Cracking Down on Corporate Crime

If corporate crime is one of the Department of Justice’s top priorities, then why don’t they produce an annual corporate crime report like the one they do for street crime? We have asked Attorney General Holder (as well as his predecessor Attorney General Gonzales) to direct the department to produce the first comprehensive study of corporate crime in 25 years.

Although the federal government does not track the incidence and magnitude of the damage caused by corporate crime in a comprehensive manner, there is little doubt that corporate crime costs far more than ordinary street crime. (See our tracking corporate crime page for details.)

Even when enforcement is strong, the penalties for corporate crime are often miniscule compared to the damage. The penalties for many categories of corporate crime are so low as to be easily absorbed as the normal cost of doing business. For example, serious violations of the Occupations Safety and Health Act (i.e. violations that pose a substantial probability of death or serious harm) carry an average penalty of only $910.

Some suggestions for cracking down on corporate crime:

1) Strengthen Criminal Liability Standards For Corporations, Executives and Directors.

Some insist that because corporations are organizations or legal fictions, they lack the requisite intent of mind (mens rea) required for the determination of criminal guilt. But a recognition that corporations are able to compensate their victims and are more readily identified as a source of harm than the individuals within them has gradually led to the general consideration that corporations can be convicted for acts that violate the law. American courts first placed corporations into a criminal law context in a 1909 New York Central Railroad case (212 U.S. 481).

Standards for criminal sanctions for both corporations and their top executives should be strengthened, especially for occupational, consumer and environmental crimes resulting in death or serious injury. For more information, see NYCOSH’s Campaign to Stop Corporate Killing.

An example of how this law might be designed is Canada’s new “Westray bill” (C-45), which will make it easier to hold corporations and their top executives and directors accountable for corporate crimes. Under the law, if anyone with supervisory authority in a corporation (not just top executives) knows about a crime committed by employees, or does nothing about corporate operations that will likely result in a crime being committed, then the corporation can be found guilty. For background on the law go to this discussion paper by the Canadian Ministry of Justice, the government’s response, the Canadian Steelworkers campaign site, this background paper by two labor attorneys.

In the UK, a new Corporate Manslaughter Statute came into effect in April, 2008. The law makes companies criminally responsible for deaths caused by a firm’s gross negligence. Penalties for violating the act potentially include unlimited fines, as well as a “publicity order” (requiring the company to publicize its crime). In addition, the courts can order the organization to take remedial steps to correct the source of the lawbreaking activity. To learn more, read this findlaw story, and for background information check out the British-based Centre for Corporate Accountability.

2) Strengthen The Sanctions for Corporate Crime

The U.S. Supreme Court determined in U.S. v. Booker that federal sentencing guidelines should be considered advisory rather than mandatory. White collar crime experts say the decision won’t significantly impact corporations because most corporate crime cases are settled before they are taken to court. (It has, however, begun to impact upon cases brought against individual executives. E.g., soon after the Booker decision, a judge issued a ruling that could reduce the sentences of 5 former Enron and Merrill Lynch executives.) An incentive for corporations to settle before going to trial was created by the Bush administration when it adopted a policy that allows companies to quietly avoid criminal prosecution in exchange for a probationary agreement to make certain internal reforms. To learn more about the “corporate crook escape clause” go here.

Since corporations cannot be imprisoned or otherwise punished in the same way that people can be, effective sanctions for corporations need to account for their institutional nature. Certain sanctions for corporations (e.g. fines and probation) are incorporated into the U.S. Sentencing Commission’s updated organizational sentencing guidelines.

Additional sanctions that should be considered for corporations include:

A) A requirement that companies publicize their crimes, as well as the measures taken to reform the company’s behavior and culture.

B) Probationary reforms specific to the company’s business. These changes can be required through court-appointed monitors or “public” directors charged with monitoring the company and recommending mechanisms for changing corporate culture. (The idea is outlined by Christopher Stone in his book, Where the Law Ends). The concept is similar to the court-ordered receivership process typically imposed on corrupt union locals and corporations wishing to emerge from bankruptcy. This approach was used when WorldCom filed for bankruptcy. Richard Breeden, a corporate monitor and former SEC commissioner was appointed by the district court. In his report to the court, Breeden outlined 75 reforms that the company was required to adopt before it was allowed to emerge from bankruptcy.

c) The corporate death penalty may be appropriate in cases involving recidivist violators, corporations that are deemed to be incapable of reform (i.e. inherently criminogenic), or companies whose crimes are considered to be a serious breach of the public trust. The corporation can be forced to go out of business by forced revocation of its business licenses or charter (i.e. articles of incorporation).

