Federal corporate prosecutions are never fair fights. Mindless companies are stripped of their right against self-incrimination and pummelled by respondeat superior into accepting plea deals. The government then uses evidence coerced from them to prosecute their employees. For fans of the Fifth Amendment and the presumption of innocence, it isn’t pretty.
In an essay cited on the White Collar Crime Prof Blog here and available from SSRN here, Northwestern’s Albert Alschuler, left, (BA and LLB Harvard) exposes the increasingly illogical practices behind corporate enforcement.
Corporate defendants must produce incriminating documents even when the act of producing these documents would tend to incriminate them. Moreover, to ensure that corporations will not benefit from the privilege, the Supreme Court requires corporate officers to produce these records even when the act of production would incriminate them personally. The exception to the privilege for corporations swallows the rule applicable to individuals, and the tail wags the dog.
All corporate prosecutions are a weird fiction, he says — there’s “no soul to damn, no body to kick,” quoting Baron Thurlow, an 18th century Lord Chancellor of England. So, Prof Alschuler writes:
Innocent shareholders pay the fines, and innocent employees, creditors, customers, and communities sometimes feel the pinch too. The embarrassment of corporate criminal liability is that it punishes the innocent along with the guilty.
Because corporations are “mindless,” the goal of punishing them should be to encourage compliance by their employees. That’s not happening, he says, because of respondeat superior. It allows companies to be convicted for acts by single errant employees. And it doesn’t recognize any defense based on good-faith attempts by the corporate body to obey the law.
Why is respondeat superior allowed to continue? Prof Alschuler says:
Neither John Ashcroft nor any other Attorney General in the past century has sought a narrowing of the respondeat superior standard of corporate liability. Although half the states employ narrower standards, Congress seems very unlikely to follow their lead. An alliance of Ralph Nader, the Justice Department, and most Members of Congress could be expected to resist any effort to deny prosecutors an important “tool” in the fight against corporate crime. Like the rest of the federal criminal justice system, the respondeat superior standard transforms prosecutors into czars while the politicians stand and say “yes, yes, yes.” This standard serves its real purpose marvelously.
That real purpose, Prof Alschuler says, is the power of prosecutors to impose whatever sanctions they like for whatever conduct they wish to punish.
Not everyone agrees that corporate prosecutions are harmful or ineffective. Sara Sun Beale from Duke law school addresses Prof Alschuler directly in her upcoming article, “A Response to the Critics of Corporate Criminal Liability.” It’s scheduled to appear in the American Criminal Law Review and is available now on SSRN here.
So the debate continues.
Albert Alschuler’s essay, ” Two Ways to Think About the Punishment of Corporations” (October 19, 2009), appears in the American Criminal Law Review and on SSRN here.
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New Site. The Global Graft Report is open for business here. It picks up where the FCPA Blog leaves off — with stories about public corruption and compliance that aren’t about the FCPA or go beyond it.
I haven’t read the article (or the response) but find the claim that “respondeat superior doesn’t recognize any defense based on good-faith attempts by the corporate body to obey the law” a bit mystifying. Both in the antitrust (e.g., US v Basic Construction, 711 F2d 570) and AML (e.g., US v Bank of New England, 821 F2d 656) areas jury instructions allowing consideration of the effectiveness of compliance programs in determining corporate liability have been approved by courts. The defense may be difficult to establish, but notably in US v. Stolt-Nielsen SA (524 FSupp 2d 586 (EDPa 2007), the court enforced an antitrust amnesty agreement against the gov’t where a) the gov’t claimed that the defendant hadn’t fully ceased its illegal activities after signing the agreement; but b) the court was persuaded by the implementation of the defendant’s antitrust compliance program that the defendant had in fact transformed its “corporate culture and reform[ed] its business practices.” And more confusing still is Alschuer’s contention that punishing companies does not “encourage compliance by their employees.” While all would agree that such punishment hasn’t eliminated all corporate crime (just as medicine hasn’t eliminated all disease), in recent years many companies have implemented strong compliance programs in a direct response to the punishment of others, and surely those programs – particularly those with rigorous enforcement measures, such as strong FCPA auditing – have prevented and detected not just some but a great many crimes. Finally, it should be noted that the world is indeed moving in the direction of greater compliance program expectations for corporations, and particularly so in the anti-corruption area following the release earlier this month of the OECD working group recommendations providing that “Member countries should encourage: . companies to develop and adopt adequate internal controls, ethics and compliance programmes or measures for the purpose of preventing and detecting foreign bribery. " To my mind, this is a significant endorsement of the efficacy of compliance programs. (Note – I have an article on compliance programs as a defense appearing in the January 2010 issue of Compliance Today.)
The post and Professor Alschuler’s comments seem to raise a number of red herrings:
First, the notion that a corporate entity is disadvantaged because it is not a natural entity and not subject to protections afforded natural persons. A corporation is an institution that is granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members.The corporation is established to provide limited advantages – primarily limitation of liability for its members/shareholders. Since it is a legal fiction, a corporate entity is not entitled to the same rights as a natural person. It should have only such rights as lawmakers and courts grant to it – nothing more.
Second, the "single errant employee" argument that a company will topple on the basis of an act of a person at the fringes of the "real business." As seen by many of the prosecutions over the past few years, it is not the actions of a rogue employee that create the problem – often it is the management of the company (whether directly or indirectly by lack of oversight or looking the other way). Further, the company is responsible for the acts of its employees. Corporations were not created to allow for acts that would otherwise be illegal if undertaken by individuals. Finally, management of a corporation is tasked with the responsibility of ensuring that appropriate rules and processes are developed, implemented and policed. If management cannot undertake that task responsibly, management needs to be replaced or the scope of the business reduced in order to ensure compliance with legal obligations.
Third, respondeat superior should not apply because "innocent" parties like shareholders and employees may suffer. Both shareholders and employees have certain responsibilities. For the former, those responsibilities include appropriate protection of their investment through active oversight of the agents charged with its direction – the board and management. For the employees, they have a responsibility to understand what can and cannot be done and the obligation to raise their hand when something appears to be going astray and use the appropriate reporting channels, both internally and externally.
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