Here we go again: Princess Cruise Lines has pleaded guilty to a second violation of a probation deal imposed by the Justice Department in 2017 for environmental crimes, will pay another $1 million in criminal penalties, and undertake even more remedial measures to strengthen its compliance program.
If all this sounds familiar, that’s because Princess and its parent company Carnival Cruise Lines were convicted of six probation violations in 2019, which resulted in a $20 million fine and the requirement that Carnival hire a chief compliance officer. Those violations had arisen from a criminal settlement against Princess in 2017, where the company admitted to felony charges of deliberately dumping contaminated waste into the ocean and then covering it up. That settlement included a $40 million fine, a compliance monitor, and a five-year probation agreement — the one Princess has violated repeatedly.
The latest violation is that Princess hasn’t yet established an independent investigations unit known as the Incident Analysis Group, which was required under the original plea deal from 2017.
“Beginning with the first year of probation, there have been repeated findings that the company’s internal investigation program was and is inadequate,” the Justice Department said in a statement released Tuesday. “Princess admitted that internal investigators had not been allowed to determine the scope of their investigations, and that draft internal investigations had been impacted and delayed by management.”
Those allegations are bad enough unto themselves, but they’re even worse when one considers the context. The 2019 probation violations involved executives sending undercover teams to Princess cruise ships to prepare them for independent inspections required during probation. So at the same time Princess and Carnival were trying to cover up external inspections, they were also undermining their ability to perform independent internal investigations.
That sends a terrible message about the true culture at Carnival and Princess, and people have heard it. As recently as October 2021, the compliance monitor and a third party auditor wrote to the federal judge overseeing the case, saying the failures “reflect a deeper barrier: a culture that seeks to minimize or avoid information that is negative, uncomfortable, or threatening to the company, including to top leadership (i.e., the Board of Directors, C-Suite executives and Brand Presidents/CEOs).” Ooof.
More Remediation to Come
An addition to the $1 million in new penalties, Princess and Carnival agreed to implement a raft of compliance improvements, too. Among them:
- Carnival must restructure so that its investigative office reports directly to a committee of the board of directors;
- The internal investigation office must have authority to initiate investigations on its own and to determine their scope;
- Management will be restricted in its ability to remove the head of the Incident Analysis Group that performs internal investigations;
- Carnival must conduct an assessment to assure that independent investigators have sufficient resources;
- Carnival must assess the effectiveness of required changes and correct deficiencies.
Even better: if Carnival fails to meet the deadlines in the plea agreement, it will be subject to fines of $100,000 per day, rising to $500,000 after 10 days. Unfortunately we don’t know precisely what those deadlines are and when the fines would begin, but you rarely see a penalty clause like this in corporate integrity agreements. Clearly the Justice Department and the judge overseeing the case have had enough with Carnival’s foot-dragging.
(UPDATE: After this post went live, Carnival emailed me the following statement:
As the court has acknowledged, we have been working in good faith through the course of probation and have already implemented a number of the changes in the order, even prior to the order, to improve in the area which is the basis of the proceedings — our internal investigations. We will continue to honor our highest commitment to strive for excellence in compliance, environmental protection, and the health, safety and well-being of our guests, the people in the communities we touch and serve in which we operate, and our ship board and shoreside personnel.)
As I read those remediation requirements, my mind kept going back to JP Morgan and that $200 million settlement it struck with securities regulators several weeks ago for “widespread and longstanding failures” in recordkeeping requirements. Why? For two reasons.
First, the facts in the JP Morgan case painted a terrible picture of the bank’s corporate culture, where even supervisory employees who were supposed to enforce JP Morgan policies about employee communications and recordkeeping were ignoring those policies and chatting away on undisclosed apps. The facts in the Carnival case are obviously different, but they also paint a terrible picture of senior management ignoring its compliance obligations and trying to save its own behind rather than do the right thing.
Second, JP Morgan’s settlement also requires the bank to hire an “independent compliance consultant” to review the bank’s policies and recommend improvements. That consultant cannot easily be fired and must report directly to the board. That’s similar to what Carnival must do with its internal investigations unit — which, admittedly, is still a team internal to Carnival; but we see the same restrictions on firing the head of the unit and having him or her report directly to the board.
Maybe we’re starting to see what corporate misconduct resolutions will look like in practice, now that the Justice Department (and other regulators) says it will enforce against misconduct more forcefully. I still believe pushing for criminal convictions will be rare, and met with extreme resistance from companies; but spelling out more demanding structures for independent compliance professionals is quite possible. It’s also what we see here in this case.
One final thought: I do wonder about the fate of Peter Anderson, hired by Carnival as its chief compliance officer in July 2019. At best, he is in a difficult position as the company keeps stumbling into one compliance quagmire after another. At worst, the culture of compliance changes that Carnival needs to make aren’t happening (at least, not according to the monitors and auditors peering over the company’s shoulder).