229. "The U.S. Sentencing Commission on Corporate Crime: A Critique," Annals, American Academy of Political and Social Science, 525 (January 1993), pp. 147-156.


Policy and Constituency Analysis

During the Carter administration's first year, the president convened a task force on energy. Disdaining Washington "politics," Carter instructed the task force to formulate the best energy policy possible, without regard to questions of political support. The panel came up with a package of measures--strongly leaning toward conservation rather than production enhancement--that was sure to raise the powerful opposition of oil, gas, and drilling corporations, as well as other business groups and conservatives--all of whom were leaning toward enhanced production as the answer to energy shortages.

The panel also included in its package a recommendation to expand the nation's reliance on nuclear energy. This was sure to antagonize environmentalists, outrage consumer groups (at least as championed by Ralph Nader), and aggravate most liberals, who tend to be anti-nuclear. As a result, when the package was sent to Congress, it had next to no political support, having alienated both conservatives and liberals and the main political players on both sides. Congress basically ignored these policy proposals. Moreover, the apolitical nature of the package and its failure in Congress weakened the ability and credibility of the president. In a sense, it might be said that by sending Congress an unsupported policy proposal, Carter lost twice.

The question that this panel and other task forces and commissions face is whether they should do their work without regard to political considerations. The answer to the question, in my opinion, should vary according to what one means by political. Surely such policy-advancing groups cannot and should not take into account the thousands of special-interest groups that roam Washington, tailoring a policy to please all, or even most, of them. Such a policy would end up as perverted as our current tax code, with hundreds of special clauses favoring numerous small groups, not in line with the public interest.

On the other hand, major constituencies must be taken into account. Implementation problems cannot be ignored in policy analysis, otherwise policy analysis becomes a form of utopian writing. In effect, as I have argued elsewhere, full policy analysis contains constituency analysis.[1] This does not mean that all constituent positions must be accepted on their face. Creative policy analysts design options that allow policy makers to move one or more constituencies from opposition to support, forming new combinations of groups that will lead to winning coalitions.

The United States Sentencing Commission initially acted as if this political problem did not exist. Possibly because its first report (on individual sentencing) moved from report to law without a hitch (largely because it was "tough" on street crime and hence had built-in support), it may have assumed that the same would happen with its treatment of corporate crime. Perhaps the commissioners failed to anticipate problems because they were caught up in other battles, especially with neoclassical economists and between the more and less conservative members of the commission. The apolitical nature of the work was further exacerbated by the fact that neither the press nor various interest groups paid much attention to what the commission was doing in its rather closeted deliberations. Indeed, when I had lunch with the chairman of the commission, Judge William Wilkins, Jr., on February 14, 1990, the day of the first hearing, he stated unequivocally that he believed that the commission's recommendations would become law within a few months.

The results of the commission's work were the first draft guidelines, published in November 1989 and subject to public hearing on February 14, 1990. While the commission asked for comments, it offered only two options, and the difference between them was minimal. One option provided for fines ranging from two to three times the amount of damage caused (or illicit gains obtained) by a corporation. The second established a 32-level sliding scale of fines that was dependent on the severity of the offense. It was like asking a person who had been dealing drugs all his life and was suddenly caught whether he would prefer to be hanged or shot.

The guidelines suggested the introduction of huge fines, up to one-third of $1 billion, for crimes that had previously resulted in fines of tens of thousands of dollars. The maximum fine provided for in the guidelines was $364 million. In contrast, four-fifths of all corporate convictions between 1975 and 1976 resulted in fines of $5,000 or less. Between 1984 and 1987, the average corporate fine was $48,000, and 67 percent of the fines were $10,000 or less. Consider some specific cases: Eli Lilly & Company, the pharmaceutical manufacturer, was fined $25,000 for a guilty plea to a misdemeanor charge for failing to inform the government of four deaths and six illnesses related to its arthritis drug Oraflex. Though the company was charged with only a misdemeanor, the drug was linked to at least 26 deaths in the United States and even more from its sale overseas. In another example, of the 60 banks convicted of money laundering between 1982 and 1990, 25 received fines of $10,000 or less.

