Corporate crime, which is often denoted economic or organizational crime, is distinguishable from occupational crime in that the primary objective of the illicit activity is to benefit the socioeconomic-legal collective known as the corporation, though the corporate actors may also benefit individually (e.g., financial performance bonus, commissions). Corporate crime occurs in the name of the employing and reporting legal entity. It is often discussed as a species of white-collar crime as corporations are dependent or contingent beings and act only through their legally authorized representatives, including high managerial agents (e.g., directors, officers) and other employees having actual or apparent authority.
The corporation as a legally responsible person must comply with applicable laws, regulations, and rules (collectively, rules) like natural persons notwithstanding the physical impossibility of imprisoning a corporation. However, other sanctions may apply (e.g., loss of charter/ license, debarment from bidding for government contracts, disgorgement of profits, civil penalties, and criminal fines). Additionally, in the United States, deferred prosecution agreements and nonprosecution agreements (DPAs and NPAs) have been used, primarily by the U.S. Department of Justice, to remedy deficient practices and procedures (i.e., internal controls over financial reporting and operations) in corporations and provide a measure of assurance that the illicit conduct will not recur in the corporation.
As the structure of many of these rules include both a bad act and an accompanying guilty state of mind (collectively, illicit conduct) before corporate liability is imposed, the context of criminal justice, law enforcement, and the corporation requires rules of attribution of a natural person’s conduct to the corporation. Generally, the doctrine of respondeat superior results in potential corporate liability when the natural person’s conduct was within the scope of his employment with and apparent authority derived from the corporation. Thus, the corporation is charged with a legal responsibility to supervise its employees and agents, though even demonstrably reasonable supervision may not immunize a corporation from imputed criminal liability caused by employees, rogue or organized: Corporations may be strictly liable for their employees’ conduct.
Though the corporation as a lawful organization of natural persons dates back over many centuries, the corporation has established itself as a primary means of global economic development and redevelopment in the last 100-plus years. It is a creature of law. Generally, state laws of incorporation in the United States, especially those in Delaware where most of the largest public corporations are incorporated, have authority to grant legal existence through issuance of a charter to corporations in the United States, whether closely (i.e., privately owned) or publicly held. State and federal agencies (e.g., the state’s secretary of state, the U.S. Securities and Exchange Commission) determine the documents necessary for filing to create the corporation’s legal existence and to identify the periodic obligations that must be met to perpetuate its legal existence (e.g., filing annual franchise tax returns, paying franchise taxes).
The corporation also functions to limit investor liability. The organizing documentation of the corporation includes the articles of incorporation or association filed under state law and a general outline of procedures for internal governance (i.e., the corporation’s bylaws). State laws establish the primacy of the board of directors (or trustees in the case of business trusts, which are similar organizations) to govern the officers, employees, and agents of the corporation. Corporations may be for-profit or not-for-profit entities.
Generally, the owner of equity capital in a for-profit corporation is at risk for only the value of its equity, which significantly limits downside risk while offering unlimited upside risk. However, not-for-profit corporations do not accumulate or distribute profits to owners. Natural persons form corporations to achieve the objectives and missions set forth in their charters (e.g., articles of incorporation filed with the state). Both types of corporations are controlled by their boards and executive officers/trustees and are potentially subject to the criminal justice system when their controlling persons or other employees or agents for whom they are legally responsible cause the corporation to violate the criminal law.
In brief, the corporation is known as a legal fiction or artificial person because its existence is owed entirely to applicable law, lacking real mind and physical body. In many respects, applying the criminal justice system to a corporation independently of its controlling persons is akin to trying and punishing an intangible entity, yet many natural persons such as employees, suppliers, and customers depend on the corporation for salaries, compensation, and goods and services.
Theories explaining the application of the criminal justice system may be summarized as instrumentalist or retributivist; that is, the system exists to achieve certain goals (e.g., obtain social objectives such as general/specific deterrence) and/or the system exists to punish wrongful conduct (i.e., administer just deserts). The harms invoking the system are public (cf. private injuries and damages such as those caused by tortious conduct addressed by civil litigation). Wrongful conduct may comprise both a public and private harm (e.g., theft by deception is punishable under criminal and civil laws). Harms may be primarily internal to the corporation (e.g., misappropriation of assets) and/or primarily external to the corporation (e.g., pollution of public waterways).
