Corporate Crime in America: Strengthening the "Good Citizen" Corporation

(Excerpt)

The Organizational Guidelines' "Carrot and Stick" Philosophy, and Their Focus on "Effective" Compliance

Win Swenson, Deputy General Counsel/Legislative Counsel, U.S. Sentencing Commission

I. INTRODUCTION

A. The previous presentation (Burress and O'Sullivan) summarized key features of the organizational guidelines. Implicit in these guideline features is a "carrot and stick" structure: companies that 1) fail to take certain actions (e.g., establish strong compliance programs, voluntarily disclose misconduct, fully cooperate in the investigation of the misconduct) and 2) have attributes indicating greater institutional culpability for misconduct (e.g., had senior corporate officials involved in the offense, or had employees obstruct justice) face stiff penalties in the event of a violation. Companies that take the prescribed steps, and do not evince attributes of greater institutional culpability, will avoid onerous penalties should a violation happen to occur.

B. In this presentation, I will attempt to set the stage for those that follow by examining three questions:

1) What is the origin of the Commission's "carrot and stick" corporate sentencing philosophy - and, relatedly, how does this philosophy contrast with prior practice?

2) What were the Sentencing Commission's objectives in establishing the carrot and stick approach?

3) How does an understanding of these Sentencing Commission objectives help one understand the definition of a guideline-qualifying compliance program - i.e., "an effective program to prevent and detect violations of law?"

II. Question One: What Is the Origin of the Commission's "Carrot and Stick" Corporate Sentencing Philosophy, and How Does this Philosophy Contrast with Prior Practice?

A. Prior to the guidelines the practice of sentencing corporations lacked a coherent, consistent rationale.

1) Court decisions demonstrated that judges truly were struggling to find meaningful ways to sanction corporations. See, e.g., United States v. Allegheny Bottling Co., 695 F. Supp. 856 (E.D. Va. 1988) (corporation sentenced to a three-year, suspended term of "imprisonment"), rev'd in relevant part, 870 F.2d 656 (4th Cir. 1989) (tbl.). See also United States v. Missouri Valley Constr. Co., 741 F.2d 1542 (8th Cir. 1984) (vacating a condition of probation that required corporate defendants to contribute money to a charitable organization); United States v. John Scher Presents, Inc., 746 F.2d 959 (3d Cir. 1984 ) (vacating condition of probation that corporate defendants use promotional business to raise money for charities designated by the probation office); United States v. Wright Contracting Co., 728 F.2d 648 (4th Cir. 1984) (vacating sentence of probation that imposed charitable contributions); United States v. Mitsubishi Int'l Corp., 677 F.2d 785 (9th Cir. 1982) (upholding a sentence requiring three companies to lend high-level executives' service to charity for one year without compensation and to pay contributions to the same charity); United States v. Arthur, 602 F.2d 660 (4th Cir.) (upholding requirement that white collar defendant accept full-time employment without salary in a charitable organization as part of probation), cert. denied, 444 U.S. 992 (1979); United States v. Clovis Retail Liquor Dealers Trade Ass'n, 540 F.2d 1389 (10th Cir. 1976) (vacating sentence of probation that included financial contribution to county alcoholism council); United States v. Nu-Triumph, Inc., 500 F.2d 594 (9th Cir. 1974) (upholding condition of probation requiring company not to engage in the distribution of pornographic material); United States v. Danilow Pastry Co., 563 F. Supp. 1159 (S.D.N.Y. 1983) (requiring bakery companies to donate fresh baked goods to specified charitable organizations).

