned pieces of legislation can have the worst consequences. One of those well-intentioned efforts, what’s known as, ‘the Yates memo,’ is just now starting to reveal its unintended consequences a year after its release.

What is the Yates Memo?

Deputy Attorney General Sally Yates issued a public memorandum entitled Individual Accountability for Corporate Wrongdoing, in which she laid out the Justice Department’s desire to spend more resources pursuing individuals for corporate misdeeds. You can read the entire thing here, but following are the memo’s main points as laid out by Yates:

1. To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.
2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialized.
6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

In my opinion, the Justice Department’s shift in strategy was directly focused on accelerating corporate risk compliance by adding more targeted regulations and dangling a carrot in the form of a cooperation credit. That’s a good result for the government, but is that a good thing for the compliance officers of the world? A bank’s compliance officer, for example, who has visibility into the bank’s AML practices might want to be aware of his or her own potential for personal liability, especially in light of recent FinCEN and FINRA actions against individuals.

For these reasons, my colleagues and I have paid close attention to this memo’s potential positive impact and its potential for unintended consequences.

5 Unintended Consequences

Unfortunately, the data available to support the positive impact of the Yates memo seems years away, but the list of published unintended consequences is growing. In fact, a recent report released by the U.S. Chamber of Commerce’s Institute for Legal Reform found that the Yates memo will actually make it harder for companies to cooperate with the government because of blurred lines such as:

• Alienating personnel whose knowledge and information is needed by criminal investigators, which ultimately complicates compliance issues.
• Reducing a corporation’s ability to internally assess whether existing compliance programs work, or how to improve them, because the company’s employees are afraid to report transgressions for fear of drawing too much attention to themselves.
• Creating even more uncertainty for corporate decisions regarding the benefits of voluntary self-disclosure of suspected unlawful conduct.
• Renewing concerns about the pressure to waive attorney-client privilege.
• Complicating what was traditionally a straightforward corporate decision: whether or not to cooperate with a government investigation.

During a speech to announce the release of the memo, Yates was quoted as saying, “Americans should never believe, even incorrectly, that one’s criminal activity will go unpunished simply because it was committed on behalf of a corporation.”

Meanwhile, bank compliance officers countrywide shook in their boots and then were crushed under yet another pile of paperwork…