Whereas occupational crimes (e.g., embezzlement) are committed for the exclusive benefit of the perpetrator, corporate crimes (e.g., antitrust violations) are committed for the primary benefit of the corporate enterprise, though natural persons (e.g., high managerial agents, other employees) inevitably also benefit economically and socially.
General Means and Methods
The corporation may be a proxy and instrument for insiders. It functions as an offensive principal (e.g., a legal party to contracts for economic development of assets) and as a defensive shield (e.g., a legal party in litigation absorbing liability, generally in lieu of the natural persons). Insiders (e.g., directors, officers, shareholders with significant beneficial ownership) control the corporation, creating the potential for their own criminal liability (viz., controlling the corporation in a criminally unlawful manner).
The corporation is the reporting entity for transactions. It owns the assets and owes the liabilities; it may absorb the risk of criminal liability through NPAs, DPAs, payments of criminal fines and civil penalties, enduring debarment from the opportunity to enter into contracts with government agencies, loss of license to operate, and so on.
Corporations become subject to the criminal justice system when their agents’ conduct triggers a law enforcement action; that is, a responsible, natural person within the legal control of the corporation performs an act or omission rising to the level of an alleged violation of law or regulation. For instance, a natural person of a U.S. parent/ subsidiary corporation that knowingly provides or arranges a gift of cash to a foreign official to obtain a government contract in China through a subsidiary of the U.S. corporation based in China may cause the U.S. parent corporation to be charged with violating the Foreign Corrupt Practices Act. Thus, the corporation becomes vicariously liable for the conduct of its employees, potentially including those at its subsidiaries in foreign jurisdictions. Additionally, a corporation may be criminally charged through purchase of a subsidiary’s equity (i.e., de jure merger) or otherwise succeeding to the rights and obligations of an acquired corporation (e.g., de facto merger); this is denoted as successor liability.
The modern corporate form of organization may enable violation of law as responsibility for decision making is often diffused horizontally across many natural persons (e.g., board and executive management committees) and hierarchically up and down through natural persons (e.g., multiple layers of review and approval). Broader social norms, including those prescribed by law, may be neutralized and rationalized through the localized mutual support systems in effect at corporations. For instance, the decisions to issue materially misleading accounting and financial reports to the public (i.e., securities fraud) may be justified by corporate employees as a means necessary to accomplish a desirable individual objective (e.g., increased compensation, promotion), resulting in the natural persons’ causing the corporation to defraud purchasers of its securities. This support system (cf. being a team player) is alluring, especially where real economic opportunity outside the corporation is not readily obtainable (e.g., conditions of economic recessions and depressions).
Generally, the failure(s) of the following control systems explains how the corporation commits illicit acts:
- The internal legal, compliance, and ethics function was ineffective (e.g., inadequate resources allocated to supervision).
- The external gatekeeping function (e.g., public auditors, regulators) was ineffective.
Inarguably, these processes cannot provide absolute assurance that the corporation does not become part of an illicit scheme as they are designed, at best, to provide reasonable assurance that the corporation does not breach the norms and rules of society. Maximization of certain objectives (e.g., profitability of profit and investment centers) may detrimentally impact other objectives (e.g., dedicating adequate resources to cost centers compliance programs).
As imperfect as the control environment and control systems may be, discovery of criminal activity often results through the following paths:
- Internal investigations (e.g., initiated by the corporation’s audit committee and/or internal audit unit)
- Formal regulatory investigations (e.g., initiated by regulatory sweeps applied to perceived risks in a targeted industry)
- Informal public investigations (e.g., initiated by the media or civil society organizations in response to social harms such as unusual rates of diseases in a geographic area)
Measuring with precision the population of corporate crime on a global basis would require not only taking account of these pathways of detection but also demanding a methodology to estimate the corporate crimes detected but not reported to the public (e.g., covered up so as not to become known even as an outcome of internal investigation, such as might be the case with insignificant crime perpetrated through natural persons not rising to the level of high managerial agents and otherwise not requiring public disclosure) and the corporate crimes not detected whatsoever (e.g., false negatives about the existence of corporate crime due to sophistication of the crime and criminals, unawareness of victims of the harms and/or causes of harms perpetrated against them).
