Unformatted text preview: On the Prospects of Deterring On the Prospects of Deterring Corporate Crime
White Collar Crime
CRJU E491W Fall 2011
William C. Smith The Challenge of Entity Crime
The Challenge of Entity Crime The concept of corporate crime does not fit naturally in the scheme of the criminal law.
The general rule is that individuals are responsible only for their own actions and that criminal liability is a function of immorality of conduct and culpability of the individual actor.
Because a corporation is an artificial entity it can only act through other “natural” persons and, thus, the justification for punishment can not be dependent upon personal choice or free will, neither of which can be exercised by an artificial “person.” The Logic of Entity Crime
The Logic of Entity Crime In the federal system, a corporation bears responsibility for the crime of an agent when the agent acts within the scope of real or apparent authority and intends to benefit the corporation.
A finding of corporate guilt therefore derives from the crime of a natural person. As such, the target of deterrence efforts must be a natural person who has the means and power to cause injury. The Fallacy of Entity Deterrence
The Fallacy of Entity Deterrence Existing white collar criminal laws have failed to deter recent frauds, such as those committed by employees of Enron.
The absence of a deterrent effect is puzzling when considering the extensive amount of time that is often required to plan and carry out corporate fraud. Those who contemplated, and ultimately committed, criminal conduct at Enron, and other firms, had ample lead time and considerable opportunity to evaluate the potential costs and benefits of their actions. More remarkably, given that prospective white collar offenders typically care about their social status and are motivated to avoid the disgrace of involvement with the criminal justice system, why are existing white collar criminal laws so ineffective in deterring corporate fraud?
Are white collar antifraud statutes significantly different in design and effect than other “standard” criminal statutes? Or are there other explanations? Structure of White Collar Crimes
Structure of White Collar Crimes Most socalled “white collar” criminal laws differ significantly from traditional criminal statutes. While traditional criminal statutes provide for express prohibitions of specific identifiable types of conduct, white collar statutes, such as those defining fraud, set out “prohibitions” of a generalized nature.
White collar criminal statutes are often written in openended language that often does not define crucial elements of the offense. S.C. Code section 161460. S.C. Code section 161460. Financial Transaction Card Fraud. (a) A person is guilty of financial transaction card fraud when, with intent to defraud the issuer, a person or organization providing money, goods, services, or anything else of value, or any other person, he: (1) uses for the purpose of obtaining money, goods, services, or anything else of value a financial transaction card obtained or retained, or which was received with knowledge that it was obtained or retained, in violation of Section 161420 or 161440 or a financial transaction card which he knows is forged, altered, expired, revoked, or was obtained as a result of a fraudulent application in violation of Section 161440(c); (2) obtains money, goods, services, or anything else of value by:
a. representing without the consent of the specified cardholder that he has permission to use it;
b. presenting the financial transaction card without the authorization or permission of the cardholder;
c. representing that he is the holder of a card and the card has not in fact been issued… 18 USC § 1341. Frauds and swindles
18 USC § 1341. Frauds and swindles Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises… shall be fined under this title or imprisoned not more than 20 years, or both... U.S. Attorneys Manual
U.S. Attorneys Manual 942The Scheme and Artifice to Defraud The mail fraud and wire fraud statutes do not define the terms "scheme" or "artifice" and the courts have traditionally been reluctant to offer definitions of either term except in the broadest and most general terms … The fraudulent aspect of the scheme to defraud is to be measured by nontechnical standards and is not restricted by any commonlaw definition of false pretenses… Statutory Vagueness
Statutory Vagueness Because of their general “vagueness,” a practical effect of many white collar crime statutes may be that potential offenders are not be able to see their conduct as giving rise to criminal liability.
The end result may be that the ambiguous statutory language allows a court to define the substantive law as including the challenged conduct only after the fact of its occurrence. Where statutes use terms such as “corruptly,” the term does not have a welldefined or settled meaning, which precludes measuring the defendant's state of mind against a clear legal standard of wrongdoing. Void for Vagueness?
Void for Vagueness? The U.S. Supreme Court has repeatedly stressed that constitutional due process requires that members of the public be put on notice of prohibited conduct before their prosecution becomes appropriate.
Where a white collar criminal statute does not provide clear and specific notice as to the conduct which is prohibited, is its enforcement constitutionally prohibited by the due process clause? Kolender v. Lawson (1983)
Kolender v. Lawson (1983) California Penal Code §647(e) required persons who loitered or wandered on the streets to identify themselves and account for their presence when requested by a peace officer to do so.
