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Corporations and Crime

The recently paused trial of Roger Ng, a former Goldman Sachs banker allegedly involved in the 1MDB Scandal, raises significant questions about preventing global financial and corporate crime (including money laundering, bribery and corruption). In addition to Roger Ng's trial, Goldman Sachs has been the target of criminal charges relating to foreign bribery and corruption. The scandal illuminates how criminal law can be applied to corporations despite their apparent lack of personhood. The organic growth of criminal law to incorporate the punishment of often immoral corporate behaviour is most adequately captured by Oliver Wendell Holmes’ opening to The Common Law:

“The life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious, even the prejudices which judges share with their fellow-men, have had a good deal more to do than the syllogism in determining the rules by which men should be governed.”

The development of corporate criminal law has its beginnings in the questions of corporate personhood that arose in the 18th and 19th Centuries, shifting from the belief that corporations could not be held criminally liable as legal fictions towards an account of criminal liability. With corporations treated as legal fictions, it became impossible to impute guilty acts and criminal intent onto the corporate body. However, in Holmesian fashion, courts and legislators developed legal means of punishing corporate wrongdoing.

Punishment and criminal liability for corporate misbehaviour was first implemented through the use of public nuisances, which were originally imposed on municipalities, but later imposed on corporations in the early 19th Century. During the same period, the law expanded to create criminal liability for crimes that did not require any form of mens rea, bypassing the need for corporations to be treated as more than legal fictions.

The Queen v. Great North of England Railway Co. in England, and State v. Morris & Essex Railroad Co. in the United States both added criminal liability in cases of misfeasance. Prosecuting corporations for crimes of intent were only brought into being just under a century later in the 1909 case New York Central & Hudson River Railroad Co. v. United States, New York Central decided that the Elkins Act was not unconstitutional and could be used to impose liability on corporations through the employees' abuse of power within the corporation. The Supreme Court found that both the intention of Congress to impose criminal punishment on corporations and the need to prevent the abuse of corporate criminal immunity were sufficient to declare the Act constitutional and, subsequently, the Court provided an inroad for corporate criminal liability.

With the law evolving to accept corporate criminal liability, the question now asks what the reasoning is for implementing criminal liability, as opposed to simply allowing victims of corporate misbehaviour to file suit against corporations more easily. One possible reason may be that plaintiffs do not have the necessary resources to file suit and obtain damages from corporate actors. With the eventual development and adoption of respondeat superior doctrine in the United States, prosecutors can obtain corporate convictions by simply imputing an agent of the corporation’s conduct onto the corporation itself, enabling easier charging of corporations with a given crime or obtaining a conviction of the corporation.

While civil and criminal liability both attempt to deter corporate activity by imposing punishments on certain corporate acts, they differ in additional respects, including procedural protections and sanctions. The procedural protections for corporations in terms of criminal liability are stricter than the imposition of civil liability as they face different standards of proof within a trial setting. By facing the reasonable doubt standard instead of a preponderance of the evidence, it becomes more difficult for there to be false convictions but also an increased chance of false acquittal. The higher standard of proof in criminal trials serves to lower the total error cost to society if an individual or organisation is convicted. However, the higher standard may fail to deter corporate criminal behaviour ex ante as a consequence of the increased costs of obtaining a criminal conviction for prosecutors. Additional criminal protections such as double jeopardy and the right to jury trial decrease the likelihood of a successful corporate conviction. The benefits of these procedural protections likely do not outweigh the sanctions faced by corporate defendants when facing criminal charges.

The sanctions placed on criminal defendants are punitive and act as deterrents against other corporate bodies committing illegal acts. Both civil and criminal law regularly use damages or cash fines as forms of punishment for violating legal provisions. Criminal procedures allow for additional punishment of the corporation, including loss of licence, debarment and probation. The potentially largest sanction is the reputational effect that a criminal conviction can have = which creates cascading effects for customers, employees, shareholders and other market participants. There may also be reduced transactions with third parties on which the firm relies, resulting in losses in share price or reduced revenue, particularly if the conviction results in heavy monetary fines or halts profitable activities committed by the corporation. The resulting losses to firms violating the law must exceed the gains from any type of criminal procedural protection or the gains from illegal behaviour. As such, corporate defendants typically enter Deferred Prosecution Agreements to avoid both the costs of trying their case and the penalties of being convicted.

The importance of corporate criminal liability prosecutors is perhaps underestimated as a necessary part of the prosecution’s toolkit against violations of the law. Despite its usefulness as a means of deterrence and retribution, the law can fall short on its capabilities as a deterrent, or for righting the wrongs of the corporation. Reforming corporate criminal law to meet these shortcomings should be a priority for white-collar crime prosecutors and may include holding senior management more accountable for illegal activities with equity fines. While in the 1MDB case Goldman Sachs has avoided criminal conviction, this does not mean that the growth of the law has been stunted. It will take time for Congress and the Courts to develop new methods of punishing corporate crime effectively without approaching a draconian prosecutorial system.


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