Under-breaded shrimp and other high crimes: addressing the over-criminalization of commercial regulation.

• Author: Terwilliger, George J., III
• Position: Symposium: Corporate Criminality: Legal, Ethical, and Managerial Implications

1. INTRODUCTION

   On July 10, 2002, a panel of witnesses, in which I was included, sat before a Senate Judiciary Subcommittee in a hearing to "mark-up" a bill that was to be included in the so-called Sarbanes-Oxley legislation. (1) The testimony during this session, convened to give due consideration to the bill, was interrupted so that the members could go to the Senate floor and vote on the very legislation under consideration. (2) So much for due consideration. The headlong rush to pass Sarbanes is symptomatic of a trend by which Congress has, often with bipartisan political fervor, moved the federal establishment to apply criminal sanctions to a wide range of otherwise legitimate commercial activity that crosses a regulatory line, and often a fuzzy line at that.

   Fraud and dishonest practices in the commercial world subvert free markets and engender a lack of respect for the rule of law. Such transgressions deserve criminal sanction. But regulating legitimate activity through criminal prosecution, particularly where prosecutors in the exercise of their broad discretion set--as a practical matter--regulatory parameters, is an ill-advised policy choice. Now would be a good time to arrest this trend and allay the damage to competitiveness that it has produced.

2. CRIMINALIZING REGULATORY VIOLATIONS

   Maintaining an honest and free marketplace is essential to our economy. Criminal law, including the investigation and prosecution of fraud in the marketplace, is a traditional and powerful tool for protecting the means and instrumentalities necessary for sound economic health. However, using criminal law as a primary means to regulate business activity, now a standard aspect of the exercise of federal prosecutorial authority, is materially different and far removed from the well-established roots of the use of criminal sanctions in our law. With the accelerating trend of criminal punishment for the transgression of often imprecise and uncertain regulatory standards, the fundamental use of criminal sanctions in the business context has shifted from protecting commerce to regulating it. This shift may do more to threaten than protect the economy because it may chill the entrepreneurial risk-taking that is essential to economic growth. Moreover, attaching criminal sanctions to violations of highly technical or vague and unintelligible regulatory standards is offensive to well established due process principles and may engender lack of due respect for the rule of law. While many of the regulatory goals enjoy widespread support and many of the regulatory areas are legitimate subject matter for regulation, that is not a sufficient justification for resorting to criminal sanctions as a means to achieve them.

   The rapid expansion in the use of government regulations to pursue a wide range of social goals has spurred the trend to use criminal sanctions to regulate business conduct. The result has been an "explosive growth of federal crime legislation," amounting to "over 4,000 offenses that carry criminal penalties in the United States Code." (3) This record number "reflects a one-third increase since 1980." (4)

   Examples of the trend toward regulation by criminalization abound. Environmental laws for instance, incorporate steep criminal penalties for failing to meet regulatory standards in conducting what is otherwise legitimate commercial activity. Polluting is legal in the United States; the government issues permits to allow it. Polluting too much, however, can be a felony. Some acts of pollution may indeed be criminal because they involve volitional and intentional acts that can result in foreseeable and significant harm--dumping highly toxic materials in an open field or waterway, for example. But the more common subject matter of environmental "crimes" involves the line between permitted and not permitted discharges, which can be razor thin, often expressed in parts per million, and the stuff of great debate between experts and scientists. (5)

   Similarly, charging a government health insurance program for medical services that were never delivered is clearly a crime. Conversely, billing government health programs for medical services is obviously legitimate commercial activity. That legitimate commercial conduct can be a crime though, when the bill sent to the government does not conform to the requirements of a sheaf of federal regulatory dictates, which are dense and given to producing uncertainty and disagreement among experts in the field. Payees can be held to answer for a criminal violation if they run afoul of such regulatory minutiae, and are often prosecuted not for healthcare fraud per se, but for making a false statement to the government, that is, a bill not consistent with regulatory requirements.

