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Regulation by Prosecution: The Problems with Treating Corporations as Criminals

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Regulation by Prosecution: The Problems with Treating Corporations as Criminals

December 12, 2010
Legal ReformOther

The criminal prosecution of corporations has been on the rise. In the 1990s major corporations were prosecuted in abundance for antitrust and environmental crimes as well as various alleged frauds. In the last decade there has been an explosion in “non-prosecution agreements” and “deferred prosecution agreements,” in which federal or state prosecutors decline to press charges in exchange for corporate concessions, which might include substantive changes in business practice, the firing of key executives, and the appointment of “business monitors” selected by the prosecutor. Federal prosecutors have entered into more than 140 of these agreements, and the corporations subject to them are a Who’s Who of international business, particularly in finance and health care.

The power to prosecute corporations as entities distinct from their employees has a long history in American law. Prior to the rise of the modern regulatory state, such prosecutions were an important means of regulating corporate behavior. Today, however, prosecutorial power rests alongside extensive civil and regulatory authority at both the state and federal level. And under both state and federal law, the government can prosecute corporations vicariously—that is, on the basis of an employee’s actions—even when the offenses are petty, the actor occupies a lower-level position, or the employee acted contrary to corporate policy.

The aggressive application of this doctrine is inconsistent with:

  • Foreign law: It is much easier to prosecute corporations in the United States than it is in the rest of the Western world. Corporations cannot be prosecuted criminally at all in some countries, such as Germany. Other Western nations, such as France, have recently adopted corporate criminal liability, but more limited versions of it than our own.
  • The Model Penal Code: The pertinent sections of the Code, which was developed by the American Law Institute in 1962, establish hierarchies of corporate crimes, single out the actions of employees with management authority, and allow corporations to defend themselves by pointing to their good-faith efforts to promote compliance with the law. The legislatures of nineteen American states have adopted at least some of the Code’s principles, as have the courts of several others.
  • Civil law protections: In two recent cases involving charges of sexual harassment, the U.S. Supreme Court opined that employers could not be held liable for actions of lower-level employees that violated corporate policy.

The sweeping scope of corporate criminal liability in America gives prosecutors exceptional and troubling power over companies—as exemplified by the federal prosecution and conviction of Arthur Andersen, the accounting firm. Although Andersen’s conviction on a single count was reversed on appeal, it was too late to save the firm or the livelihoods of its 85,000 employees. As a certified public accountant in the business of attesting in government filings to the reliability of public companies’ financial statements, Andersen was particularly vulnerable to prosecution. But other kinds of businesses face problems of their own: debarment from government work following indictment; damage to reputation; difficulty in obtaining credit; and diversion of management’s attention from the firm’s essential business. The costs and risks of prosecution induce many companies, even those that believe themselves to have done nothing wrong, either to plead guilty or to enter into deferred prosecution agreements.

Prosecutors’ campaign against corporations has the following defects:

  • It has thoughtlessly imposed policies and practices on corporations that interfere with vital commercial operations.
  • It has pressured companies to abandon their employees by offering rewards for terminating them, for releasing material damaging to their interests, and for refusing to participate in their defense.
  • It has been carried out with little legislative authorization or judicial oversight.
To address such excesses, it is not necessary to abolish corporate criminal liability. But its imposition will be unfair and even ineffective unless:
  • The law allegedly broken expressly calls for criminal penalties against corporations.
  • The crime allegedly committed is a serious one.
  • The crime was allegedly committed or authorized by high-level executives.

If, having met these criteria, a prosecution is instituted,

  • Corporations should be allowed to point to their good-faith efforts to promote compliance with the law.
  • The law should not inflict any collateral consequences on the corporation unless and until it has been convicted.

Such measures should put a stop to what may reasonably be called regulation by prosecution.