Specific Typologies of Corporate Crime
Corporate crime may be differentiated into the following subclasses:
- Corporate crimes of performance
- Corporate crimes of accounting for performance
Performance-related crimes are the commission of criminal conduct independent of any breach of duty of disclosure (e.g., criminal discharge of pollutants into a public waterway); accounting-related crimes arise from the criminal failure to disclose accurate, complete, and timely information required under laws, regulations, or rules requiring such disclosure. However, these subclasses are not mutually exclusive. For instance, a corporation may commit criminal acts of bribery of foreign officials and knowingly fail to report these instances, potentially resulting in corporate criminal liability for crimes of performance and accounting. Thus, the commission and the concealment of corporate crime are often found together.
Corporations as artificial persons cannot act on their own; principals or high managerial agents (e.g., directors, officers) commit actions or omissions that potentially put their employer—the corporation—at risk of criminal sanctions. These controlling persons have de jure, if not also de facto, control over corporate conduct; they authorize, if not also initiate, record, process, and report corporate conduct. Controlling persons are motivated by and motivate other employees toward economic and financial goals of efficiency and productivity of inputs to obtain required rates of return on capital invested in the corporate enterprise. The need for a high return on investment (ROI) may strain corporate actors from the top down.
The investment and disinvestment processes are composed of investors and financiers that transfer permanent (i.e., equity) and conditional (i.e., debt) capital to corporate enterprises in the endeavor to obtain competitive rates of return from these investees. As capital may flow more or less freely across investees and geographies, these enterprises may be strained by exogenous forces (e.g., investors) to report favorable results of operations through financial metrics (e.g., generally accepted accounting principles, or GAAP) while maintaining compliance with law, regulation, and rule applicable not only where the corporation is based (e.g., the state of Delaware) but also where it conducts business (e.g., the European Union). In conflict, business operations are constrained by these rules and compelled by investor demands. While neither unlawful conduct nor unprofitable operations are legitimate or stated objectives of the controlling persons and their support team of employees and agents, the conflicts arising from this set of global forces may create an unintended anomie: Where so many rules apply, the immediate and transcending (local) rule of corporate survival trumps all.
Controlling Corporate Crime
The state (i.e., collectively, the governing political jurisdiction, including the federal level) plays a significant role in defining corporate crime. Just as corporations are artificial constructs created and licensed by the state, crimes are also artificial in the same sense: Narrowly, a crime is that which violates any legitimately enacted law or regulation allowing the commission or omission of specified conduct to be proscribed and punished by the state in its criminal justice system (cf. due process). According to this definition, corporate conduct is not a crime unless the state lawfully determines it is. Thus, cash payments or other consideration given to a foreign governmental official may constitute a crime in a given political jurisdiction while such transfers of consideration to a domestic governmental official may not constitute a crime (cf. Foreign Corrupt Practices Act).
Crimes are fact-sensitive, and state resources are not unlimited. Factors such as prosecutorial discretion and administrative convenience of the state’s criminal enforcement arm(s) and regulatory agencies are essential considerations toward determining what corporate conduct is deemed criminal. Moreover, facts are evidence and information-dependent such that only that which is readily transparent is subject to criminal enforcement action; this is especially relevant where state of mind (i.e., mens rea) must be proven beyond a reasonable doubt (e.g., jurisdictions of the United States require such a burden of proof in criminal actions). As corporations lack mind, the state is required to impute a natural person’s state of mind to the corporation (e.g., board of directors, minutes outlining a corporate plan as expressed by board members to violate antitrust laws).
Practicably, criminal laws are only as effective as their enforcement by the state; arguably, laws that exist in criminal codes but are not enforced by the state are not meaningfully real. The state through its actions determines both its own legitimacy and the legitimacy of specific corporate conduct by its enforcement actions. Generally, it deters specific types of conduct through demonstrable public enforcement of criminal law, serving as an instrument in furthering social objectives realizable upon prohibition of outlawed conduct (e.g., criminalizing pollution of waterways by corporations furthers the public good of maintaining sources of potable water).
