Throughout the industrial world, we are witnessing what seems to be a significant increase in the identification and sanctioning of corporations engaged in unlawful activity. While there are some people who assert that the existing system of imposing large fines and persecuting corporations for criminal liability (e.g. BAE, Daimsler-Chrysler and Siemens) are adequate, they frankly are wrong. Such enforcement actions are rare and business community is well-aware of this situation.
We are in an era of “virtual” law enforcement with respect to corporations. Regulatory compliance in numerous areas is inadequate. On the rare occasions when some corporation transgressions are uncovered, the punishment incurred is usually born by corporation shareholders, not the individual wrongdoers. This situation has an Alice in Wonderland quality where those actually at fault are not held accountable for the harm they cause society. Frequently, corporations deny and fight when the regulatory authorities believe they have not acted in compliance with the law.
While corporations may conduct internal investigations to ascertain the validity of the accusations, their general tendency is to engage in a legal and public relations counter offenses. Ultimately, they may agree to institute a compliance program aimed at preventing violations or the payment of fines – but usually only after reaching non-prosecution or deferred prosecution agreements with the government intended to protect those who violated the law or allowed conditions to exist where the law was violated. At the same time, they frequently deny liability to lessen their exposure to private civil lawsuits.
As a fictional entity, it defies logic that it can have performed an actus rea [guilty act] with the required mens rea [guilty mind]. Corporations do not commit acts – people do; corporations do not have minds. Furthermore, the very concept of corporate criminal liability is problematic as there is no “it” to punish. It cannot be imprisoned, feel shame, denied access to friends and family or suffer a decline in its standard of living. In many instances, the risk of detection and punishment for violations of laws and regulations are sufficient minute that they may be regarded as merely the cost of doing business.
Corporations are the creation of man-made law. Ironically, in many instances, they enjoy the civil and constitutional rights of citizens. When corporations are “punished,” for bribing officials, failing to have in place adequate regulatory compliance systems, polluting the environment, or violating securities laws, those individuals who committed the unlawful illegal act are frequently not even prosecuted.
In addition, there is the issue of proportionality – that is, whether the punishment is proportional to the harm caused. Government bodies often opt to impose fines and other obligations on the corporations as a form of punishment. Often, this amount is small in comparison with the corporations’ the value of its assets. The determining the true costs for remedying harm can be difficult – how does one punish British Petroleum if it is found that it has blame for economic catastrophe in the Gulf of Mexico?
If the corporate criminal is punished, those who suffer are usually the shareholders. Would it not be more appropriate to hold corporate management, directors or the employers who committed unlawful acts or were criminally negligent accountable?
Typically, the U.S. Department of Justice is willing to enter into Non-Prosecution Agreements (NPAs) or Deferred Prosecution Agreements (DPAs) where corporations had a weak or non-existence compliance system, but agree to establish an effective program. If NPAs or DPAs are violated, sometimes there are consequences for individuals, but if these downsides were significant, corporation management would be far more reluctant to enter into such arrangements. Whether NPAs and DPAs, can deter future criminal conduct depends on their severity and specificity.
The Government likes settlement agreements since they generally avoid having to try complex cases and risk the embarrassment of possible failure to get the desired result.
DPAs or NPAs, usually, but not always, will have some impact on corporate culture and require actions aimed at improving regulatory compliance – but this frequently is difficult to gauge. Requiring employees to attend seminars and requiring corporations to hire “compliance personnel” does not guarantee changed corporate behavior and satisfactory results for the public.
What can be done? If as part of DPAs and NPAs, the culpable individuals were by law prohibited to work or consult for or in any what profit from a relationship with a publicly-traded company for a five-year period – we might be able to achieve a modicum of accountability. Such individuals might be regarded as persona non grata in the corporate world for their acts or negligence. In addition, such agreements might be more effective if the ensured that those culpable individual officers, directors, managers, experienced meaningful falls in their standard of living and the forfeiting of bonuses and severance packages.
Furthermore, DPAs and NPAs must take into account that come corporate entities use complex corporate structuring aimed at protecting corporate parents through the use of special-purpose entities. For example, a subsidiary might plead guilty, thus allowing corporate parent to avoid being disbarred from competing for public contracts or participating in tenders, as well as possibly benefiting from particular government programs.
Complex corporate structuring is largely an Anglo-American legal system done for tax minimization or to insulate parent companies’ from potential liability to public or private entities. In contrast, many civil law systems make it relatively easy to pierce the corporate veil that operates as a shield for their parent companies. For example, many civil country’s codes provide that if a subsidiary has insufficient assets to pay creditors, the parent has the obligation for the debt. Perhaps this concept should be incorporated into DPAs and NPAs for a five-year period as well.
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Tags: accountability, corporate compliance, Corporate Governance
June 2, 2010 at 4:51 pm |
One thing I have learned is that a registered agent is a vital part of corporate compliance. If you don’t stay in compliance you run the risk of someone being able to pierce your corporate veil. This means your personal assets would be at risk then.