The predictable result was a firestorm of opposition. Major corporations (and the lawyers who work for them) and trade associations (and the columnists close to them) severely criticized the commission's recommendations. At the February 14, 1990 hearing, the National Association of Manufacturers' representative testified: "The proposed guidelines...are extremely harsh, punitive, unwarranted, and will place many businesses on the threshold of insolvency." The American Corporate Counsel Association added that the draft was "critically flawed." In the press, warnings were issued that if the draft guidelines "become law this year, the judge might wind up managing a major corporation,"[2] or that "a single misadventure by an unauthorized low-level employee in a remote plant could have threatened a corporation with a multimillion-dollar fine."[3]

Liberal groups that might have approved of the commission's recommendations were barely aware of the hearings and initially played a rather minor role in the process. Late testimony was submitted by the Natural Resources Defense Council and a small group of environmental lobbies, but other public-interest and consumer-advocacy groups did not mobilize their constituencies.

The result was predictable: the commission withdrew its recommendations and promised to reconsider them. Then, forewarned but either disinclined or unable to marshal constituency support, it swung full force in the opposite direction. Its new set of recommendations, released March 6, 1990, drastically scaled back most of the penalties, in some cases as much as 97 percent! For example, under the commission's original guidelines, a level 10 offense carried a penalty of up to $64,000; the new option reduced it to $17,500. Level 25 dropped from a hefty $136 million to $580,000. The maximum proposed penalty dropped from $364 million to about 3 percent of that, or $12.6 million. It should be noted that because they started from such a high base, these new fines were still higher than those typically imposed on corporations, which tend to be (with the exception of environmental crimes) trivial.

These much diluted and weakened guidelines were still not acceptable to the basic political lineup. Liberal groups (alerted by the author) now entered the arena, though rather weakly. Consumer groups were still not interested, and environmentalists largely focused on their cut. Overall, liberal groups had little influence in Washington at this point, with the Bush administration at the height of its power.

Business groups, high on their recent victory over the commission's draft, went in for the kill. They wanted the commission either to withdraw its conclusions completely and go back to study the matter or adopt only recommended guidelines. The National Association of Manufacturers and others demanded "adoption of voluntary policy statements rather than mandatory guidelines," despite the fact that mere recommendations would leave individual judges to pass sentences as they saw fit. The White House was successfully drafted to help the business community restrain the commission. Then-Deputy Attorney General Donald Ayer had issued a strong letter of support to the commission in February; the letter was withdrawn, however, shortly after a meeting between members of the Business Roundtable and White House Counsel C. Boyden Gray resulted in an "inquiry" from the White House to the Justice Department.[4] The press was also brought into the act on both sides, including a full-page article in the Washington Post by the author[5] and analyses in the New York Law Journal[6] and the Wall Street Journal.[7]

Given the new political constellation, the commission, buffeted and bobbed by forces it neither understood nor controlled, issued its final report on May 1, 1991, on all but environmental crimes. It had finally been pushed into an acceptable formula. In it, the commission enhanced somewhat the reduced penalties (a sop to the critical press and the liberals), but provided a list of extenuating circumstances that allowed offending corporations to reduce easily the remaining penalties to small amounts, if not to zero. The mitigating factors include:

- Occurrence of the offense despite the existence of an effective compliance program designed to prevent and detect violations
- Lack of knowledge of the offense on the part of high-level management
- Prompt reporting of the offense to governmental authorities
- Full cooperation in any investigation
- Clearly demonstrated recognition and acceptance of responsibility for criminal conduct.

When the fine is first set, the defendant is given a culpability score of 5 resulting in no increase or reduction in the penalty. Corporations can then subtract various points for meeting the mitigating factors. For example, the existence of an effective compliance program subtracts three points and reduces the fine to 40 percent of the original amount. If the corporation meets all of the last three criteria, it can subtract five points and reduced the penalty to only 5 percent of the original fine.

In the process, though, the commission stumbled onto a rather important concept. Given our present political reality, it is difficult to go after major corporations and penalize them on a level that would deter future crimes.[8] Therefore, it makes sense to close the barn door before the horse bolts--that is, prevention has much to recommend itself over relying exclusively on after-the-fact, acute treatment.

The commission made the existence of internal plans that advocate against criminal conduct, and serious efforts to make them stick, a major way to mitigate penalties if a corporation is caught committing a crime. The guidelines contained detailed conditions defining an effective compliance program including: designation of a specific high-level person to be responsible for the program, written policies and reporting procedures, and mandatory participation in training programs by employees. To the extent that corporations will respond by introducing more of these compliance programs, the more corporate crime will be curbed, at least when it is not orchestrated from the highest level.