Edward Lawson, a lawabiding black man who wore his hair in dreadlocks, was frequently subjected to police questioning pursuant to the statute, when he walked in socalled “white neighborhoods.” He was detained or arrested approximately 15 times within 18 months, was prosecuted twice, and was convicted once.
Lawson, representing himself, brought a civil rights action against San Diego police chief William Kolender. The Supreme Court ultimately held that the law was unconstitutionally vague because it rendered otherwise innocent conduct criminal based on the excessive discretion afforded the police. 18 U.S.C. § 1346. Definition of “scheme or 18 U.S.C. § 1346. Definition of “scheme or artifice to defraud” For the purposes of this chapter, the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services. Honest Services Fraud
Honest Services Fraud Section 1346 is used frequently by federal prosecutors in corporate fraud cases because the language of statute is vague enough to be applied to unethical or criminal activities that do not fall into a specific category, such as bribery or extortion.
Defense attorneys dislike the law and see it as a poorly defined statute that can be used by prosecutors to convert any kind of unethical behavior into a federal crime. On the Prospects of Deterring On the Prospects of Deterring Corporate Crime
Part 2 White Collar Crime
CRJU E491W Fall 2011
William C. Smith Other Impediments
Other Impediments Besides the structure of white collar criminal statutes themselves, observers have identified other impediments to the deterrence of white collar offenses. Corporate Culture
Ethical SelfDeception Corporate Culture
Corporate Culture Some observers propose that corporate culture itself may explain why white collar statutes fail to deter criminal conduct.
Companies that value decisive and aggressive managers may attract optimistic, overconfident, and risktaking individuals with excessive self esteem who can not appreciate the possibility that a business decision may cross the line into illegality. Groupthink
Groupthink The term “groupthink” refers to an organizational dynamic that impedes independent assessments of risk as individuals become inclined to support, or at least not question, decisions of the group at large.
The term was created by Irving Janis, a Yale research psychologist, who found it to be present in “highly cohesive” groups which have a great need to work closely together. Groupthink Symptoms
Groupthink Symptoms Janis identified eight symptoms indicative of groupthink: Illusions of invulnerability Rationalization of warnings that challenge group assumptions
Unquestioned belief in the morality of the group
Stereotyping those opposed to the group as “weak”
Pressuring members who question the group to conform
Self censorship of ideas that deviate from group consensus
Illusions of unanimity among group members
Selfappointed members who shield the group from dissenting information (“mind guards”) Groupthink Disaster
Groupthink Disaster A classic example of the disastrous impact of groupthink can be seen in the Space Shuttle Challenger explosion in January 1986 in which engineers for MortonThiokol Corporation, a NASA contractor, did not want to go against NASA’s launch recommendation for the shuttle although they harbored serious concerns about the possible erosion of orings in the Titan rocket engines.
Rather than disagree with NASA’s strongly stated desire to launch, due to severe pressure from the Reagan administration, the engineers remained silent when consulted as to their launch recommendation. The result was that the seven crew members of the shuttle died when an oring failed shortly after liftoff. Sympathetic Interpretation
Sympathetic Interpretation Some corporations may harbor tendencies toward “sympathetic interpretation” which can lead to an almost unnoticed transition into criminal behavior over an extended period of time. Corporate executives acting in response to a business crisis may “sympathetically” interpret an accounting convention to the company’s benefit, such as by declaring that a transaction that has not been completed should be counted as revenue, thus allowing the company to declare greater revenue in order to meet market expectations.
Although this initial act, made without an intent to defraud, is not likely in itself criminal, it establishes a pattern of rule
bending that can lead to similar subsequent decisions that are criminal. Ethical SelfDeception
Ethical SelfDeception Corporate executives, who view themselves as inherently ethical, may have a hard time perceiving that a given situation may even raise ethical concerns.
Some researchers believe that the ethical self
perception of the executive creates an effect called “ethical fading,” which is the gradual loss of an ethical perspective.
Ethical fading is based on selfdeception which allows a person to behave in a selfinterested fashion while, at the same time, falsely believing that moral principles have been upheld. The end result is an “internal con game” in which the ethical aspects of a situation fade into the background and important moral implications become obscured.
