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Will Biden Restore ‘Charitable’ Shakedowns?

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Will Biden Restore ‘Charitable’ Shakedowns?

The Wall Street Journal January 28, 2021

He’s ordered a review of a Trump policy against settlement payouts to favored third parties.

Buried in the Biden administration’s flurry of early executive orders is a potential challenge to the core legislative function: the power to tax and spend. Under the proposal, the Justice Department may revert to using its enforcement power to force companies under investigation to give billions of dollars to outside interest groups—a common practice before June 2017. Implicitly, this amounts to a federal appropriation unauthorized by Congress.

After the 2008 financial crisis, for instance, the Obama administration’s Justice Department extracted multibillion-dollar settlement deals from major banks. These agreements directed the banks to send almost half the settlement dollars not to the Treasury or the actual victims of corporate misconduct but to “consumer relief” payments directed by administration officials. Among these payments: funding for new “affordable housing” developments, as well as gifts to government-sanctioned community-development, legal-aid and housing activist groups.

Although the Obama Justice Department was unusually aggressive in using threats to make implicit appropriations, it didn’t invent the approach. Under George W. Bush, Justice entered a deferred prosecution agreement with Bristol Myers Squibb that required the company to endow a professorship at Seton Hall University’s law school—alma mater of Chris Christie, the U.S. attorney overseeing the settlement deal. The professorship? A chair in business ethics.

Early in the Trump administration, Attorney General Jeff Sessions put an end to such practices. Under the policy Mr. Sessions adopted, “any agreement on behalf of the United States in settlement of federal claims or charges” couldn’t direct or provide for “a payment or loan to any non-governmental person or entity that is not a party to the dispute.” There were exceptions, as codified last year in a final rule—among them, restitution to actual victims, lawyer fees and “payments expressly authorized by statute.”

Mr. Sessions was right. Law enforcement necessarily generates some revenues from private parties. Money flows to the U.S. Treasury from statutorily authorized fines. In some cases, defendants should pay restitution to victims of civil or criminal misconduct. Yet that’s different from reallocating fines or restitution payments to unrelated third parties. 

Federal prosecutors were able to funnel settlement dollars to third-party groups because the corporate defendants were “voluntarily” settling the claims—unlike an actual court judgment levying a fine or ordering restitution. But with billions of dollars of liability on the line, in addition to potentially crippling losses of government licenses and contracting permits, corporations negotiating with the Justice Department might as well be negotiating with Don Corleone : It’s an offer they can’t refuse.

The manner in which the government has resolved such claims has drawn fire from across the political spectrum. I’ve focused on the vast powers assumed by Justice—delegating implicit regulatory authority to department lawyers outside formal rulemaking or congressional or judicial review. On the left, Massachusetts Sen. Elizabeth Warren has assailed settlements she calls “get-out-of-jail-free cards for the biggest corporations in the world.” She has a point: corporations can’t go to jail, but executives willingly shell out shareholders’ money to avoid their own criminal culpability. They’re indifferent to whether the money goes to the government, an actual victim, or a third-party group favored by government enforcers.

Therein lies the rub. Most individual criminal defendants accept plea bargains, and the majority of big-ticket civil lawsuits are resolved through settlement rather than trial. But such settlements are not unchecked. Plea bargains must be approved by a judge—who would be expected to reject an agreement that required a defendant to give a donation to some bureaucrat’s favorite nonprofit. A plaintiff’s lawyer seeking to settle a lawsuit by directing a defendant to divert money to a third party would be in ethical hot water, unless his client clearly agreed with the plan. (There’s a limited exception in class-action law, where allocating settlement proceeds to charities has become all too common. But even that’s subject to judicial review, and the Supreme Court may end it soon.)

Neither civil settlements nor nonprosecution agreements between the government and a private defendant go before a judge. Even if they did, judges in our adversary legal system would be ill-equipped to review such decisions, since the government and defendant have agreed to the terms. That makes it imperative to put firewalls in place to prevent executive-branch officials from using enforcement authority to direct money to charities, whether community organizers or alma maters.

Will the Biden administration reverse Mr. Sessions’s common-sense firewall? It’s too soon to know. The Sessions rule is but one of several “agency actions” singled out for review under a sweeping executive order on public health and the environment that also put a moratorium on Arctic drilling, revoked the permit for the Keystone XL pipeline and proposed a new working group to rejigger the government’s environmental cost-benefit analysis. The new Justice Department will be responsible for the review called for under the executive order, and senators should ask the administration’s nominees tough questions. 

This piece originally appeared at The Wall Street Journal (paywall)


James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute. He is the author of “The Unelected: How an Unaccountable Elite is Governing America.” Follow him on Twitter here.

Photo by Alex Wong/Getty Images