197. "Going Soft on Corporate Crime," Washington Post, (April 1, 1990). Miami Herald, (April 15, 1990). Cleveland Plain Dealer, (April 15, 1990). Fulton County Daily Report, Atlanta, GA (May 21, 1990). Recorder, San Francisco, (May 21, 1990). Connecticut Law Tribune, Stamford, CT (May 21, 1990).


This week, sociologist Amitai Etzioni looks at the U.S. sentencing Commission's attempts to develop guidelines for punishing organizations that commit crimes.

A STEAMROLLER of business lobbyists is about to flatten whatever is left standing of the three-year effort by a congressionally appointed commission to standardize and strengthen penalties for corporate crime.

Only a few weeks ago, the United States Sentencing Commission seemed on the verge of completing its work. After years of research and testimony, it had published tentative guidelines for determining sentences. It had drawn up a scale of fines far heavier than any business executive would have imagined possible in the mid-'80s: Instead of $ 5,000 or less -- the amount levied in four-fifths of all corporate convictions from 1975 to 1976 -- fines were set as high as $ 364 million. In addition, the commission had devised innovative new punishments -- including probation and community service for convicted organizations. By Feb. 15, the end of the original public-comment period, the only major question remaining was which of its two tough new alternative methods of fining corporations would become law.

But by March 6, following an industry lobbying blitz, the commission suddenly began considering dramatically reduced fines. And now, as business pressure reaches a peak, the U.S.S.C. appears ready to cave in still further. Thus, despite daily reports about massive S&L fraud, oil spills and rampant insider trading, it seems that corporate criminals will be able to continue receiving, in effect, a slap on the wrist.

Congress established the U.S.S.C. in 1984 to design guidelines ensuring greater certainty and uniformity in federal criminal sentencing. At that time, there were wide discrepancies from jurisdiction to jurisdiction in sentences imposed on individuals committing similar crimes. A person could be jailed for 20 years in Texas for possessing a marijuana cigarette, whereas in New York he or she would draw a suspended sentence. Under the revised system, which took effect Nov. 1, 1987, the commission set minimum and maximum penalties which prevent judges in various parts of the country from handing down sentences which vary by more than 25 percent. Where Are Standards? The 1987 guidelines, however, did not address penalties for organizations (mainly corporations). So the commission began studying the special problems posed by these defendants. For example, often prosecutors can firmly establish the collective guilt of a corporation, but because the crimes may involve complex financial transactions over long time periods, it may not be possible to determine exactly which individuals are responsible for what actions.

A set of hearings on sentencing guidelines was held on Feb. 14. At that time, the commission's chairman, Judge William Wilkins Jr. was confident that the recommendations would be sent to Congress by May l. If Congress did not act to block them, the guidelines would automatically take effect six months later.

The U.S.S.C.'s most difficult problem was devising a method to set penalties. For organizations that are clearly operated for criminal purpose, the answer was easy: The fine should be high enough to strip them of all assets and to put them out of business. For others, the commission proposed two options, each mandating stiff punishments. [See box.]

After largely ignoring the work of the U.S.S.C. during three years of hearings, business has suddenly awakened to the immense consequences.

The proposed guidelines, a representative of the National Association of Manufacturers (NAM) told the commissioners, "are extremely harsh, punitive, unwarranted and will place many businesses on the threshold of insolvency." Joseph diGenova, a former U.S. attorney for the District of Columbia now in private practice, urged the commission at the Feb. 14 hearing to go back and study corporate conduct some more. Frank McFadden, testifying for the American Corporate Counsel Association, described the proposals as "critically flawed."

Victoria Toensing, special counsel for Hughes Hubbard & Reed, a law firm whose clients include twice-convicted General Electric, argued that the guidelines "have a low threshold and overwhelmingly intrusive conditions. They are far from what Congress had in mind and far from realistic."

All those who testified for business interests maintained that corporations are, by and large, very law-abiding. John Borgwardt of Boise Cascade Corp. testified that "many, if not most, organizations are composed of morally and ethically honorable people who genuinely try to comply with the law." In fact, a Department of Justice study found that of almost 600 corporations monitored during 1975-76, "over 60 percent had at least one enforcement action initiated against them." My own study of the Fortune 500 industrial corporations showed that during the period 1975-1984, 62 percent were involved in one or more incidents of corrupt behavior such as price fixing, bribery, violation of environmental regulations and tax fraud. (Corporations were considered "involved" if their executives used the corporate structure for the criminal act and the profits accrued to the corporation and not to the individual.) Business Backlash All this mattered little. In the weeks following the hearings, business lobbyists and corporate attorneys turned up the heat. Meanwhile, the usual array of environmental, public-interest and consumer groups kept a low profile.

On March 6, the commission issued yet a third option -- a new set of proposed guidelines apparently intended to supplant the first two -- and extended the period for public comment. The fines were slashed. Under the commission's original guidelines, an offense of Level 10 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 under the original options was $ 374 million. In the new scale it is about 3 percent of that: $ 12.6 million.

Moreover, the mitigating factors were also altered so as to vastly reduce the fines. For example, if two out of four factors are present, the minimum fine is reduced by 75 percent and the maximum by 66 percent. If all four mitigating factors are present, the maximum fine is one-twelfth of the posted fine; at the highest possible level of criminality, this would amount to $ 1,050,000. Ivan Boesky could have paid that from petty cash.

