Countering Capture: A Political Theory of Corporate Criminal Liability.

• Author: Arlen, Jennifer

INTRODUCTION 862 I. STRUCTURING INDIVIDUAL AND CORPORATE LIABILITY TO DETER CORPORATE CRIME 866 A. Current Federal Enforcement Policy 867 B. Optimal Structure of Individual and Corporate Liability C. Traditional Economic Argument Against Corporate Criminal Liability 867 II. POLITICAL ECONOMY OF CORPORATE LIABILITY FOR MISCONDUCT 869 A. Interest Group Politics as a Threat to Effective Corporate Enforcement 870 B. How Political Actors Can Influence Federal Enforcement 870 1. The President's Channels for Influence 871 2. Congress's Pathways to Influence 871 III. HOW CRIMINAL ENFORCEMENT CAN MILITATE AGAINST CAPTURE 873 A. Relative Vulnerability to Political Influence Channeled Through the 874 President 874 B. Relative Vulnerability to Political Influence Channeled Through Congress 877 C. Corporate Criminal Enforcement Enhances Corporate Civil Enforcement @879 1. Coordination on Individual Enforcement Actions Would Not Suffice 882 IV. CONCLUSION 884 INTRODUCTION

Corporate misconduct is best deterred when corporate and individual liability for organizational misconduct is structured to achieve two primary goals. (1) First, corporate liability must be sufficiently broad and substantial to ensure that corporations do not profit from their employees' misconduct. Second, individual wrongdoers must face a material and salient risk of sanctions for their organizational misconduct. To achieve this latter goal, enforcement officials need to structure corporate enforcement policy to induce companies to detect, self-report, and fully cooperate by providing evidence on the entire scope of the misconduct and the identity and complicity of those responsible. Enforcement officials also need to pursue the individuals responsible for the misconduct. (2)

Currently, federal authorities strive to achieve these goals by combining broad corporate criminal and civil liability for organizational misconduct governed by respondeat superior with a corporate criminal enforcement policy that rewards corporate self-reporting and full cooperation. It also favors individual criminal and civil liability for misconduct. (3) This structure has enabled the United States to enter into more corporate criminal settlements with large companies than any other country (4) and to sanction many individual wrongdoers. (5) Corporate criminal liability has been an important part of this effort to deter corporate misconduct.

Yet some leading scholars assert that the government should not impose criminal liability on corporations on the ground that the state can achieve its deterrence objectives at a lower social cost solely through corporate civil liability (6) with substantial monetary sanctions. (7) These scholars argue that corporate criminal liability is unnecessary because civil liability can impose the same costs on companies as criminal liability: monetary penalties, (8) collateral consequences, (9) mandated internal reforms, and a monitor. In addition, these scholars claim that procedural differences between criminal and civil enforcement do not justify imposing corporate criminal liability. (10)

The argument that government-imposed corporate civil liability is as effective as corporate criminal liability rests on the unstated assumption that the relative effectiveness of criminal and civil enforcement depends entirely on the laws governing sanctions and procedures. This is not the case. Relative enforcement effectiveness also depends on criminal and civil enforcement officials' respective willingness to pursue corporate enforcement. Specifically, it depends on their relative willingness to impose material sanctions on large corporations for misconduct, induce full corporate cooperation, and pursue individual wrongdoers. Enforcement authorities are not equally willing or able to use the tools available to them to pursue effective corporate enforcement because they are differentially vulnerable to having their corporate enforcement efforts undermined by elected officials seeking to promote the interests of large companies.

Large corporations have both the motivation and the financial resources to intervene to reduce corporate enforcement. They can do so by inducing elected public officials to use their influence over agencies to reduce the likelihood of corporate enforcement. Accordingly, the claim that pure civil corporate enforcement is as effective as joint criminal and civil enforcement is not valid if eliminating corporate criminal liability would improve companies' ability to use their political influence to suppress corporate enforcement.