In sum, to those who believe that commissions should do what is in line with the over arching values of the society, disregarding all other considerations, the U.S. Sentencing Commission failed. Its mountain of deliberations and studies produced a molehill of enforcement. To those who believe that commissions should take implementation problems into account in their policy analyses, the commission zigzagged itself into a position that has some merit. It could have done much better, however, but probably only in a less pro-business environment and only if liberal groups had at least mobilized more effectively to support its work.

Neoclassical Fantasies

The commission's deliberations and work provide an important study in the consequences of applying neoclassical economics to public affairs. It turned out that this theory is even less applicable than when it is applied to intramarket choices. Moreover, the moral value issues involved stood out clearly.

At issue are twin questions: On what basis should the size of the punishment for a crime be determined? and What role should the moral values of a community play in such a determination? Neoclassical economists argue that the basis should be considerations of costs and benefits: the "costs" of a crime should exceed the loot or benefits. Thus, if a corporation made a profit of $6 million from selling an unsafe product and the fine were, say, $7 million, it would refrain from committing this crime.

Second, neoclassical economists imply (and occasionally explicitly state) that the question of values need not enter the picture at all. Thus, the fact that the community finds some crimes more abhorrent than others or wishes to use the penalties to send a message about the importance of some values (say, not betraying your country by selling certain high-tech items to the enemy) should not be a factor. An economist who testified before Congress about what he considered to be the commission's wrongheaded concern with just punishment stated, "`Justice' and its cognate forms are high-sounding words, but they can not be permitted to operate as trump cards in sentencing policy....[J]ustice was served by basing organizational sentences on the level of harms caused or threatened by offenses."[9] People are assumed to be moved by self-interest and not values. The law, neoclassicists argue, should work on corporations' calculations of profit and loss rather than try to affect their preferences by affecting their values.[10]

The commission found this approach impossible to follow, and it let go of its staff economists and consultants. In a much-publicized resignation, Commissioner Michael Block, a University of Arizona economics professor, essentially resigned over the commission's refusal to use calculations of social harm as derived from past fine levels as the sole basis for determining fine levels. [11]

What went wrong? First of all, the economists' approach turned out to be unempirical. To pursue their recommendations, the commission needed to take detection ratios into account. These come into the picture because courts must assume that not all crimes are detected and punished. Therefore, the penalties must be higher as detection ratios decrease; otherwise, a corporation might rationally calculate that since it has only, say, a 1 in 10 chance of being caught, even if the fine is somewhat larger than the gains of violating the law, it is still more profitable to proceed and violate the law. To stay with the example cited above, if the benefit of a violation is $6 million, the fine would have to be not $7 million but at least $60 million to be an effective deterrent.

It is hardly surprising that the commission found, however, that the detection ratios for most crimes are very difficult to establish. After all, they require knowledge of the number of crimes that have been committed but remain uncovered. Moreover, even if in some areas one can get a rough estimate of the size of the ratio, it would be nearly impossible to litigate on such estimates. For example, the prosecution might claim that the detection ratio is 5 (1 out of 5 is caught) for consumer fraud, while the defense might argue that the ratio is 3. How could such a dispute be settled?

Another problem for the commission was the generally pro-business bent of neoclassical economists and their consequent assumption that detection ratios are very high and as a result the fines would be set rather low. Gary Becker, for instance, suggested 50 percent: "[If the illegal] act does $1 million worth of harm with a 50% chance of going unpunished, then the fine would be $2 million. Fines of this size would force companies to think longer and harder before committing white-collar crime."[12] Jeffrey Parker, a former commission staff member, suggested that the actual detection ratio was 1 in 10 to 1 in 20.[13] However, from what little we know about the subject, we can glean that the ratios are much lower; 1 out of 50 may be closer to the mark. Consider the fact that the Resolution Trust Corporation, established to manage the savings-and-loan bailout, reports that criminal fraud was discovered in 60 percent of the savings institutions seized by the government in 1989.[14] Or, a study by the Department of Justice that looked at almost 600 of the largest U.S. publicly owned manufacturing, wholesale, retail, and service corporations with annual sales of $300 million or more showed that during 1975 and 1976 "over 60 percent had at least one enforcement action initiated against them [actions were all federal--administrative, civil, and criminal]...more than 40 percent of the manufacturing corporations engaged in repeated violations."[15]

As a result, fines would have to be set at astronomical figures to satisfy the neoclassical economists' criteria, and would often put convicted corporations out of business. While this might well deter others, it is politically unrealistic, and probably not in the public interest, to put a major corporation out of business, and throw thousands out of work because it happens to be the one corporation that was caught.