Criminal law as a control over corporate activity is also influenced by social factors such as the capacity of resistance of natural persons. Specifically, natural persons are limited by the material resources (e.g., savings, assets, income) at their disposal and the knowledge they may have regarding potential criminal activity initiated or authorized by corporations (e.g., their position of authority within the corporation). A significant pathway for discovery of corporate criminality is the whistle-blower, a position fraught with conflicts and risks notwithstanding the existence of legal protections in some regimes.
The corporation, especially public corporations listed on major stock exchanges (e.g., New York Stock Exchange or NYSE, NASDAQ), commit to compliance with industry norms, using experts and consultants such as attorneys and certified public accountants (CPAs) to meet disclosure and other requirements mandated by criminal law and supporting regulation (e.g., public corporations listed on the NYSE issue financial statements to the public that must be accurate, complete, and timely).
However, as criminal law sanctions are applied under the legal theory of vicarious liability (cf. respondeat superior) when employees within the apparent scope of authority granted by the corporation act with the requisite culpable state of mind for the specific crime for the benefit of the corporation (if not also for themselves individually), difficulties of proof beyond a reasonable doubt, which is required in criminal courts under U.S. law, should not be underestimated. Modern corporations diffuse decision making through multiple layers of review and approval such that proving what a given natural person knew and when may be costly and time-consuming, often resulting in failure to obtain sufficient proof of state of mind. Moreover, when objectives conflict between and among the corporation and the natural persons whose conduct may cause the corporation to become vicariously criminally liable (cf. goal divergence and goal congruence), the information required to sustain the high level of proof may not be transparent (e.g., due to incomplete records).
The organized, social responses to corporate crime arise from three types of organizations:
- Public sector (e.g., laws, regulations, administrative sanctions)
- Private sector (e.g., lobbying the public sector, development of standards for gatekeepers such as attorneys and CPAs, civil lawsuits)
- Independent sector (e.g., think tanks, civil society organizations focusing on research and best practices throughout the global economy)
These organizations’ efforts are not mutually exclusive. As corporate crime itself is often like organized crime (e.g., characterized by command and control systems and hierarchies of decision making reaching across different legal regimes and geographies), though undoubtedly rogue employees exist and cause vicarious criminal liability to their corporate employers, coordinated responses from these sectors are necessary to confront and mitigate the risks created by global corporations’ potential failure to abide by criminal laws, which are not uniform across states and nations.
The global economic system, which is a form of state-sponsored capitalism, defines the market and enables and sustains market power, which exerts influences on stakeholders, including those seeking advantage within or from the corporation. As the criminal justice system is contingent upon the political system, which is state or nation-based, for its effectiveness (e.g., allocation of human and material resources to law enforcement agencies, definitions of corporate crimes), the global corporation is potentially subject to a variety of criminal justice systems, unlike a corporation limited in its operations and reach. Judicial systems (i.e., criminal and civil courts of law) differ across nations, if not also states. Thus, generalizing as to the designs and operations of the criminal justice system in relation to corporate crime requires acceptance of the risks of errors and exceptions. There is no global standard or model.
In sum, countervailing measures have been developed to mitigate and remediate the risks posed by corporate crime. These are primarily designed to make the opaque (e.g., concealment of corporate crimes) transparent and include the following:
- Increasing the quality and quantity of information communicated to controlling (natural) persons of corporations (e.g., establishment and maintenance of whistle-blower hotlines available to employees and other stakeholders)
- Increasing the responsibilities of gatekeepers—both internal such as audit, compliance, and risk management committees, and external such as independent auditors, credit rating agencies, and regulatory public and independent sector agencies
- Increasing the remedial tools available to the public sector (e.g., regulators, prosecutors, judiciary) such as development of DPAs and NPAs and empowering the public sector with other sanctions such as potential debarment of the corporation from bidding on government contracts as well as revoking its charter or license to operate
The criminal justice system is an awkward device to control and sanction artificial entities. Persons that cannot be imprisoned and are formed to limit liability are structurally and legally different from natural persons whose fear of loss of liberty is poignant and whose existence is literally and inevitably composed of skin in the game. The system uses the corporation to absorb punishment in addition to and/or in lieu of punishment to responsible natural persons.
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