This Article evaluates the political economy of corporate enforcement and shows that eliminating corporate criminal liability would enhance large companies' ability to use their political influence to reduce corporate enforcement effectiveness for two reasons. (11) First, corporate civil enforcement is more vulnerable to companies' political influence than corporate criminal enforcement because both the President and Congress have a greater ability to intervene to reduce corporate civil enforcement intensity. (12) Second, eliminating corporate criminal liability would leave corporate civil enforcement more vulnerable to companies' political influence than it is at present because coordination with criminal enforcement reduces civil enforcement's vulnerability to capture and increases its effectiveness. (13)

Civil enforcement is more vulnerable to companies' political influence channeled through the President or Congress than criminal enforcement because the President and Congress are each better able to use their influence the identity--and thus ideology--of enforcement agencies' senior leadership to reduce the intensity of corporate civil enforcement. The President and members of Congress can influence the selection of the senior leadership of both criminal and civil agencies. (14) This authority directly impacts civil enforcement intensity because civil agencies' senior leadership tends to directly control their agencies' enforcement decisions. By contrast, the senior political appointees in the Department of Justice in Washington, D.C. do not directly control criminal enforcement; instead authority over federal corporate criminal enforcement decisions is dispersed. The Department of Justice grants the 94 individual U.S. Attorneys' Offices considerable autonomy over corporate enforcement decisions. U.S. Attorneys are not required to obtain prior approval from senior political leadership at Main Justice before bringing most corporate criminal enforcement actions. (15) Thus, influence over the selection of Attorney General and other senior officials in Main Justice does not give elected officials direct influence over corporate criminal enforcement intensity.

In addition, civil enforcement is more vulnerable to political influence because members of Congress are better able to use their authority over agencies' budgets to undermine corporate civil enforcement. The differential influence over civil and criminal enforcement is particularly pronounced when either the White House favors active enforcement, but powerful members of Congress do not, or when the White House favors weak corporate enforcement, but individual U.S. Attorneys in important offices (such as the SDNY) are committed to vigorous corporate criminal enforcement. Eliminating corporate criminal liability would thus undermine deterrence by shifting control over corporate enforcement to agencies that are more vulnerable to companies' political influence.

Eliminating corporate criminal liability would also undermine deterrence by leaving civil enforcement more vulnerable to capture than it is at present. Corporate criminal enforcement can spur civil enforcement to act, in spite of political pressure, because companies cannot as easily use political influence to mute civil enforcement when criminal authorities have intervened and shone a spotlight on corporate misconduct. Corporate criminal liability also reduces capture by enabling coordinated civil and criminal enforcement, which can both reduce civil enforcement's vulnerability to capture and increase its effectiveness. (16) Coordinated enforcement lowers civil agencies' enforcement costs and improves effectiveness, thereby reducing Congress's ability to mute civil enforcement by constraining agencies' budgets. Coordinated enforcement enables civil authorities to benefit from prosecutors' superior ability to induce companies to fully cooperate. (17) Corporate full cooperation reduces costs by shifting the burden of substantial investigation costs to companies. (18) It also can improve effectiveness by producing evidence that otherwise might not be practically available. (19)

Coordinated enforcement can also improve the deterrent effect of civil enforcement by increasing civil authorities' propensity to pursue individual wrongdoers. Individual liability is essential to deterrence. (20) Civil authorities tend to be less inclined to pursue individuals for intentional or knowing misconduct than are criminal authorities because they often have a regulatory mission, in addition to enforcement authority. They can satisfy the former through efforts to reform the firm, which is less costly than individual enforcement. As a result, they are less likely to pursue individual wrongdoers when acting alone. Coordinated enforcement reduces the cost to civil authorities of pursuing individual wrongdoers by enabling them to benefit from corporate cooperation induced by prosecutors, which includes evidence about individual wrongdoers. (21) Coordinated enforcement also changes civil authorities' political calculus relating to individual enforcement, as inaction is more visible--and thus more politically costly--when prosecutors pursue individuals.

Most of the benefits of coordinated enforcement would be lost if corporate criminal liability were eliminated--even if individual wrongdoers remained subject to...