The Changing Role of Criminal Law in Controlling Corporate Behavior James M. Anderson, Ivan Waggoner C O R P O R A T I O N For more information on this publication, visit www.rand.org/t/rr412 Library of Congress Cataloging-in-Publication Data is available for this publication. ISBN: 978-0-8330-8786-7 Published by the RAND Corporation, Santa Monica, Calif. © Copyright 2014 RAND Corporation R® is a registered trademark. Cover image via f11photo/Fotolia. Limited Print and Electronic Distribution Rights This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited. Permission is given to duplicate this document for personal use only, as long as it is unaltered and complete. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial use. For information on reprint and linking permissions, please visit www.rand.org/pubs/permissions.html. The RAND Corporation is a research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous. RAND is nonprofit, nonpartisan, and committed to the public interest. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. Support RAND Make a tax-deductible charitable contribution at www.rand.org/giving/contribute www.rand.org Preface This report examines the use of criminal law in the corporate context. The research had three primary goals: (1) trace the development of the application of criminal law to corporate activities, (2) identify and analyze empirical trends with respect to the use of criminal law in this context, and (3) use this research to develop guidance for policymakers in this area. This report should be of interest to policymakers and researchers who are interested in the advantages and disadvantages of using crimi- nal law to control organizational and corporate behavior. The report builds on a body of research by the RAND Institute for Civil Justice and the RAND Center for Corporate Ethics and Gov- ernance. From the effects of the Foreign Corrupt Practices Act1 to the effect of the Federal Sentencing Guidelines on corporate governance, the center has been publishing independent analyses to aid policymak- ers in achieving an empirically grounded understanding of the relevant issues. RAND Institute for Civil Justice The RAND Institute for Civil Justice (ICJ) is dedicated to improving the civil justice system by supplying policymakers and the public with rigorous and nonpartisan research. Its studies identify trends in liti- gation and inform policy choices concerning liability, compensation, 1 Public Law 95-213, Foreign Corrupt Practices Act, December 19, 1977. iii iv The Changing Role of Criminal Law in Controlling Corporate Behavior regulation, risk management, and insurance. The institute builds on a long tradition of RAND Corporation research characterized by an interdisciplinary, empirical approach to public policy issues and rigor- ous standards of quality, objectivity, and independence. ICJ research is supported by pooled grants from a range of sources, including corporations, trade and professional associations, individu- als, government agencies, and private foundations. All its reports are subject to peer review and disseminated widely to policymakers, prac- titioners in law and business, other researchers, and the public. The ICJ is part of RAND Justice, Infrastructure, and Environ- ment, a division of the RAND Corporation dedicated to improving policy and decisionmaking in a wide range of policy domains, includ- ing civil and criminal justice, infrastructure protection and homeland security, transportation and energy policy, and environmental and nat- ural resources policy. Questions or comments about this report should be sent to the project leader, James M. Anderson ([email protected]). For more information on the Institute for Civil Justice, see http://www. rand.org/icj or contact the director ([email protected]). Contents Preface ............................................................................. iii Figures and Table ................................................................vii Summary .......................................................................... ix Acknowledgments ............................................................. xvii Abbreviations .................................................................... xix CHAPTER ONE Introduction ....................................................................... 1 Overview of Corporate Criminal Liability ...................................... 5 Research Questions ................................................................ 6 Research Approach and Sources of Data ........................................ 7 Organization of This Report .....................................................13 CHAPTER TWO How Did Criminal Law Come to Be Applied to Corporate Behavior, and What Lessons Can We Draw from That History? .......................................................................15 Emergence of Corporate Criminal Liability ...................................16 The Development of Vicarious Criminal Liability ........................... 26 Diminishing Relevance of Criminal Intent ....................................29 Conclusion ........................................................................ 38 CHAPTER THREE Recent History: A Shift to Reforming Corporations from Within .....41 The Traditional Approach: Prosecuting the Corporation, Not Individuals ................................................................... 42 v vi The Changing Role of Criminal Law in Controlling Corporate Behavior Guidelines Era: The Start of Structural Reforms ..............................45 The Rise of the Nonprosecution Agreement .................................. 50 Conclusion .........................................................................67 CHAPTER FOUR Trends in Prosecutions of Corporations and Individuals ................69 Overall Trend: Declining Prosecutions .........................................69 Convictions and Firm Size .......................................................71 Prosecution of Individuals Alongside Convicted Corporations .............71 Differences in the Enforcement of Civil and Criminal Law .................71 Deferred Prosecution Agreements and Nonprosecution Agreements .......73 White-Collar Offenses ...........................................................76 Important Exceptions: Sarbanes-Oxley and Foreign Corrupt Practices Act ............................................................................ 86 Summary .......................................................................... 94 CHAPTER FIVE Conclusions and Policy Implications ....................................... 97 What Lessons Can We Draw for Policymakers? ............................. 98 References ....................................................................... 107 Figures and Table Figures S.1. Corporations Convicted in Federal Courts, 1994–2010 ........xii S.2. Deferred and Nonprosecution Agreements, 1992–2010 .......xiii 4.1. Corporations Convicted in Federal Courts .......................70 4.2. Conviction Trends for Firms of Different Sizes ..................72 4.3. Number of Corporations Sentenced Alongside Individual Codefendants .........................................................73 4.4. Trends in Criminal and Civil Prosecutions .......................74 4.5. Deferred-Prosecution and Nonprosecution Agreements from 1992 to 2010 ...................................................75 4.6. Federal Prosecutions of White-Collar Crimes .................. 77 4.7. Prosecution Data on Securities Fraud .............................79 4.8. Federal Prosecutions for Lending Fraud ..........................82 4.9. Federal Prosecutions for Marketing and Commodity- Credit Fraud ..........................................................83 4.10. Federal Prosecutions for Antitrust Offenses ..................... 84 4.11. Federal Prosecutions for Commerce and Trade Offenses .......85 4.12. Federal Prosecutions for Embezzlement from Lending, Credit, or Insurance Institutions .................................. 87 4.13. Federal Prosecutions for Hazardous Waste–Related Offenses .............................................................. 88 4.14. Federal Prosecutions for Fair Labor Standards Act Offenses ...89 4.15. Enforcement of Sarbanes-Oxley Criminal Provisions .......... 90 4.16. Federal Prosecutions for Foreign Corrupt Practices Act Offenses .............................................................. 92 vii viii The Changing Role of Criminal Law in Controlling Corporate Behavior Table 4.1. Recent Debarment and Suspension Activity .....................93 Summary Corporations are immensely powerful entities, capable of both greatly increasing human welfare and greatly harming it. It is therefore impor- tant that both corporations and the people who work on their behalf are appropriately regulated and controlled. What should the role of criminal liability be in controlling corporate behavior, and how can the execution of that role be improved? On the one hand, corporations have enormous power, and, when a corporation causes harm, there is a natural instinct to apply crimi- nal sanctions, society’s most serious expression