Corporations can sidestep prosecution by cooperating with the government and offering up employees to avoid their own criminal liability. Ellen S. Podgor discusses two prominent reasons why the current approach to corporate criminality is inefficient.
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Corporate criminality is nothing new in the United States. Although prosecutions for corporate crimes like fraud date back to the early 1900s, the challenges that the government faced then continue today. Namely, corporations are fictitious bodies—they cannot be placed in prison. Fines and other remedial measures are the limited ways in which the government can punish and ensure that corporations adhere to the law. Though corporate criminality is intrinsically more difficult to prosecute than the crimes of an individual, many of the barriers to holding corporations accountable and preventing future wrongdoing are due to failures in regulatory enforcement.
In some situations, the relevant statute to find corporate wrongdoing requires a mens rea, or evidence of the employee’s intention or knowledge of wrongdoing. This is much harder to prove than that an act of wrongdoing simply occurred. In situations that require a mens rea, courts employ the doctrine of respondeat superior to hold the corporation liable for the criminal acts committed by an employee when it is within the scope of the employee’s corporate duties and when it benefits the corporation.
Most criminal cases brought by the government are resolved with a non-prosecution agreement (NPA), in which the corporate defendant promises good behavior and remedial action to avoid being charged criminally; a deferred prosecution agreement (DPA), where the corporation similarly makes promises to meet certain conditions to avoid trial; or a plea agreement, where the defendant admits some wrongdoing in exchange for concessions from the government prosecutors. Although the terms of the agreements may differ, for the most part they include payment of a significant fine, an agreement to embed within the corporation a monitor who reports to the government, and a promise to have a beefed-up corporate compliance program that will deter future criminal activity. These agreements offer some value in that they incentivize the company to correct wrongdoing.
Receipt of these agreements, however, is often contingent on the corporation providing the names and evidence against the employees who committed unlawful conduct. The government offers corporations significant incentives to turn in employees who commit criminal acts. When a corporation cooperates, reports wrongdoers, and provides evidence of the wrongdoing to the government, the corporation can in some instances receive a declination of prosecution from the government, where the government does not press charges even with substantial evidence of wrongdoing.
With the corporation turning against its employees to receive a financial benefit, corporations and their employees can find themselves on opposite sides rather than as a united front aiming to correct internal wrongdoing. In this case, the corporation uses an internal investigation to obtain evidence against employees and then provides that evidence to the government in the hopes of receiving a declination of prosecution or an agreement for a lower fine. Declinations of prosecution may deter future criminal activity but they do little to hold corporations accountable for the criminal activity that has already occurred.
The inefficiency of this approach is apparent for two reasons. First, the corporation and its employees are not working together to fix the problems within the corporation. The corporation is trying to obtain evidence from its employees to then use for its own benefit. In contrast, the employees are fearful to cooperate with the corporation as, over time, they realize that the corporation may negotiate a deal that will put them in prison. A more efficient approach would be to incentivize both the corporation and its employees to form a united front against criminality.
Second, corporate criminal accountability is impaired by the government’s failure to provide a strong regulatory enforcementstructure that proactively deters criminal conduct or catches it before it produces substantial financial losses and other harms. For instance, the lack of strong administrative enforcement could result in customers becoming ill from food or harmful products placed in the marketplace. The current enforcement process focuses on punishment after a crime. Having a pro-active regulatory approach to catch the problem early on allows for a civil administrative remedy to stop the conduct before it harms a larger number of the populace and becomes subject to a criminal investigation.
Strong regulatory enforcement provides an administrative framework that can minimize harms from corporate criminal activity and prevent the use of the criminal process. A strong regulatory enforcement structure would better discourage a corporation from polluting the environment or putting products on grocery shelves that harm customers. The conduct would likely be stopped prior to becoming a criminal nightmare. Deterrence could be achieved, for example, by imposing monetary fines upon the corporation before improper conduct becomes widespread.
Because the loss to society from the corporation’s misconduct or fraud is now greater than it would have been if the administrative body had moved against the corporation early on, the ramifications to the wrongdoer will be greater, providing a higher sentence and/or fine to the perpetrator of the crime. Corporate accountability is minimized because the prosecution occurs after a substantial loss, as opposed to when the initial harm could have prevented this outcome.
For the corporation, the government, and society, the current model is inefficient. One stops the harmful conduct only after there is substantial harm which results in a larger fine for the corporation. In addition, the corporation is also likely to have increased civil liability from individuals hurt by the corporation’s misconduct.
When the government moves further away from prosecuting corporations and offers more incentives to the entity for a declination of prosecution, accountability becomes more tenuous. Likewise, when you have a shrunken regulatory system, corporations and the public end up facing greater harm because of the corporate misconduct. Curtailing corporate criminality requires a thoughtful approach that maximizes efficiency. This requires the corporation, its employees, and the government, to unite in confronting potential criminal conduct.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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