In March, 2005, the FTC shut down three consumer debt companies accused of violating the Do-Not-Call-Registry and cheating poor customers out of $100 million by promising debt relief that didn�t work and instead worsening their personal debts — in many cases forcing them to file for bankruptcy. The FTC’s ex parte temporary restraining order issued in August 2004, which forced the companies into receivership “for the purpose of taking the necessary steps to wind down the businesses of the Corporate Defendants, liquidate their assets,” and use any net assets to pay over $11 million in fines to be used to compensate the victims.

Calls for significant sanctions like this increased even before Enron. During his 1998 campaign for New York Attorney General, for example, Eliot Spitzer declared that “when a corporation is convicted of repeated felonies that harm or endanger the lives of human beings or destroy our environment, the corporation should be put to death, its corporate existence ended, and its assets taken and sold at public auction.”

States already have the ability to strip corporations of their charters for serious corporate violations, although they are rarely invoked. One way to compel the use of this sanction upon recidivist corporate lawbreakers is to enact a law requiring it. See the Corporate 3 Strikes Act introduced in California.

For more information on charter revocation:
“Chartering a New Course: Revoking Corporations’ Right to Exist,” by Charlie Cray, M.Monitor (11/02).
The Petition to Revoke Unocal’s Charter
“Corporate Three Strikes” fact sheet (Citizen Works).
CELDF’s “Citizen’s Guide to Corporate Charter Revocation Under State Law.”
“Taking Care of Business: Citizenship and the Charter of Incorporation” by Richard Grossman and Frank Adams.
“Awakening Sleeping Beauty: Reviving Lost Remedies and Discourses to Revoke Corporate Charters” (masters thesis) by Gil Yaron, 2000.
“Taking Charge — Corporate Charter Revocation in Canada” by Gil Yaron.

Short of revoking a company’s charter (or business license in the case of companies incorporated elsewhere), governments can also revoke the operating authority or licenses of the corrupt division or subsidiary in violation of the law.

Recent examples of federal and state license revocations:

In June 2003, the Federal Energy Regulatory Commission (FERC) revoked Enron’s right to trade electricity and natural gas after the company manipulated electricity prices during California’s 2000-2001 electricity crisis.

In October, 2003, Ohio’s Department of Agriculture (after an appeal) ordered Buckeye Egg Farm Barns to close (revoking 12 permits and denying 11 others) based on the company’s history of environmental violations.

Essential Information petitioned the FCC to deny Clear Channel license renewal based on the company’s bad character record.

The potential for significant economic disruption and damage to innocent employees, pensioners and outside shareholders is likely to create an understandable reluctance to use this sanction. In some cases, a court-supervised transition plan might be designed to sell off the company’s assets (if they are significant enough) in a manner that compensates such innocent parties. In most cases, however, that may not be enough.

The Department of Justice published a report in 1979 which outlines other actions that might impose significant structural changes without damaging innocent parties, including reincorporation under public ownership and/or federal chartering of corporations, or the “deconcentration and divestiture” of certain assets or specific divisions deemed to be at issue. (See “Illegal Corporate Behavior,” U.S. Department of Justice Law Enforcement Assistance Administration, National Institute of Law Enforcement and Criminal Justice, October 1979).

d) The use of equity fines has been proposed as appropriate sanction that creates an proactive incentive for corporations to obey the law. Under this sanction, guilty corporations would be forced to issue stock with an expected market value equal to the amount of a fine deemed necessary to deter criminal activity.

Because equity fines would reduce the value of existing shares (by dilution) and thus the value of stock options, they would likely create an incentive for executives to reduce lawbreaking behavior at the company. Similarly, they would create an incentive for Wall Street analysts to recognize dangerous corporate behavior that could lead to such fines, potentially causing analysts to discount the rating of companies perceived to be vulnerable to prosecutions.

In addition, equity fines would counteract the incentives that the market places on lawbreaking behavior. By diluting shareholder wealth, they can create an incentive for shareholders to demand that their corporations abide by the law and increase dislosure of environmental and other harms.

Finally, equity fines’ main advantage is that they avoid many of the problems associated with cash fines, including shifting the cost of the fine onto consumers, taxpayers and others who do not benefit from the company’s lawbreaking behavior. (Stockholders benefit from criminal activities, whether actively complicit or not, so there is little reason to feel sorry for their having to suffer some loss, given they were unjustly benefiting from the corporation’s lawbreaking behavior.) (To learn more see John Coffee, Making the Punishment Fit the Corporation: The problems of Finding an Optimal Corporation Criminal Sanction, 1 N. Ill. U.L.Rev. 3, 21, 1980.)

