Editorial

Corporate Crime and Punishment

Does corporate crime pay?

Increasingly, not only does it pay, it's not even prosecuted - even when the corporate crime cops have the goods on the bad guys.

Over the last five years, prosecutors in the United States have chosen not to prosecute corporate crime, but instead to enter into deals with corporate criminals that let them escape conviction. These arrangements, most common in the realm of securities and accounting fraud, are known as non-prosecution or deferred prosecution agreements. With a non-prosecution agreement, the prosecutor agrees not to charge a company criminally, in exchange for fines, cooperation and changes in corporate structure. With a deferred prosecution agreement, the prosecutor files a charge, but agrees to drop the charge if the company abides by promises to the prosecutor.

A December report by Corporate Crime Reporter, "Crime Without Conviction," details 34 such cases over the past decade and a half - with more than two thirds of the cases occurring since 2002.

The rise of non- and deferred prosecution deals in corporate crime cases entrenches a double standard for criminal justice: individuals who commit acts of criminal wrongdoing are charged, convicted, sentenced (often to very harsh prison terms), and stigmatized for life; but corporations, if they are willing to cooperate with prosecutors and give up executives involved in misconduct, can escape with modest fines, promises not to repeat their bad behavior - and no criminal stigma.

The KPMG case, profiled in the 10 Worst Corporations of the Year, poses a stark example. KPMG's fraudulent activities cost Uncle Sam at least $2.5 billion in evaded taxes. But the company will pay a fine of $456 million and walk away without the taint of a criminal plea or conviction.

The double standard is all the worse because it contradicts and undermines the basic purposes of the criminal justice system - deterrence and punishment - for the very actors for whom such objectives make the most sense. Because corporations coldly calculate costs and benefits - undertaking careful and detailed risk assessments as a fundamental part of their intentional decision-making process - they are most likely to be responsive to hard-hitting penalties.

There are three basic defenses of the non- and deferred prosecution agreements.

The first defense is practical. Because corporations are anxious to avoid prosecution, negotiations over a deal not to prosecute gives great leverage to prosecutors. They can use this leverage to gain information to prosecute executives who committed the underlying crime, and to demand ongoing monitoring of the corporation's actions and changes in its structure. But the goals of ongoing monitoring might instead be achieved through prosecution and implementation of a probation period, as was notably done with a case involving Consolidated Edison in the 1990s.

While it is understandable that prosecutors might enjoy exercising the power they have in no-prosecute arrangements, this approach ignores the effect of the deal on other potential wrongdoers. The message sent is: You get at least one free opportunity to break the law without facing criminal sanctions.

The second rationale not to prosecute a corporation is that corporations are merely legal fictions, without the mental capacity to have criminal intent, and that therefore prosecutions should be reserved for individuals who carry out bad acts in the company's name.

But the law treats corporations not as fictions, but as real entities with the rights and privileges of real, live human beings (such as free speech and many other constitutionally guaranteed rights). Actually, the law confers on corporations a multitude of powers that real people cannot attain - like perpetual existence.

Corporations also have their own distinct cultures that transcends individuals. Explained then-U.S. Deputy Attorney General Larry Thompson in a 2002 speech, "Large corporations develop their own methods and culture that guide employees' thoughts and actions. ... That culture may instill respect for the law or breed contempt and malfeasance. The organization must be held accountable for the culture and the conduct it promotes."

The third defense of the no-prosecute approach is the need to avoid imposing harm on innocent bystanders - a convicted company's shareholders or employees, for example. But while concern for innocent parties is legitimate, it does not generally justify a no-prosecute approach. First, there are many innocent parties to consider, including those hurt by the criminal wrongdoing in the first place. Second, the innocent party concern is driven especially by a fear that a convicted company will be forced out of business. That rarely happens, though convictions may (and should) have bottom-line consequences. Third, not all of the presumed innocent parties - especially shareholders - have clean hands; they often benefited along the way from corporate misdeeds. And, as Win Swenson points out in this issue's interview, more frequent prosecutions and convictions will give shareholders and other potentially affected parties a heightened incentive to monitor corporate respect for legal rules, and stay away from companies ready to play fast-andloose with the law.