Gone also are several of the aggravating factors -- such as any reference to prior criminal record. However, business lobbyists were not satisfied. A source close to the commission reports that the line-up of lobbyists visiting the chair of the commission has not receded since March 6, and that the commission is actively deliberating whether to retreat further. As of last week, at least three options were being considered: Withdrawing the proposal and not reporting to Congress by May 1 as planned; issuing a recommendation for merely non-binding guidelines to judges (which would have little power); or further weakening the fines. Any of these would have the effect of continuing the status quo.

Under the existing system, fines for corporations are puny. Between 1984 and 1987, the average fine imposed in all corporate cases was $ 48,000, and 67 percent of these were for $ 10,000 or less. This allowed many corporations to treat potential fines as a "cost of doing business." Moreover, many companies, when caught red-handed, often merely agreed to desist from illegal behavior in the future and escaped further punishment. "The fines were so small," diGenova told the commission, recalling his days as a prosecutor, "that they were not worth the candle" -- i.e., not worth the effort of bringing them to trial. Nell Minow of Institutional Shareholder Services Inc., who represents those who have stocks in corporations, observed that, "the reason that corporate executives think they can get away with violations of the law is that there have been too many cases where they have."

Moreover, imposing fines on the corporation alone may not sufficiently deter executives, suggests Sally Simpson of the University of Maryland's Institute of Criminal Justice and Criminology. Punishing both may be effective, but there seems to be a tendency for executives to withhold evidence of corporate culpability until they gain partial or full immunity.

Such cases, corporate representatives argue vehemently, are rare, and usually the corporation as a whole and its top management are not involved. Earlyn Church, from Superior Technical Ceramics Corp., told the U.S.S.C. that her corporation (which has fewer than 100 employees) retains seven full-time professional engineers who work to ensure compliance with various federal laws and regulations. Given that "compliance with our laws is not always a simple and precise tasks" and violations may occur accidentally, why should the top managers or the corporation be punished? Church urged that "mandatory fines should not be imposed on an organization that has done everything reasonably possible to prevent a crime.

That seems fair enough. But why not retain substantial punishments for corporations which systematically and knowingly violate the law under the guidance of those in charge? Examples of violations where top executives were involved abound: Beech-Nut, in which management orchestrated the systematic adulteration of apple juice sold to infants; Film Recovery Systems Inc., in which three executives received homicide convictions for the death of an employee who inhaled cyanide fumes on the job because warning signs were removed; defense contractors making defective weapons; labs that perform "sink tests" (that is, dump blood samples in the sink and report negative test results); banks that launder drug money. In several of these instances, individual executives were fined and even jailed, but no penalties were imposed on the corporations that profited from the crimes. Nor were they made to introduce internal mechanisms to prevent the recurrence of the same crimes. The Shame of It All Business lobbyists took particular aim at one of the commission's most innovative ideas: elevating from an occasional, rarely used sanction, to more common practice, the notion of corporate probation. The commission recommends that under a set of narrowly defined limited conditions, reserved largely for corporations whose management was actively involved in the crime, corporations should be required to submit to court a compliance plan according to which their performance will be monitored.

This idea has the business community greatly troubled. A representative of the Corporate Counsel Association commented sarcastically that judges are not experts in accounting and "do not have the training, experience or time to run companies in the manner the suggested conditions of probation would require." Several distinguished legal scholars took exception, citing a whole list of past instances in which corporate probation proved to be a viable sanction.

A fair resolution may lie somewhere in between. The commission may have gone a bit too far in proposing more detailed and frequent accounts than is necessary. But the basic idea of corporate probation has several merits. First, a corporation that has shown a pattern of criminality, as distinct from a one-time "incidental" violation, may well deserve to be limited for a while from extending its corporate culture to other corporations (by acquiring them or merging with them).

Additionally, it is likely that the shaming effect probation has on executives, and the warning it provides to shareholders, would encourage rehabilitation. Carl Mayer of Hofstra Law School testified, "the corporation, to avoid adverse publicity, will have an incentive to reform its internal operations to avoid criminal activity." Forcing corporations to set up internal guidelines and supervisory schemes is surely a way to ensure greater integrity. "The goal in setting the guidelines," said chairman Wilkins, "was to provide incentives to corporations to voluntarily comply with the law."

Community service is perhaps the commission's most imaginative recommendation. The guidelines allow judges to sentence a corporation to community service provided that it is related to repairing the damage caused by the offense. Imagine a corporation that adulterated baby food being required to send its employees, at the firm's expense, to serve "organic" food to kindergartners for two years; or a company that manufactured faulty arms sending its executives to work in military hospitals and funeral parlors.

Much worry was expressed by business representatives for the "innocent shareholder" who, they say, will ultimately pay the cost of the fine. But as many believe and the law dictates, shareholders are the ultimate source of power in corporations: Should they suffer from management that engages in illegal activities, they are free to hire new executives.

At a time when American society is calling for tougher penalties for crime in the streets, and crime in corporate suites is rampant, shouldn't the attorney general's maxim, "serious time for serious crime" be extended to convicted corporations? Shouldn't corporations be afforded the same rehabilitative opportunities as individuals by being on probation and supervision for a while, and to make amends by doing community service? These are the questions citizens ought to be asking of the commission now. Otherwise, they shouldn't be surprised if corporate criminals get away with murder -- figuratively and literally.

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