Fading may explain why an executive who discovers that subordinates have altered financial statements may elect to conceal the fraud in an effort to avoid negative effects of disclosure and to gain time in which to correct inaccurate statements. Reacting to NonDeterrence
Reacting to NonDeterrence In an effort to increase, or instill, deterrence of white collar fraud, in the wake of the scandals of 2002, Congress’ first reaction was to enhance the penalties for common white collar crimes, such as wire and mail fraud, by as much as 400% above existing levels.
Maximum statutory penalties, however, do not necessarily represent actual penalties in the federal system; the actual sentence being determined according to sentencing guidelines which allow substantial upward or downward departures. Studies conducted after the enactment of the congressional sentencing increases indicate that the enhanced penalties will not likely increase deterrence. The result may be due to the fact that people generally tend to discount future rewards or punishments and that, especially, those who work in a corporate environment are not likely to consider the possibility that their conduct would even be regarded as criminal.
Many researchers also believe that for an enhanced prison sentence for white collar crime to have a significantly deterrent effect that it would have to exceed the bounds of what is deemed “plausible” in our society. United States v. Adelson (2006)
United States v. Adelson (2006) Richard Adelson, president of a company specializing in cancer diagnosis testing, was convicted of conspiracy, securities fraud, and three false filing counts under Title 18 of the U.S. Code.
Adelson discovered a fraud begun by subordinates under the former CEO, but did not expose the scheme, and instead concealed and participated in its continuation.
Based on a $260 million total shareholder loss and various adjustments, the recommended sentence under the sentencing guidelines was imprisonment for 85 years. The sentencing judge stated that the sentence imposed by the sentencing guidelines was “patently unreasonable” and imposed a sentence of three and a half years, based on federal sentencing goals of retribution and general deterrence. Even the prosecutors who had tried the case, suggested a downward departure from the guidelines sentence. Adelson likely illustrates the public belief that severe prison terms for white collar offenses fail the “plausibility test” in that they offend community values. Why Penalty Enhancements Fail
Why Penalty Enhancements Fail Two reasons help explain the general failure of sentence enhancements to deter white collar crime: Extremely harsh sentences may actually be contrary to the philosophy of deterrence due to the fact that, at some level, the supposed benefit of deterrence evidenced by a lengthy prison sentence may not offset the financial costs that many see as being passed on to the community, such as the lost productivity of the defendant and the costs of incarceration and supervision upon release; and
The overbreadth and vagueness of criminal white collar statutes may create great unease in members of the public when harsh prison sentences are given for conduct that is not clearly defined as criminal by those statutes. Deterrence Through Enforcement
Deterrence Through Enforcement If enhanced penalties are generally ineffective as deterrents, will relative certainty of enforcement action work?
The factor that seems to play the determinative role in providing an answer is whether governmental enforcement is “fair and even
handed.” The general community accepts condemnation of criminal acts as long as the procedure to arrive at it is fair. This attitude appears to indicate that increased regular (i.e. nonsporadic) enforcement, resulting in more convictions, but less harsh prison sentences, will likely have a greater deterrent effect than imposition of harsh sentences for a few offenders.
In other words, the reasonable certainty that an offender will be prosecuted, rather than the likelihood of a severe sentence if the offender is convicted, appears to play a greater deterrent role in white collar crime scenarios. Negotiated Deterrence?
Negotiated Deterrence? Corporations are highly motivated to avoid indictment and also to avoid the “collateral consequences” that follow indictment, such as loss of shareholder value and clients, in addition to the penalties that could come with a criminal conviction. One effective means that has been used by federal prosecutors to deter future corporate wrongdoing has been the negotiation of agreements under which prosecutors agree not to file charges, or not to prosecute already filed charges, as long as the corporation abides by the terms of the agreement. The terms of such agreements typically require that the corporation cooperate with the government’s investigation and take such steps as dismissing the executives and employees who were involved in the alleged illegal conduct or refuse to pay their attorneys’ fees.
Other conditions have included the corporation’s voluntarily waiver of attorneyclient and work product privileges and disclosure of internal investigations, memoranda, and financial documents, which may serve to implicate individuals who participated in the criminal activity alleged. The practice of negotiated agreements has come under judicial fire as encroaching on the constitutional rights of targeted individual defendants and has resulted in DOJ modifications to its policy of entering into such agreements.
In 2008, in United States v. Stein, the U.S. Court of Appeals for the Second Circuit, upheld a lower court decision that government pressure on KPMG to agree to withdraw payment of attorney's fees for targeted employees violated the employees’ constitutional rights. ...
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