3) Ban Corporate Crooks from Federal Contracts The federal government is the largest single consumer in the world, spending over $350 billion a year (2006) on goods and services. The federal government maintains an Excluded Parties List of companies barred from federal contracts, based on their past performance. A corporation’s involvement in corporate crime can be the basis for inclusion on the EPL. For example, the General Services Administration suspended Enron and Arthur Andersen from federal contracts after the companies’ obstruction of justice and accounting fraud were revealed. Unfortunately, the federal government regularly conducts business with companies that have repeatedly or significantly broken the law, despite statutory requirements that federal agencies award contracts to “responsible sources.” For instance, in early 2005, Titan pleaded guilty to bribery in a settlement that would waive Federal Acquisition Regulations (FAR) requirements that the government only do business with “responsible” contractors. The FAR should be strengthened to establish strict contractor eligibility standards.

For a state-by-state list of debarred contractors check out the Laborers International Union site.

A related approach is used by Indiana, which bars companies with a bad record from state environmental permits. See Indiana’s “Good Character Law”.

To learn more about contractor accountability standards read this and visit our contracts page.

Also see the GAO Study, “Government Contracting: Adjudicated Violations of Certain Laws by Federal Contractors”, GAO-03-163, November 2002.

4) Make Certain Types of Corporate Harm a Federal Crime

a) War Profiteering. For more information, go HERE.

b) Failure to Inform E.g. H.R. 4973 (96th Congress, 1st Session), introduced by Rep. George Miller would make it a Federal crime for an appropriate manager to knowingly fail to inform the appropriate Federal agency in writing, and to warn affected employees in writing, within 30 days after discovering in the course of business that a serious danger is associated with a product or business practice.

c) The Corporate Decency Act is a comprehensive model bill drafted by Essential Information.

5) Strengthen the Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act is weakly enforced and riddled with loopholes. According to a March 2003 report by the Senate Finance Committee, the Justice Department and SEC failed to act upon strong evidence provided by the IRS of alleged bribery by Enron officials in Guatemala. A number of companies including Halliburton, Tyco, Xerox, Accenture, Titan and Enron have reported instances of overseas bribery by their employees in recent years. Meanwhile “grease payment” exemptions and loopholes created by a 2002 court decision have watered down the law’s effectiveness. These loopholes should be closed and Congress should continue to monitor the SEC/DOJ’s enforcement of the law. See our corporate bribery page for more.

6) Ban Tax Deductions for Fines and Penalties for Corporate Misbehavior One of the many criticisms levied against the $1.4 billionsettlement with 10 Wall Street banks was that a sizeable chunk of the settlement could be tax-deductible, essentially pinning much of the penalty on taxpayers. Only about $450 million of the $1.5 billion total was characterized as either “penalties” or “fines,” which are not tax-deductible. Other requirements of the settlement, including investor restitution, education and the dissemination of independent research and advertising and insurance fees are typically considered tax-deductible under federal corporate income tax laws, which generally view such expenses as part of the cost of doing business. (The IRS has the ability to challenge such deductibility, but tax specialists point out that they are not disposed to doing so. In 2002, the IRS ruled that a company facing accounting fraud lawsuits could deduct the cost of settling shareholder lawsuits.) In addition, money set aside in anticipation of investor lawsuits allows corporations to trim their current tax burden. (See Gregory Zuckerman, “Wall Street’s Settlement Will be Less Taxing,” WSJ, 2/13/03, C1).

To remedy this loophole, in 2003 Senators Charles Grassley (R-IA) and Max Baucus (D-MT) introduced the Government Settlement Transparency Act of 2003 (S 936) in the Senate Finance Committee. “Our responsibility is to end all imprecision,” Grassley said. “Otherwise some creative people will try to get out of paying whatever they can, and the rest of the taxpayers will bear the burden.”

7) Make corporate crime a law enforcement priority.

