Ralph Lauren’s Deal with SEC and DOJ
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.
Bribing foreign officials is a US federal crime, whether or not the action is a crime under foreign law. 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.
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.)
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.
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 SEC’s resolution strongly rewards corporate cooperation and diligence in response to internal control problems that lead to legal violations, which the corporate defense bar is applauding. The DOJ’s more punitive intervention gets less praise in those quarters.
For me, the case illustrates a useful approach to the problem of misconduct within a large global corporation: allowing the corporation to determine the required internal governance and compliance reforms to reduce the risk of future violations rather than having those changes hammered out in a contractual negotiation with government officials.
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.
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.
The most worrisome thing about deferred prosecution agreements today is not the hand-wringing one hears so much about whether corporations are being let off too easily or unfairly persecuted. It is what effects mandatory governance reforms will have at these companies.
The kind of conscientious response that Lauren demonstrated is the kind of thing government should reward and endorse. The SEC and DOJ both deserve credit for showing such deference and restraint in the Lauren case.