The commission also felt strongly that certain crimes need to be severely punished, even if one cannot calculate the costs. Thus, it granted various conditions for departures beyond the maximum fine levels, including criminal acts that threaten national security, that target vulnerable victims (such as the elderly or disabled), or that involve foreseeable risk of death or serious injury. [16]

All this is of interest not merely with respect to the commission's report, but to all those who try to apply neoclassical economics to the study of crime and more generally to public choice and other matters of public policy.

Two Innovative Ideas: Corporate Probation and Community Service

The least attention has been paid in hearings and the press to two interesting ideas the commission explored. The first is corporate probation. The way the commission worded the idea, it sounded more like a partially suspended sentence: in the case of corporations that could not pay their full fines (and thus presumably were insufficiently deterred from repeating their crime), the court could oversee certain activities for a period of up to five years. For example, the court could require the defendant to provide regular financial reports, to notify the court of adverse changes in the company's business or financial position, to publicize its offense, and to submit to unannounced audits of its books or interrogation of knowledgeable individuals. Such corporations would, in effect, need a judge's approval to pay dividends, obtain new financing, or enter into a merger with another corporation.

This led to an outcry that the commission would create a situation "tantamount to having the courts running a commercial enterprise," and that "such restrictions will lead to loss of jobs and the eventual demise of any business faced with probation."[17] Such complaints disregard the fact that the commission's recommendations apply only to convicted criminals.

As I see it, the commission's idea deserves further consideration. Close supervision of a corporation--especially if it is convicted of a pattern of wrongdoing carried out over a period of years--seems appropriate until it is established that the corporation has been rehabilitated.

My own version of the same basic idea is for corporations to be sentenced to rehabilitation even when no other penalty is exacted or even if they are able to pay their fine in full. Imagine, for instance, a corporation that is found to have systematically neglected the safety of its consumers. It seems socially productive to put it on a five-year "diet" of closer inspections; if it is found to have truly mended its ways, the inspectors should report that the firm has been rehabilitated and fully restore it to membership among decent and law-abiding corporations. One can further imagine that if the transition were not complete, the court could extend the period of rehabilitation (and thus send a signal to consumers to be particularly wary); or the court might lift the standing ahead of schedule if a corporation were making particularly strong corrections in its practices in favor of consumer protection.

Even more interesting is the idea of community service. The commission suggested that a corporation could be required to perform community service that is directly related to its crime when the defendant "possess[es] knowledge, facilities, or skills that uniquely qualify it to repair damage caused by the offense or to take preventive action."[18] This applies to the related question of who is the criminal. Corporate representatives argue that corporations "are extraordinarily **law-abiding" and that most "are composed of morally and ethically honorable people who genuinely try to comply with the law."[19] They claim that when the law is violated, it is "frequently because of the unauthorized act of an employee." [20]

The fact is, though, that violations of the law are orchestrated all too often by management, and that the profits often flow not to an employee but into corporate coffers. Take, for example, the case of Beech-Nut, which systematically adulterated the contents of its infant apple juice, a product that generations of mothers had trusted. Top managers clearly helped to orchestrate the adulteration. When they were caught red-handed, far from desisting, they shifted to mixed juices, in which the adulteration was more difficult to detect. Later, facing an imminent federal indictment, they attempted to sell these products in Third World countries.[21] Many other cases have a similar structure, from the homicide conviction of three Film Recovery Systems executives in Illinois for the death of an employee caused by inhaling cyanide fumes on the job[22]; to a 15-year conspiracy by VSI Corporation (the nation's largest aircraft fastener manufacturer and a subsidiary of Fairchild Industries) to falsify test reports on parts;[23] to purchases of top-secret Pentagon documents giving arms manufacturers illegal competitive advantages. The commission collected data showing that in large, publicly held firms, 25 percent of the time a top executive knew of the criminal activity, and in 33 percent of the cases, a manager knew.[24] Under those conditions, it seems quite proper to penalize management and the corporation.