Although state and U.S. attorneys are often eager to apply the full weight of the law to corporations and top executives, they are often hampered by the large expenditures of time and special investigative skills required. At the federal level, the enforcement divisions of both the SEC and the Department of Justice have been chronically underfunded, resulting in high staff-turnover and an inability to keep up with the many possible cases that require investigation. Without proper resources, it is difficult to apply the rule of law to corporate criminals. As John Coffee of the University of Columbia Law School has pointed out, the reluctance of Justice Department officials to prioritize the pursuit of financial fraud and other complicated forms of corporate crime has done little to deter such activity. �The consensus of criminologists is that likelihood of apprehension is far more important than the severity of punishment. � From a policy perspective, this means that the passage of tough mandatory sentences that impose exemplary sentences on white collar offenders will do less to achieve deterrence than investment in enforcement and detection.�

In addition to increasing enforcement budgets, the Department of Justice should be directed to establish a permanent corporate crime division, including a standing, nimble task force ready to investigate major reported cases of crime, including financial or offshore banking support for terrorism. (See S. 2712, introduced after BCCI scandal in 1990 �to establish a Financial Services Crime Division in the Department of Justice.�) The department should track the extent and cost of corporate crime by producing an annual corporate crime report and maintaining a publicly-available online database of information useful to federal contract officers, investors, investigative journalists and other members of the public. The department should also establish a national information clearinghouse and legal brief bank for local prosecutors.

8) Tighten Discretionary Standards for the Prosecution of Corporate Criminals. In January, 2003 Deputy Attorney General Larry Thompson (who was also the head of the Justice Department’s Corporate Fraud Task Force) issued guidelines to U.S. Attorneys which spell out the government’s policy for prosecuting corporations for corporate fraud and other forms of corporate crime. Thompson’s memo suggested that “indicting corporations for wrongdoing enables the government to address and be a force for positive change of corporate culture, alter corporate behavior, and prevent, discover, and punish white collar crime.” Yet the Department added a corporate immunity provision known as a “deferred prosecution agreement” which allows prosecutors to agree not to prosecute a company in exchange for cooperating with an investigation. Because these agreements can be conducted in secret, and concluded without any notice to the public, the victims of corporate crime are effectively shut out of any part in the negotiations. Congress should make it mandatory for corporations to publicize the settlement and establish a threshold for mandatory prosecution. For more information go HERE.

9) Empower Citizens to Enforce the Law, especially when the government won’t. A Citizens Bounty Act should be established to restore the citizens’ right to force corporations to comply with the law when government fails to do its job. One possible approach might be to apply the qui tam (whistleblower) provisions of The False Claims Act. Some kind of provision should be applied to laws which protect the environment, protect the safety of workers, prohibit racial discrimination or otherwise affect the purposes of the people. A series of wrong-headed Supreme Court opinions, culminating in the 1992 decision, Lujan v. Defenders of Wildlife, has twisted the law of “standing” — the determination as to whether a particular person or group has the right to bring a lawsuit — in a manner that has undermined the intent of Congress, the provisions of the Constitution and the will of the people.

10) Take away homestead (“keep the mansion”) loopholes for corporate crooks. State laws that exempt certain property from confiscation, forced sale or foreclosure should be overridden in order to satisfy any judgment or court order for payment of debts, fines and other penalties associated with fraud or other forms of corporate and white collar crime. See Securities Fraud Deterrence and Investor Restitution Act of 2004 (H.R. 2179).

11) Empower Investors, Consumers and Ratepayers by creating associations that will allow them to independently monitor enforcement agencies and advocate policies that reflect their interest. See Sen. Paul Wellstone’s “Consumer and Shareholder Protection Association Act of 2002” These associations can be enhanced through the use of an Investor Education Fund created from penalties assigned to corporate crooks.

Corporate Crime Links:

Government:
Securities and Exchange Commission
Senate Government Affairs Committee Report on Enron
GAO Report on SEC Operations
SEC budget history
U.S. Department of Justice
DOJ’s Corporate Fraud Task Force
Remarks by President Bush (9/03)
GAO report on violations by federal contractors
Research Guide to International and U.S. Laws on White-Collar Crime and Corruption
Senate Judiciary Committee Hearing on Thompson Memo

Other:

Corporate Crime Reporter
20 Things You Should Know About Corporate Crime by Russell Mokhiber, editor of CCR
Government Accountability Project (help for whistleblowers)
Transaction Records Access Clearinghouse (independent data on federal law enforcement)
“Plundering America: How American Investors Got Taken for Trillions by Corporate Insiders” by William Lerach. Also see his firm’s Enron Fraud website.
“Limited Options” by Prof. John C. Coffee Jr. of Columbia University, Legal Affairs Nov./Dec. 2003 (a good short recap of the corporate crime wave and its causes).
Forbes’ Wall Street Fine Tracker 
Center for Corporate Accountability (British group promoting worker and public safety)
Corporate Manslaughter (England) (CCA)
White Collar Crime Prof Blog
Citizen Works