2) Scholars also disagreed about how best to respond to corporate violations. See, e.g., Kip Schlegel, Just Deserts For Corporate Criminals (1990) (endorsing the application of the"just deserts" theory, which mandates that the punishment reflect the seriousness of the offense, to corporate crime); Michael K. Block & Joseph G. Sidak, The Cost of Antitrust Deterrence: Why Not Hang a Price Fixer Now and Then?, 68 Geo. L.J. 1131 (1980) (arguing that threatening antitrust violators "with exorbitant economic penalties that have only a minimal probability of being enforced" is not the optimal solution); John C. Coffee, Jr., Corporate Crime and Punishment: A Non-Chicago View of the Economics of Criminal Sanctions, 17 Am. Crim. L. Rev. 419 (1980) (arguing that "fines are an inefficient means by which to deter organizational crimes"); Brent Fisse, Reconstructing Corporate Criminal Law: Deterrence, Retribution, Fault, and Sanctions, 56 S. Cal. L. Rev. 1141 (1983) (arguing that the punishment for corporate criminals should not be limited to fines); Richard A. Posner, Optimal Sentences for White-Collar Criminals, 17 Am. Crim. L. Rev. 409 (1980) (arguing that a sufficiently large fine for white-collar crime is socially preferable to imprisonment); Andrew von Hirsch, Desert and White-Collar Criminality: A Response to Dr. Braithwaite, 73 J. Crim. L. & Criminology 1164 (1982) (arguing that "white-collar crimes should have a pyramidal structure of seriousness similar to that of ordinary crimes").

3) Empirical research of corporate sentencing practices conducted by the Sentencing Commission showed that corporate sentencing was in disarray. First, the Commission found that nearly identical cases were treated differently. Thus, there was evidence of disparity in corporate sentencing. Second, while some fines appeared quite high, the average fines were meaninglessly low. By that I mean that fines appeared to be, on average, less than the cost corporations had to pay to obey the law. See Mark A. Cohen et al., Report on Sentencing of Organizations in the Federal Courts, 1984-1987, in U.S. Sentencing Commission Discussion Materials on Organizational Sanctions at 7-11, 21 (tbl. 9). See also Ilene H. Nagel & Winthrop M. Swenson, The Federal Sentencing Guidelines For Corporations: Their Development, Theoretical Underpinnings, and Some thoughts About Their Future, 71 Wash. U. L.Q. 205, 215 (1993). This seemed to raise the specter that corporate crime did in fact "pay," as some had historically claimed.

B. Because the government's approach to corporate crime enforcement was managed by so many distinct entities and personalities, See generally Marshall B. Clinard et al., U.S. Dep't of Justice, Illegal Corporate Behavior 37 (1979) (stating that the regulatory agencies responsible for enforcement do not adequately coordinate their activities). it was difficult to make out what the government's policy was in all this. One thing clear was that the government's corporate crime enforcement policy often got mired in litigation. In very simple terms, you might say that the prevailing system was characterized by "speed trap enforcement" and a "circle the wagons" corporate response.

1) By "speed trap enforcement" I mean that the government's policy toward corporate crime often seemed reducible to that of the many state police forces out on the national highways. State police departments accept the fact that in all of the millions of miles of national highway there are only so many trees, grassy knolls, and dips in the road in which they can hide the limited number of patrol cars they have. So, they pick the best spots, turn on the best radar equipment they can requisition, and wait for unwary lawbreakers that happen by those spots. One can argue that the government engaged in a similar policy toward corporate lawbreakers - substantial resources were put into catching corporate lawbreakers, but little effort was put into providing a meaningful response to these violators. And, just as with speed traps, the enforcement community simply accepted the fact that for every one they nabbed, many more went sailing by somewhere else. See id. at 35-36 (discussing limitations of enforcement efforts).

2) This rather bare-bones enforcement policy toward corporate crime, in turn, fostered a "circle the wagons" response by many transgressing corporations. This was because companies often perceived little incentive to respond any other way.

(a) First, corporate decisionmakers could not know what penalties they would be facing because corporate penalties - just like fines from speeding tickets among the many jurisdictions around the country - were not imposed in any predictable way; they depended mostly on where the transgression occurred and the unpredictable proclivities of individual prosecutors and judges.

(b) Second, there was no guarantee that a company's cooperation with the authorities or its demonstration of extenuating facts - such as significant compliance efforts - would better the company's predicament. It was easy for companies to rationalize in this environment that the safest response was: "circle the wagons" and fight back - that is, litigate - for all your worth.

C. Meanwhile - and surprisingly given the state of things - many representatives of the business community argued that the Commission should ignore corporate sentencing altogether and leave the prevailing system as it was. They cited evidence that Congress's creation of the Sentencing Commission was motivated more by concerns over the sentencing of individuals than of corporations.

