Gigantic settlement figures, such as the $2.6 billion fine leveled on J.P. Morgan last week, may not be all they appear. Senators Elizabeth Warren (D-MA) and Tom Coburn (R-OK) introduced the Truth in Settlements Act last week, designed to uncover misleadingly inflated government fines.
“Agencies trumpet the top-line amount they obtained while failing to disclose that the settlement includes significant tax deductions or ‘credits’ for routine conduct that dramatically reduce the actual value of the settlement,” Warren states.
The bipartisan legislation would require federal agencies that have negotiated a settlement of $1 million or more with a company to disclose its specific terms to the public—how much of the settlement is tax-deductible and how much involves “credits” for routine conduct. Warren and Coburn also insist that when settlement details are deemed confidential, as they often are, federal agencies must explain: (1) what interests confidentiality protects and (2) why the interests protected by confidentiality outweigh the public’s interest in knowing about the conduct of the Federal Government and the expenditure of Federal resources.
According to Senator Warren, “[a]nytime 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.”
Publicly Searchable Settlement Database
The Truth in Settlements Act requires each Executive agency to “make publicly available in a searchable format in a prominent location on the Web site of the Executive agency” a list of each settlement agreement entered into by the Executive Agency, which shall include:
- The date on which the parties entered into the settlement agreement;
- The names of the parties that settled claims
- A description of the claims each party settled
- The amount each party settling a claim is obligated to pay under the settlement agreement
- The total amount the settling parties are obligated to pay
- For each settling party, the amount the settling party is obligated to pay that has been designated as a civil penalty or fine, or otherwise specified as not tax deductible.
Furthermore, whenever an Executive agency makes a written public statement that refers to an amount to be paid, the agency must specify how much companies will actually pay in fines. Currently, the tax code allows corporations to deduct any settlement payments classified as restitution or compensation, but prohibits them from deducting payments classified as penalties or fines. The Act seeks to make any such classification transparent.
The Truth in Settlement Act acknowledges the potential confidentiality issues at stake, but does not really offer any recommendations at this point.
The Act directs the Comptroller General to submit to Congress a report, including recommendations for legislative or administrative action to increase the transparency of Government settlements while continuing to protect the legitimate interests that confidentiality provisions serve.
It will be interesting to follow the response to the bill. Both Senators sit on the Senate Banking Committee, and Warren has pressed regulators on why they have not taken Wall Street banks to trial. Regulators argue that settlements are often reached because they are quicker and less expensive the drawn out litigation.
Perhaps increased transparency in settlement deals, including the tax treatment of the payments, will be a middle ground between costly trials and toothless “fines.”