   Extracting oil and gas from federal lands is, of course, legitimate commercial activity. Yet failing to abide by complex government regulations when valuing crude oil or raw gas for royalty purposes may not only lead to treble damages claims under the False Claims Act, but federal grand jury attention as well. The list can be extended almost indefinitely.

   Problems caused by such explosive growth in federal regulatory prosecutions, especially in the criminalization of what in the past would have been viewed as purely civil or administrative matters, have been exacerbated by the various legal doctrines that have made it far easier to prosecute corporations. These include the respondeat superior doctrine and vicarious corporate liability, the collective knowledge doctrine, and the general lessening of the intent standard in many of the crimes involved. Where "intent" simply means "knowing conduct," and where a corporation is held to know everything any of its employees knows and is held responsible for the actions of every employee, it is easy to understand why corporate prosecutions proliferate.

   One final point bears emphasis at the outset. To question the use of criminal sanctions to enforce highly technical and complex regulatory norms is not to suggest that criminal prosecution has no appropriate role in dealing with corporations or that fraud or dishonesty in the marketplace should be condoned. Quite the contrary. A dishonest market is not a free market and the criminal law is an essential tool for preserving the honesty and integrity of the market. The federal government and federal law enforcement have a crucial role to play in policing the marketplace for fraud and corruption and enforcing standards that promote investor confidence in capital markets and provide transparency in credit and other fiduciary transactions. One does not have to look far for examples of how dishonesty, deceit, and corruption can cripple a nation's commercial system and economy. Indeed, businesses themselves have a vital interest in a level--that is, an honest--commercial playing field. A core function of the federal government is to promote commerce by protecting its means and instrumentalities. Thus, the core purpose of federal criminal law in the business context should be to protect and preserve the instrumentalities of commerce, a traditional role and a critical function. But much of the criminal law to which businesses today must adhere has strayed far from the goal of promoting these core values.

3. THE EARLY EVOLUTION OF FEDERAL CRIMINAL LAW

   A reminder of the evolution of the use of federal criminal law, particularly as related to commercial activity, is essential to appreciate and place in context the criminal regulatory regimes that face businesses today. The first Congress enacted laws punishing treason, (6) misprision of treason, (7) perjury in federal court, (8) bribery of federal judges, (9) forgery of federal certificates and securities, (10) and murder, robbery, larceny and receipt of stolen property on federal property or on the high seas. (11) These and other statutes tracked closely the powers conferred on the federal government by the Constitution. Article I, section 8 of the Constitution gives Congress, inter alia, the power to "punish" treason, counterfeiting, piracies, felonies committed on the high seas and offenses against the law of nations. (12) These clauses, and the statutes enacted pursuant to them, served a fundamental purpose: to protect the country and the functions of government.

   In the latter half of the nineteenth century, a pattern of lawmaking by which the sanction of criminal laws safeguarded commerce and cleansed it of corruption developed. The Civil War brought the False Claims Act, (13) which, though enacted to prevent fraud by wartime profiteers, also operated to punish frauds in federal procurement, which taxed the public welfare by providing sub-standard goods or services and taxed the public fisc by denying the government the value of its bargain in connection with government contracts and contractors. Similarly, the predecessor to the mail fraud statute operated to protect the mails from use as an instrumentality of fraudulent schemes of any nature. (14) The Interstate Commerce Act (15) and the Sherman Antitrust Act, (16) passed in the post-Civil War period, (17) sought to provide protection to the free market by aiming to free interstate commerce from unnatural, anticompetitive impediments.

   Enacting federal criminal statues to protect the means and instrumentalities of commerce continued through much of the twentieth century. Banks are easily recognized as critical instrumentalities of commerce. Thus, first through the federal bank robbery statutes and later via a broad panoply of criminal prohibitions, banks became well fortified by the protection of federal criminal statutes. (18) New Deal securities acts and financial reporting laws were designed to preserve the integrity of commerce and increase investor and consumer confidence in publicly traded markets and the financial system generally. (19) Years later, criminal RICO provisions responded to the risk posed to...