D. Given the lack of coherence in prevailing corporate sentencing practices and what most commissioners concluded was a broad, but definite, mandate from Congress to improve sentencing practices where they could, See Nagel & Swenson, supra note 3, at 214. the Commission decided to plow forward.

E. However, concluding that current corporate sentencing was in need of improvement begged an even more important question: could the Commission fashion a corporate sentencing policy that was any better? The Commission ultimately concluded that the answer was yes, but it is critical to recognize that this was not a foregone conclusion. For detailed discussions of the history of how the organizational guidelines were developed, see Nolan Ezra Clark, Corporate Sentencing Guidelines: Drafting History, in Compliance Programs and the Corporate Sentencing Guidelines: Preventing Criminal and Civil Liability 2:01-2:06 (Jeffrey M. Kaplan et al. eds., 1994). See also Nagel & Swenson, supra note 3, at 217-51.

1) The Commission's early forays into the development of organizational guidelines reflected little of the carrot and stick philosophy the Commission ultimately came to adopt.

2) For example, the first model the Commission considered - a so-called "optimal penalties" approach - relied on a formula to produce what theory said should be perfectly calibrated fines. The theory was that these perfectly calibrated fines would, in turn, bring about perfectly efficient crime-avoiding responses by corporations. Under the approach, fines were to be set according to this formula: the optimal fine = monetized harm (i.e., loss) probability of conviction.

3) This approach was really an idealized version of the pre-existing, "speed trap" approach to corporate crime enforcement. It assumed that government policy need be little more than a commitment to catch some corporate wrongdoers and fine them. Fines for the unlucky corporations that were caught would then be set in inverse relationship to the likelihood of being caught, and corporate managers - carefully, coldly scrutinizing these perfectly calibrated fines and concluding that crime could not pay - would rationally choose, instead, to spend resources obeying the law.

4) As it did with a variety of approaches over the next few years, the Commission rejected this approach and moved on. Overall, the process of developing organizational guidelines spanned five years, produced numerous official and informal drafts and generated mountains of public comment.

F. Ultimately the "carrot and stick" approach seemed to emerge from the Commission's acceptance of three facts:

1) Fact One: Vicarious liability means not all corporate defendants are alike - The Commission came to recognize that the doctrine of vicarious criminal liability for corporations operates in such a way that very different kinds of corporations can be convicted of crimes; from companies whose managers did everything reasonably possible to prevent and uncover wrongdoing, but whose employees broke the law anyway, to companies whose managers encouraged or directed the wrongdoing.

2) Fact Two: Responsible corporate actions can foster crime control - The second key fact the Commission came to embrace was that actions by corporate managers can significantly reduce the likelihood and impact of corporate crime. Voluntary disclosure and cooperation by a company mean, for example, that harms caused by the company will be rectified and individuals within the company will be identified and held accountable. Similarly, strong corporate compliance efforts hold out the promise of fewer violations in the first instance and greater detection and remediation of offenses when they occur.

3) Fact Three: Mandatory guidelines can create incentives - Finally, the Commission recognized that because guideline penalties are essentially mandatory and therefore predictable, penalties tied to how well a corporate defendant had undertaken specified crime-controlling actions would create incentives for companies to take those actions. With a guideline system, corporate managers would know - unlike the situation in the pre-guideline era - that their "good citizen" actions would make a difference in terms of the company's exposure to penalties. Good citizen actions, low penalties. Failure to take such actions, high penalties - "carrot and stick."

III. Question Two: What Were the Sentencing Commission's Objectives in Establishing the Carrot and Stick Approach?

A. The Commission had three principal and related objectives in structuring the organizational guidelines as it did.

1) Objective One: Define a model for good corporate citizenship - The first objective was to define a model for corporate action that would exemplify "good corporate citizenship" with respect to the narrow issue of law abidance. The Commission, for example, did not try to draft a broad model for corporate social responsibility. Cf. Edward Petry, Should the Government Create a Corporate Model for Social Responsibility?, 4 Center for Bus. Ethics News (Bentley C., Waltham, Mass.), Summer 1995, at 3.

