199. "Getting Down to Business on Corporate Crime" Legal Times, p. 21, (May 21, 1990). "Dealing with Corporate Culprits: Seeking Big Fines for Big Crimes" The Connecticut Law Tribune, (May 21/28, 1990), "Corporations Are Criminals Too" The Recorder (San Francisco Law Journal), (May 21, 1990).

The business community is up in arms about attempts to toughen the penalties for corporations that violate the law. In April, business leaders successfully pressured the White House and, through it, the Department of Justice to hold back the U.S. Sentencing Commission, which was about to recommend guidelines that would have required stiff fines - up to hundreds of millions of dollars per offense - for convicted corporations.

Business interests argue that corporations “are extraordinarily law-abiding,” as one of their lawyers has put it, and that when transgressions do occur, they are carried out by some menial worker, say, in the mail room, unbeknownst to management. They also claim that, because the law is so complex, not even the best intentions and a large staff dedicated to ensuring compliance can obviate the occasional corporate slip-up. Since the culprits are complex government forms and excessive regulation, they argue, corporations should meet understanding rather than punishment. Furthermore, business people point out, when one punishes the corporation, one, in effect, hurts innocent shareholders.

Criminal Profile

What do we know about the scope of corporate crime and the identity of the actual perpetrators? The Office of the Inspector General in the Department of Defense reports that 20 of the 100 largest defense contractors have been convicted in criminal cases since 1983. A study by the Justice Department that looked at almost 60 0of the nation’s largest corporations showed that during 1975 and 1976 “ over 60 percent had at least one [federal administrative, civil, or criminal] enforcement action initiated against them . . . [and] more than 40 percent of the manufacturing corporations engaged in repeated violations.” The Resolution Trust Corp., 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. My own study of the Fortune 500 found that 62 percent were involved in one or more incidents of illegality - including price-fixing, bribery, fraud, and environmental violations - during the period from 1975 to 1984. From oil spills to laundering drug money to tax evasion, corporate crime is far from rare.

Who is involved? While the answer differs from case to case, in many instances laws are violated systematically under the guidance of top executives. For example, the shenanigans at General Dynamics the cost the Defense Department hundreds of millions of dollars in the 1970s were orchestrated by its chief executive officer. At Beech-Nut, top management oversaw the systematic adulteration of apple juice sold to infants.

In the past, prosecutors have gone after executives rather than corporations because they could not get meaningful sentences against the companies. For example, since 1982, 60 banks have been convicted of money-laundering; of those, 25 received fines of $10,000 or less. Such small fines have had a negative effect; corporations can easily absorb these sums as part of the cost of doing business.

Reaping the Benefits

As to innocent shareholders, they are the beneficiaries of the illegal behavior. A corporation is a transgressor when illicit profits are channeled into its coffers rather than pocketed by executives. Hence, it seems proper to make the shareholders pay for the punishment. It is up to them, after all, as the ultimate source of corporate sovereignty, to see to it that the executives, acting as their agents, uphold the law. And if the executives do not, it is up to the shareholders to retain a cleaner crew.

What is the right level and type of punishment for corporations? Because one cannot jail an organization, the main issue is how high to set fines. Some economists argue that fines must take into account not only the potential for gain, but also the likelihood of being detected. Thus, Gary Becker of the University of Chicago said in a 1985 Business Week article, “[If the illegal] act does $1 million worth of harm with a 50-percent chance of going unpunished, then the fine would be $2 million.” This is indeed a valid observation except that the probability that a corporate crime will be detected, the corporation tried and convicted, and the government will actually collect the fine is much lower - perhaps even closer to 0.5 percent rather than 50 percent. Granted, it is very difficult to get statistics on undetected crime, but an inkling of the situation is provided by a finding by Data Resources Inc., also published in Business Week, that out of 130 stocks examined during a one-year period from July 1986 to July 1987, 70 percent had run up very shortly before takeovers were announced, suggesting rampant insider trading. Yet there have been only a handful of convictions. It follows that to deter corporate crime, fines should be close to the stiff ones suggested by the U.S. Sentencing Commission before it succumbed to business pressures.

Sliding Scale

The commission had recommended a sliding scale of fines, reflecting such factors as the nature of the crime and mitigating circumstances. For such serious crimes as drug companies neglecting to report data showing that drugs they sold caused multiple fatalities or for crimes causing major and repeated damage to the environment, fines could be as high as $364 million per single offense. (One may contend that an unusually stiff fine put Drexel Burnham Lambert out of business. Aside from the question of whether it was actually the collapse of the junk-bond market that did in Drexel, it is not obvious why it is impermissible to put out of business a corporation that benefits from a pattern of wrongdoing.)

Sociologist John Braithwaite of the Australian National University has argued for a rather different approach. Instead of waiting until the corporation has committed a crime, it would be better to begin with a requirement or incentive that corporations set up internal guidelines and enforcement mechanisms against illegal and immoral conduct. (Some courts have imposed such conditions as an element of probation; for example, requiring that a corporation establish a written policy whereby corporate officers and employees must notify a designated officer when they are being subjected to pressure to participate in illegal acts.) In this way, corporations would be less likely to violate the law, and if they did, there would be much less of a question of who is responsible.

Requiring the introduction of internal guidelines - and treating them, in sentencing a corporate offender, as a mitigating circumstance - would also serve, the Sentencing Commission has correctly pointed out, to deal with corporations one cannot fine sufficiently because to do so may halt the production of parts essential for national security, and important new drug, or some other item of great merit. Moreover, the commission has suggested, such a corporation could be sentenced to a period of rehabilitation during which it would be put under court supervision until it built up an internal compliance plan and showed that it prevented new criminal activity for a given number of years. Meanwhile, the corporation would be prevented from acquisitions and mergers to avoid spreading its yet-to-be-tested corporate culture.

Regrettably, rather than supporting these measures of offering other ways to stem corporate crimes, business leaders succeeded in forcing the U.S. Sentencing Commission to retract its recommendations. The commission announced - after it had studied the matter for three years - that it suddenly discovered that more study was required. Given that the White House and those at the top of the Department of Justice joined the business groups to pressure the commission to retreat, one cannot but conclude that this administration’s interest in law and order is limited to the streets. It does not reach in to corporate suites.

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