Time to stop living vicariously: a better approach to corporate criminal liability.

• Author: Pollack, Barry J.
• Position: Achieving the Right Balance: The Role of Corporate Criminal Law in Ensuring Corporate Compliance

INTRODUCTION

Much has been said and written of late about the propriety of holding corporate entities vicariously criminally liable for the actions of their agents and the role a supposedly effective compliance program should play in corporate charging, liability, and sentencing decisions. Academics and governmental agencies often cite empirical studies as support for the positions they advance in these debates. Rather than relying on empirical data or anything approximating the scientific method, this article offers anecdotal evidence based on the experience of a single practitioner. To the extent that this article cites any empirical data, it does so only to support the notion that the author's "real world" anecdotal experience is not anomalous. Based on that experience, this article argues that the current regime for prosecuting corporate entities for the criminal offenses of their agents allows the government to allege, without proving, wrongdoing by some corporate actor, and then encourages large corporate entities to buy their way out of criminal liability by agreeing to the unproven allegations and paying a substantial monetary penalty.

Academics and practitioners have suggested that one way to modify the current regime would be to offer the existence of an effective compliance program as an affirmative defense to corporate criminal liability, or even to require the government to prove the lack of such a program as an element of a corporate criminal offense. This article argues that under the existing regime, corporations already possess substantial incentives to create and maintain adequate internal controls and robust compliance programs.

Continuing to expose corporations that lack adequate compliance programs to vicarious criminal liability while shielding those that do have such programs adds no meaningful additional incentive to corporations to create and maintain such programs. Accordingly, few corporations would create or enhance compliance programs based solely on this proposed modification to the current regime of corporate vicarious liability. Allowing corporations with such programs to escape criminal liability when the corporation was nonetheless pursuing criminal objectives would circumvent the widely accepted policy goal of holding bad corporate actors criminally liable. Conversely, there are good corporate actors wholly lacking in criminal intent, which, for lack of resources or for other reasons, do not have adequate corporate compliance programs and would not establish such programs simply because doing so would preclude criminal liability. Such entities should not be criminally prosecuted. Thus, tying corporate liability to the existence of corporate compliance programs is both over-inclusive and under-inclusive if the primary goal of the criminal enforcement regime is to punish bad corporate actors.

The time-worn rationale for vicarious corporate liability is the observation that a corporation can only act through its agents. This does not mean, however, that the corporation as a collective entity shares the intent of every one of its agents. Indeed, this cannot be the case as different corporate agents may have diametrically opposed intents. This article argues that corporations should be subjected to criminal prosecution if, and only if, the corporation possesses criminal intent, i.e., the criminal actions of its agents manifest the collective criminal intent of the corporation.

Criminal offenses for individuals typically require intent. Indeed, the presumption that an individual should not be punished for a crime without a showing of intent is a long-settled principle of common law jurisprudence. The 17th and 18th Century writings by Edward Coke and William Blackstone state that the existence of "criminal intent" and a "vicious will" is the prerequisite of any crime. (1) Courts in this country have a long and uninterrupted history of following this basic tenet of criminal law. (2)

Similarly, a corporation should not be subject to criminal liability if it lacks criminal intent. Where the criminal actions of corporate actors are contrary to the collective intent of the organization, the corporation should not be prosecuted. The collective intent of a corporate entity should be measured by the actions, knowledge, and intent of senior management. The existence of an effective corporate compliance program may be relevant to assessing the intent of the corporate entity; however, it is that intent, and not the presence or absence of an effective compliance program, which should determine whether or not the corporate entity has engaged in criminal conduct.

This article first briefly summarizes the current regime for assessing corporate criminal liability, including the innumerable incentives a corporation has to establish and maintain a robust compliance program. Second, this article discusses how the current regime plays out in practice and why the result is a system that frequently imposes criminal-type sanctions on corporations without the benefit of any formal fact-finding, much less the assessment of corporate criminal liability based on the results of a legitimate fact-finding process that demonstrates the corporation to be a bad actor. Third, this article proposes changing criteria by which corporate criminal liability should be assessed, eliminating vicarious liability and changing the focus from an assessment of the corporation's compliance program to an assessment of whether or not the organization acted with a criminal intent.

1. THE CURRENT REGIME

   1. Vicarious Liability

      For at least a century, corporations have been held to be vicariously criminally liable for the actions of their agents. (3) A corporation may be able to avoid vicarious criminal liability if a corporation's low-level employee engages in criminal activity outside the scope of his or her employment. (4) However, courts construe the scope of employment very broadly, such that a corporation's ability to avoid vicarious criminal liability for the acts of an agent is exceedingly narrow. Corporations have been held accountable for criminal acts of low-level employees such as clerical workers, truck drivers, and manual laborers. (5) Additionally, corporations have been found liable for crimes committed by middle- and low-level managers, even where the criminal conduct was beyond the actual scope of the agent's authority. (6) Accordingly, in light of the broad interpretation courts have given the concept of vicarious liability, if there is a colorable argument that a corporation's employees have engaged in criminal conduct, a corporation typically has little to no defense on the merits of a criminal prosecution.

   2. Emphasis on Effective Compliance Programs

      A corporation can be vicariously criminally liable for the actions of its agents, even if the corporation had in place an effective corporate compliance program designed to prevent and to detect wrongdoing by its agents. The existence of such a program does not shield a corporate entity from prosecution or threatened prosecution. It is, however, a substantial factor on which the government relies in negotiating a resolution of potential criminal charges against a corporation and can be used by a corporation to reduce the monetary penalty assessed. The United States Sentencing Guidelines ("Guidelines"), the United States Attorneys' Manual and additional guidance from the Department of Justice ("DOJ"), and a disposition issued by the Securities and Exchange Commission ("SEC") on October 23, 2001 (popularly referred to as the "Seaboard Report") (7) all provide direction on the standards and requirements that the government typically considers as part of an effective corporate compliance program. The specific guidelines of all three are considered in detail in the following sections.

      1. The United States Sentencing Guidelines

         With few exceptions, federal courts follow the Guidelines when calculating a corporation's penalty for committing a criminal offense. (8) The provisions of the Guidelines for penalizing corporations convicted of a crime come directly into play only when a corporation faces sentencing, having unsuccessfully contested criminal charges and having been convicted. However, the DOJ consults the Guidelines prior to making offers to dispose of potential criminal charges through a negotiated resolution. Accordingly, the provisions of the Guidelines have an impact not only in contested cases, but in the much greater number of corporate criminal matters that are resolved by negotiated plea, deferred prosecution agreement, or non-prosecution agreement. (9)

         One factor taken into account when performing a Guidelines calculation is whether the corporation's offense occurred "even though the organization had in place at the time of the offense an effective compliance and ethics program." (10) A company benefits from having an effective program in place by receiving a reduction in the sentencing calculation.

         To qualify for this reduction, the company's compliance program must be reasonably designed, implemented, and enforced so that it is generally effective in preventing and detecting criminal conduct. In addition, the company must:

         (1) exercise due diligence to prevent and detect criminal conduct; and

         (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

         The Guidelines stipulate that, at a minimum, this requires:

         (1) the establishment of standards and procedures to prevent and detect criminal conduct;

         (2) the establishment of oversight, which requires that:

         (a) the company's governing authority be knowledgeable about the content and operation of the organization's compliance and ethics program and exercise reasonable oversight;

         (b) high-level personnel, at least one of whom is assigned overall responsibility of the compliance and ethics program, ensure the program's existence and...