2) Objective Two: Use the model to make corporate sentencing fair - The second objective was to incorporate this model into the guidelines so that corporate sentencing would be more fair. Penalties would go up and down depending on objective, defined criteria that would reflect a corporation's true culpability for criminal conduct.

3) Objective Three: Use the model to create incentives for companies to take crime controlling actions - The third objective was to create the incentives for good corporate citizenship that I mentioned before - incentives for corporations to undertake crime-controlling measures that, in turn, satisfy the Commission's model of good corporate citizenship.

4) This final objective marks a significant departure from the "speed trap" enforcement policy of the past. Under the new approach, the enforcement policy is something more than just "lie and wait" and impose a fine. The new policy is interactive. Companies take actions to join the fight against corporate crime and government responds by significantly limiting potential penalties for the companies that do. Limited government enforcement resources are augmented by the potentially highly effective efforts of companies themselves.

IV. Question Three: How Does Understanding this Last Objective - i.e., the Goal to Have Companies Themselves Undertake Effective, Crime - Controlling Actions - Help One Understand the Definition of Qualifying Compliance Program under the Guidelines?

A. An understanding of this objective makes clear what the Commission had in mind in defining an "effective" compliance program under the guidelines: the Commission wanted companies to use some reasonable degree of diligence and ingenuity to devise compliance programs that actually work. Put another way, the often-cited seven steps in the definition of an "effective" compliance program should not be viewed as a superficial check-list requiring little analysis or thought.

B. The actual guidelines definition of an "effective program to prevent and detect violations of law" support this interpretation. To begin with the "seven steps" are only one part of a four-part definition. For further discussion of the definition, see Winthrop M. Swenson, An Effective Program to Prevent and Detect Violations of Law, in Compliance Programs and the Corporate Sentencing Guidelines: Preventing Criminal and Civil Liability 4:06-4:08 (Jeffrey M. Kaplan et al. eds., 1994).

1) The definition begins with a paragraph of general criteria that includes what might be called the definition's baseline requirement: a qualifying compliance program is one that has been "designed, implemented, and enforced so that it generally will be effective." U.S.S.G. 8A1.2, comment. (n.(3)(k)) (emphasis added). To establish such a program, the introductory commentary continues, the company must exercise "diligence."

2) The seven steps constitute the second part of the definition. What is especially important to recognize is that the seven steps are drafted somewhat generally. Each step can be satisfied by a range of possible approaches. Finally, the definitional commentary stresses that the seven steps are the "minimum" steps required . Id. Thus, by their own terms the seven steps are drafted to imply a framework, not a highly specific course of action that companies can simply "adopt."

3) The third part of the definition stresses that the particular features of the company - its size, its areas of risk (due to the kinds of business in which it is engaged), and its prior history all must be given close attention in determining the "precise actions necessary" for an effective program. Id.

4) Finally, the definition concludes with a sentence instructing that a company must look to its external environment - to compliance standards met by others in the company's industry and to any relevant regulatory requirements - to ensure that its program measures up.

V. Conclusion

A. The definition of an "effective" compliance program does not envision that the process of developing a creditworthy program will be a passive one. You might say that - within reasonable and appropriate limits - the Commission wanted companies to "struggle" a bit to learn what works, tailor what are found to be generally effective approaches to their own particular circumstances, and continuously evaluate their unique compliance experiences to refine their approaches to compliance.

B. This is all part of the shift in enforcement policy that I described before. At its heart the new policy contemplates a kind of compact between government and the private sector so that our collective response to corporate crime can be made more effective.

C. Thus, over the next two days, we will look at how companies are engaging in this "struggle" to make compliance work, and what mechanisms they are creating to share "best practices" information.

This afternoon's concurrent sessions recognize the inherent flexibility in the guidelines' definition of an "effective" compliance program. In Session A, we will look at new external standards for effective compliance approaches that are being proposed to provide additional guidance to practitioners in this area.

In Session B, we will examine how the guidelines should be read to embrace a variety of approaches that prove effective, even when those approaches are not explicitly mentioned by the guidelines. This session is particularly relevant to those who have questioned whether good corporate conduct is better supported through a values or ethics-based approach than a "law-centered" one.

Finally, during the course of symposium, we will examine whether and how the government's role in this new enforcement approach to corporate crime can be improved.