May/June 2012
Operating your business legally and ethically is no longer sufficient in this new era of heightened government enforcement. Three additional steps can help protect you from criminal investigations and prosecutions.
By Benjamin G. Dusing
A scrap industry veteran who had been operating in the Cincinnati area for many years thought he was doing all the right things. For years he worked proactively with local law-enforcement agencies to prevent, detect, and deter materials theft. So imagine his astonishment when, in October 2010, dozens of armed state and federal agents, led by the criminal investigation division of the Internal Revenue Service (Washington, D.C.), stormed his facility brandishing firearms and literally put a gun to his head in front of his customers.
The officers were executing a search warrant obtained in connection with a large-scale investigation into the region’s scrap recycling dealers and their role in high-dollar metals theft. This company was one of six the investigators raided that day. While officers detained employees for questioning, searched computers, and seized records, the business screeched to a standstill. Then, thanks to a news release issued by federal authorities, the press arrived on the scene. The raid was front-page news the following day.
If you think this couldn’t happen to you, think again. White-collar and corporate crime investigations and prosecutions have increased exponentially over the past few years, and law-enforcement agencies are directing more of their efforts toward the scrap recycling industry, whether it’s to track down materials theft problems or enforce stringent environmental laws. What happened to this dealer can happen to anyone.
Getting it Wrong
In my former career as a federal prosecutor, I worked with the Federal Bureau of Investigation, the IRS, and other federal and state law-enforcement authorities daily to fight white-collar crime and corporate misconduct. I soon learned the obvious: Corporations and those who run them break the law from time to time—often in an amazingly brazen fashion. But I also learned an equally important lesson: The government can—and often does—get it wrong. The FBI, the IRS, and other federal investigative agencies are not infallible; as for local and state authorities, they sometimes take the “shoot-first-and-ask-questions-later” approach. I don’t want to cast aspersions too broadly—some of my closest friends are in law enforcement—but the point remains: Getting it wrong happens more often than you’d think.
Now that I’m in private practice and serve as counsel to scrap recycling companies, I’ve encountered many people who find themselves the target of local, state, or federal criminal investigations through no fault of their own. Take the aforementioned Cincinnati-area scrapyard owner, who is my client. Over the years, he has paid a measurable price for his cooperation with law enforcement. For example, at the direction of law enforcement, as part of sting operations designed to combat metals theft, he has routinely purchased material suspected as stolen, yet very rarely has he received restitution payments after the material was seized as evidence or returned to its owner. He even has permitted law-enforcement officers to work at his business undercover to assist them with a sting operation. Like virtually everyone else in the industry, he has come to view such losses as a cost of doing business and being a good corporate citizen. Yet his history of partnership with law enforcement didn’t protect his company from unfairly being the target of a federal grand-jury investigation.
My client’s ordeal, thankfully, has a happy ending. Ultimately, the authorities acknowledged they had insufficient evidence to seek an indictment—but only after my client had suffered serious damage to his reputation and incurred significant legal and other costs. As it turns out, the entire investigation was based on the allegations of a confessed metal thief who had yet to be sentenced for his crimes—i.e., someone with a serious ax to grind whose story should have been met with skepticism. The feds hadn’t bothered to check with the locals, who would have told them of my client’s track record of assisting law-enforcement officials, not plotting against them.
Sadly, my client’s experience is not unique. Take the case of OmniSource Corp., a scrap company based in Fort Wayne, Ind., with more than 70 facilities in the Midwest and Southeast. In October 2010, a Marion County, Ind., grand jury returned an eight-count indictment accusing the firm of racketeering and receipt of stolen property. The prosecution was based on a February 2009 raid of six company scrapyards by FBI, state, and local authorities.
After the indictment, then-OmniSource President Mark Millett was beside himself. After all, the company was “a scrap industry leader in anti-theft training and law enforcement cooperation,” he stated in a press release announcing the indictment. It had hired more than 50 police officers at its own expense to help detect and deter metals theft. What’s more, OmniSource had invested more than $1 million in anti-theft measures, lobbied for stronger scrap-purchasing regulations, and installed state-of-the-art cameras and monitoring and recordkeeping software to track scrap purchases. In short, OmniSource had done nothing wrong—and Millett was determined to prove it.
Ultimately, all charges against OmniSource were dismissed, and Millett (who is now president and CEO of OmniSource parent company Steel Dynamics, also in Fort Wayne), received his much-deserved vindication. So unjust was the prosecution that the Marion County prosecutor’s office took the highly unusual step of declaring that the evidence had not supported the indictment the grand jury handed down—a remarkable admission, given that the previous prosecutor had presented that same evidence to the grand jury to request the indictment. The exoneration didn’t come until July 2011, however—two years after the initial raid. In the interim, the company lingered in prosecutorial limbo, spending valuable time, money, and other resources on its legal defense.
