The Fuel that Runs the Corporate Investigation Machine

The United States pursues more successful corporate criminal enforcement actions against large multi-national firms than any other country, collecting enormous penalties and occupying center stage in the global enforcement arena. U.S. dominance draws its horsepower and its torque from two sources.  The first, of course, is an extremely broad and easy to apply corporate liability rule: respondeat superior.  Under this rule, corporations are liable for all crimes committed by their employees in the scope of employment with some intent to benefit the firm. The second is the power granted to prosecutors to negotiate and settle cases, most often through deferred and non-prosecution agreements (NPAs and DPAs),  by agreeing to reduce penalties and not to seek to convict firms that either discover and report crime by their employees or cooperate by providing enforcers with the evidence needed to prove such offenses.  Thus was born a system in which private business bears much of the costs of public enforcement and – resource constraints aside – prosecutors are better able to police the uniquely opaque and complex setting of the large business firm.

This now familiar story oversimplifies how the U.S. system has enabled prosecutors to be so successful pursuing criminal cases against large corporations. U.S. enforcement authorities cannot succeed without obtaining witness testimony, documents, and data.  They have benefited greatly from their ability to shift the locus of investigation from the public to the private sector because, in the U.S., in contrast to many other countries, a variety of laws—such as those governing self-incrimination, employee rights, legal privileges, and data privacy—enable private investigators to collect evidence that government investigators could not as readily obtain.

In a new paper, The Law of Corporate Investigations and the Global Expansion of Corporate Criminal Enforcement, we demonstrate how heavily dependent the U.S. system of corporate criminal enforcement is on these laws governing corporate investigations.  Indeed, doctrines controlling investigative powers, which are deep-rooted in American law and were not developed with corporate enforcement in mind, may, as much as respondeat superior liability and DOJ enforcement policy, explain why the U.S. system of corporate crime control has developed into what it is today.

The most substantial implication of this insight is that legal systems in Europe and elsewhere that are now pursuing expansion of corporate criminal liability and adoption of non-trial corporate resolutions designed to reward corporate self-reporting and cooperation may not obtain the same benefits from shifting initial investigations to the private sector.  Many countries’ rules governing investigations give prosecutors greater investigatory powers while impeding investigations by private actors.  As we explore in detail, many countries:

  • give prosecutors more power to compel self-incriminating statements from suspects at lower cost;
  • grant employees far greater rights to resist employer demands to respond to investigative inquiries;
  • limit companies’ ability to investigate under the cloak of legal privilege;
  • and place burdensome restrictions on companies’ freedom to perform the kind of intrusive and powerful processing of employee data and that is routine in large U.S. corporations.

Given these differences, we think it unlikely that many other nations will easily match the results of U.S. enforcers simply by pursuing broad liability rules and entering into NPAs, DPAs, and similar settlements.  It may be necessary for other nations to consider other ways to enhance enforcement in light of the very different allocations of public and private investigative powers in their legal systems. Policy questions warranting consideration include:

  • whether public enforcers may be better positioned than companies to investigate, in which case effective enforcement requires providing them with more resources rather than relying primarily on private investigations;
  • whether other countries should focus on DPAs and lower penalties principally as a means to give companies greater incentives to report wrongdoing earlier;
  • whether some legal principles, such as the attorney-client privilege, might warrant modification to facilitate private investigations of corporate crime;
  • and whether other countries should embrace laws that protect and reward whistleblowers who report crime to public authorities—regimes that to date have been less developed and more controversial abroad than in the U.S.

As we discuss in our paper, this comparative inquiry into the law of corporate investigations casts light on the U.S. system.  Observing how other nations are debating and shaping innovations in corporate enforcement is a reminder that the U.S. system did not emerge from considered and organized law reform.  Respondeat superior liability fell from tort law into the criminal law through a century-old Supreme Court decision.  NPAs and DPAs developed out of the plea bargaining practices derived from the executive branch’s largely unreviewable enforcement discretion.  The modern corporate enforcement machine arose gradually and almost organically from the practices of prosecutors, defense lawyers, and corporations trying to address corporate crime.

Examining how this system developed  around the doctrines that determined the relative access of prosecutors and companies to evidence may be instructive for those who would advocate reform of the U.S. system.  Debate about improving corporate enforcement should be based on a tripartite model that includes not only liability rules and settlement policies but also the law controlling the gathering of the facts necessary to prove corporate crime.

This post comes to us from Jennifer Arlen, the Norma Z. Paige Professor of Law at New York University and faculty director, Program on Corporate Compliance and Enforcement and Samuel W. Buell, the Bernard M. Fishman Professor at Duke University School of Law.  It is based on their recent article, “The Law of Corporate Investigations and the Global Expansion of Corporate Criminal Enforcement,” available here.