Countries around the world are reforming their laws governing corporate criminal liability. Jurisdictions and scholars arguing against broad corporate liability, often rely on the claim that corporate civil liability should be as effective because it can impose equally large sanctions on companies. Yet corporate liability is only effective when enforcement officials have the resources and political will to pursue large politically-influential corporations. At the federal level in the U.S., companies need to be subject to both criminal and civil liability for their misconduct. Federal civil enforcement is less effective than criminal enforcement because large companies can more easily leverage their influence with members of Congress or White House officials to blunt civil corporate enforcement. Civil enforcement also tends to be less committed to ensuring that individual wrongdoers are sanctioned.

Companies’ Incentives and Ability to Weaken Corporate Enforcement

Companies can profit from their employees’ misconduct and thus have strong motivations to use their leverage with elected politicians to reduce the risk of corporate enforcement. Companies focus on reducing enforcement – rather than repeal of corporate criminal liability –  because the latter would lead to public outcry either immediately or when the next corporate scandal occurs. By contrast, companies can protect themselves from enforcement without drawing public scrutiny by inducing elected officials to intervene to reduce the likelihood and effectiveness of enforcement.

Companies are better able to employ their influence over elected officials to curtail federal civil enforcement than federal criminal enforcement because both the president and influential members of Congress can more easily temper civil enforcement than criminal enforcement.

Vulnerability to Influence Channeled Through Senior Political Appointees

Both the president and members of Congress can influence the appointment – and thus ideology – of the senior leadership of civil and criminal enforcement agencies. With civil enforcement, this influence directly affects corporate enforcement because the heads of the agencies tend to directly control enforcement decisions. For example, enforcement officials with both the Securities and Exchange Commission and the Commodities Futures Trading Commission cannot bring an enforcement action without approval from the relevant agency’s commission.

By contrast, senior criminal enforcement officials in Washington do not directly control, or exercise veto power over, most corporate criminal enforcement decisions. The Department of Justice grants the 94 U.S. attorneys’ offices considerable autonomy over corporate enforcement decisions. The president has less direct influence over U.S. attorneys than over other executive officials. There are policies and a strong convention against the White House intervening in specific criminal enforcement decisions. In addition, although U.S. attorneys are appointed by the president, the appointment process involves considerable local input, which tends to leave them less directly tied to the White House. U.S. attorneys also historically have enjoyed the protection of a convention against at-will termination by the president.

In addition, U.S. attorneys’ enforcement decisions are not directly controlled by senior leadership at the DOJ. The DOJ grants the U.S. attorneys considerable authority over criminal enforcement decisions in their districts.[1] U.S. attorneys generally determine what cases their office will bring and usually do not need approval from a political appointee in Washington, D.C. before bringing an enforcement action.[2] The U.S. attorneys can pursue corporate criminal enforcement actions even when the president would like to reduce corporate criminal enforcement.

Thus, a president who wants to reduce corporate enforcement can more readily do so  in civil enforcement cases. This is not to say that presidents never interfere, directly or indirectly, with corporate criminal enforcement decisions. Nevertheless, the decentralization of criminal enforcement, combined with U.S. attorneys’ incentives to be perceived as effective and independent, makes that more difficult to do nationally on a broad scale.

Relative Vulnerability to Politicians’ Budgetary Control

Influential members of Congress also can effectively curtail civil enforcement by starving agencies of resources.[3] First, Congress can reduce an agency’s budget or appropriated funds.[4] Congressional leaders on the relevant budgetary and oversight committees also can reduce enforcement by signaling that budgetary favors depend on the agency not aggressively pursuing large firms.

Congress cannot as readily use these techniques to reduce corporate criminal enforcement. Congress sets the budgets for the U.S. attorneys’ offices and the DOJ’s Criminal Division, but these budgets cover all aspects of criminal enforcement; corporate criminal enforcement is not a separate line item. Thus, Congress cannot use its power of the purse to starve corporate criminal enforcement without also cutting funds needed to pursue the cases that the constituents of pro-business, anti-regulation members of Congress want prosecuted: including immigration, drug enforcement, anti-terrorism, and fraud affecting public programs like Medicare.

Congress also can reduce resources devoted to civil enforcement indirectly by enacting laws that require civil regulatory agencies to undertake new duties, such as adopting new regulations or exercising additional oversight, thereby siphoning off resources devoted to enforcement. This technique does not work with criminal enforcement, however. Congress can enact criminal laws that would be costly to enforce, but it cannot direct criminal enforcement authorities to make enforcement of these laws a priority.

Coordination with Criminal Enforcement Reduces Capture of Civil Enforcement

Eliminating corporate criminal liability also would undermine deterrence by ending coordinated criminal and civil corporate investigations, which can reduce the pernicious effects of political influence in two ways.

First, companies cannot as easily use political influence to mute civil enforcement when criminal authorities shine a public spotlight on company misconduct. Second, corporate criminal liability enables coordinated criminal and civil investigations, which can enable civil authorities to benefit from prosecutors’ superior ability to induce companies to investigate and fully cooperate. Coordinated enforcement also may increase civil authorities’ propensity to pursue individual wrongdoers, which is essential to deterrence. Most of these benefits of parallel enforcement would be lost if corporate criminal liability were eliminated, even if individual wrongdoers remained subject to both criminal and civil liability.

Conclusion

For the U.S. to deter corporate misconduct effectively, companies must be subject to both criminal and civil liability to limit their ability of their political influence to undermine enforcement. Other jurisdictions evaluating whether corporate civil liability is sufficient should consider the relative vulnerability of their own enforcement authorities’ to political influence in determining whether corporate criminal liability is needed.

ENDNOTES

[1]   E.g., U.S. Department of Justice, Justice Manual, Principles of Federal Prosecution of Business Organizations, § § 9-2.001 (hereinafter Justice Manual).

[2]   See Anthony O’Rourke, Parallel Enforcement and Agency Interdependence, 77 Md. L. Rev. 985, 996 (2018).

[3]  The president also can undermine enforcement through his influence over the budget. The analysis above about why Congress can more effectively undermine civil enforcement also applies to influence channeled through the president.

[4]   Congress’ practice of taking public action to look tough on corporate misconduct while using the power of the purse to undercut enforcement was on full display following the financial crisis. Publicly, Congress enacted financial fraud legislation and authorized substantial amounts to the DOJ and FBI to pursue financial fraud. Yet, below the radar, Congress immediately undermined enforcement by providing the DOJ and FBI only a fraction of the amounts authorized. See Daniel Richman, Corporate Head Hunting, 8 Harv. L. & Policy Rev. 265, 273-74 (2014).

This post comes to us from Jennifer Arlen, the Norma Z. Paige Professor of Law and faculty director of the Program on Corporate Compliance and Enforcement at New York University School of Law. It is based on her article, “Countering Capture: A Political Theory of Corporate Criminal Liability,” available here.