One way to proceed is to demand that the corporation perform community service as part of its punishment--or as the only punishment when the violation is not particularly troubling. This could be achieved by the corporation using its facilities and resources to arrange for, say, soup kitchens for the homeless if it previously sold adulterated food; sending its executives to do volunteer work in emergency rooms if they deliberately built cars that became fire bombs when hit from the rear; or requiring its board to work in Veterans Administration hospitals if the corporation profited from systematically falsifying test records on drugs, declaring them safe when they were not.

Here it may be said that a politically confused and buffeted commission saw through the neoclassical economists' mumbo jumbo and opened the gate to some imaginative sentencing.

The author would like to acknowledge research assistant Suzanne Goldstein.


ENDNOTES

1. See Amitai Etzioni, The Responsive Society: Collected Essays on Guiding Deliberate Social Change (San Francisco: Jossey-Bass, 1991), chapter 5.

2. Victoria Toensing, “Corporations on Probation: Sentenced to Fail,” Legal Times, 12 February 1990.

3. Robert J. Giuffra, “Sentencing Corporations,” American Enterprise, (May-June 1990).

4. Neil A. Lewis, “White House Aide Intervenes on Tough Fines for Businesses,” The New York Times, 29 April 1990.

5. Amitai Etzioni, “Going Soft on Corporate Crime” The Washington Post, 1 April 1990.

6. Barbara Franklin, “Corporate Penalties: Model Sentencing Guide Rewards Good Behavior” The New York Law Journal, 29 March 1990.

7. Stephen Wermiel and Martha Brannigan, “Sentencing Panel Puts Off Debate on Guidelines for Corporate Fines,” The Wall Street Journal, 11 April 1990.

8. The treatment of Exxon after the Valdez spill is the exception, not the rule; also, in general, environmental groups are more powerful than other groups that support penalties on corporations, such as consumer and other liberal groups.

9. Testimony of Jeffrey Parker before U.S., Congress, House, Committee on the Judiciary, Subcommittee on Criminal Justice, 101st Cong., 2d sess., 24 May 1990, pp. 463-64.

10. A fuller discussion of this issue can be found in papers from “A National Conference on Sentencing of the Corporation,” George Mason University Law School, Fairfax, VA October 25, 1990. For a much more complete discussion of this issue, see Amitai Etzioni, The Moral Dimension: Toward a New Economics (New York: The Free Press, 1988).

11. For further discussion of the commission, see the proceedings of the Cato Institute’s conference, “Corporate Sentencing: The Guidelines Take Hold,” Washington, DC, 31 October 1991.

12. Gary S. Becker, “The Economic Approach to Fighting Crime,” Business Week, 28 October 1985, p. 20.

13. Parker testimony before House Subcommittee on Criminal Justice.

14. Thomas C. Hayes, “Sick Savings Units Riddled by Fraud, FBI Head Asserts,” The New York Times, 12 April 1990.

15. Marshall B. Clinnard, Illegal Corporate Behavior (Washington, DC: Department of Justice, 1979), p. 108.

16. See U.S., Sentencing Commission, draft guidelines 5 November 1990, sec. 8C5.

17. Testimony of James Carty of the National Association of Manufacturers before U.S., Congress, House, Committee on the Judiciary, Subcommittee on Criminal Justice, 101st Cong., 2d sess., 24 May 1990, p.244.

18. Federal Register, 55(214):46612, 5 November 1990.

19. Testimony of Joseph diGenova before U.S., Sentencing Commission, 14 February 1990.

20. Testimony of John Borgwardt of Boise Cascade Corporation before U.S., Sentencing Commission, 14 February 1990.

21. Parker testimony before House Subcommittee on Criminal Justice, p. 446.

22. James Traub “Into the Mouths of Babes,” The New York Times Magazine, 24 July 1988.

23. “3 Executives Get 25 Years in Worker’s Death,” The New York Times, 2 July 1985. The conviction was later reversed on technical grounds.

24. “Maker of Aircraft Fasteners Pleads Guilty to Conspiracy,” The New York Times, 12 May 1990.

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