Proactive Measures
The experiences of my client and OmniSource are just two examples of the nightmares scrap companies have faced. It’s hard not to get indignant just thinking about it. In both instances, the government investigations were unwarranted and their actions unjustified. There’s a lesson to be learned, however: The scrap recycling industry is firmly on law enforcement’s radar screen, and companies that choose to ignore this reality do so at their peril. That said, certain measures can help a business minimize its risk of becoming subject to such investigations or the risk of such an investigation ripening into a full-scale prosecution, and such measures could even mitigate the penalties in the case of a conviction. I believe it’s absolutely essential that every business have a government-investigation compliance plan that, at minimum, consists of three parts: proactively working with local law enforcement and creating and implementing both an enforcement-response plan and a business code of conduct.
1. Proactively work with local law enforcement. This is an essential component of any plan because it’s the single best avenue for heading off unjustified, misguided, and resource-sapping investigations before they begin. In most circumstances (though my client’s was a notable exception), state or federal agencies consult with local law enforcement before they take action, thus a good working relationship with the local sheriff or police department can protect against misunderstandings. Forward-thinking scrap recycling businesses look for opportunities to form such relationships by initiating dialogues rather than merely responding when the police call on them. For example, a company can alert the authorities when someone tries to sell suspicious material or, even better, it can approach law-enforcement agencies and ask to meet to discuss avenues of collaboration to combat materials theft. Further, a scrap company can work with the police and local businesses to establish a notification system or get all parties to sign up for ISRI’s ScrapTheftAlert.com, which alerts subscribers in a 100-mile radius to a reported material theft.
2. Create a government-enforcement response plan. A written, strategic plan of response can guide a company’s on-site managers and employees in the event of a government enforcement action such as a raid, ensuring that they take appropriate steps to minimize the business’s exposure and mitigate disruption. I recommend that companies train all managers and employees on the plan at least once a year, ideally in conjunction with annual compliance training.
At a minimum, the plan should specify that the on-site manager immediately must contact not only his or her supervisor, but also a predetermined company attorney with white-collar crime experience. (I’ve found that raided businesses have a tendency to contact their “general” company attorney. Though it’s important to notify this person, if he or she does not have criminal law experience, that attorney’s involvement in these situations could actually make matters worse.) Include the criminal defense attorney’s contact information in the written plan.
The plan also should instruct all employees to be cooperative with on-site agents but be mindful as well of their constitutional right to refuse to speak to law enforcement before consulting with company or personal counsel. You might be surprised by how often law-enforcement agents executing a search warrant imply that employees must speak with them. Other important provisions of a government-enforcement response plan might pertain to record-handling and steps that can be taken to ensure that managers and employees don’t inadvertently waive their corporate attorney-client privilege.
3. Have a written, robust business code of conduct. The most important step a company can take to protect itself against a government enforcement action is to have a business code of conduct: a document that outlines a company’s policies and principles, namely its commitment to “do things the right way,” and specifies the ethical standards the company expects its employees to uphold. This document can act as both sword and shield. It can prevent the occurrence of misconduct that might give rise to law-enforcement scrutiny by making it clear to employees—for whose actions a business is almost always responsible—the company’s high ethical expectations. More important, however, it can mitigate the consequences of any misconduct if it does occur. Believe it or not, once a business has become the subject of an investigation—or worse, if it’s formally charged with a crime—the existence of a written business code of conduct factors heavily in determining the outcome. First, subjectively, the fact that a business has invested corporate resources to compile and implement a code speaks well of the organization and generally runs counter to the idea that the firm intentionally did anything wrong. Second, objectively, there is a tangible legal significance to having an “effective ethics and compliance program”—i.e., a business code of conduct—that’s spelled out in federal law.
The U.S. Department of Justice (Washington, D.C.) publishes the U.S. Attorney’s Manual to guide federal prosecutors when they are deciding whether to prosecute organizations, rather than individuals, for crimes. The manual directs prosecutors to weigh the existence of an “effective” compliance program against other evidence that might lead it to charge an organization with a crime. What’s more, if an organization is prosecuted and convicted of a crime, the existence of a written business code of conduct can reduce the company’s potential sentence under federal sentencing guidelines. Given the tremendous protection a written business code of conduct can give and the minimal investment of time and money it takes to create one, there is simply no excuse not to have one.
With government enforcement actions on the rise, even the most responsible scrap recycling organizations can find themselves at risk of being subjected to resource-sapping, image-damaging raids, investigations, and prosecutions. Companies can minimize the risk of such actions and mitigate their consequences, however. Business owners should speak with counsel about creating these essential compliance protections now, before it’s too late.
Benjamin Dusing, a partner with Adams, Stepner, Woltermann & Dusing (Covington, Ky.), is a former federal prosecutor in Ohio and Kentucky. Paralegal Marion Hirseman contributed to this article.
Operating your business legally and ethically is no longer sufficient in this new era of heightened government enforcement. Three additional steps can help protect you from criminal investigations and prosecutions.