Criminal Liability Company

“Critically assess whether the law should impose criminal liability upon a company and, if so, what test or tests should be used to impose such liability.”

Introduction

The society today is increasingly faced with various kinds of economic crimes that were unknown earlier in any given legal system. Now day’s courts and prosecutors are often dealing with such phenomenon holding the corporations criminally liable as most economic activities take place through them. However there has always been a hesitation of criminal law to sanction corporations for their wrongdoing and it was only after the 2nd World War that criminal law recognised corporate criminal liability. Even then the European system has not been able to incorporate the concept in its criminal legal system. Nonetheless responsible social policy mandates that we deter those who victimise society through their dangerous acts and since corporations has been the villain; it needs to be stopped even if commentators question the use of criminal law.

The primary purpose of this essay is to critically analyse the issues related to corporate crimes and liability and the problems of attribution attached to it. Firstly I shall discuss in brief the development of corporate criminal liability and then shall go onto discuss the problems of punishing the corporations and responses taken. I shall also conduct a comparative study to see if there is a solution or whether there is a possibility of harmonisation of laws to resolve the crisis.

Development Of Corporate Criminal Liability

Before the French Revolution took place criminal liability of corporations were generally accepted but however the French Penal Code was silent on this subject perhaps due to economic liberalisation and as Belgium adopted the French code, it too avoided the subject and formed the basis that since corporations are legal fiction, it could not fulfil actus reus or mens rea criterion. The Dutch too followed the same league but with industrialisation the criminal law was not left untouched and the countries undergoing major economic change like UK and USA realised its need. Although the English courts rejected the idea initially, but had to change the position and gradually corporate sanctioning developed. Firstly, the courts accepted corporate liability on breach of statutory duty, followed by imposing vicarious liability and finally in 1944 a corporation was imposed direct liability and prosecuted and punished in three landmark cases.The rationale of these cases were highly criticised but it surmounted the mens rea hurdle and established that the mens rea of employees were to be considered as that of the company’s, if the agent is an ‘alter ego’ meaning high up in the corporate hierarchy. Thus the traditional approach has been ‘identification’ but from a prosecutorial perspective it has lacunas as it provides for ‘derivative’ liability. Even the US gradually developed corporate criminal liability in a distinct manner and the courts were no longer reluctant to punish due to economic changes and this move was confirmed in “New York Central & Hudson River Railroad Com-pany v. US” . Therefore the current standards for corporate criminal liability holds that corporations are liable for the criminal acts of their employees so long as they are done within the scope of employment and to benefit the employer but the encumbrance is proving these two conditions can be difficult and holding a corporation vicariously liable is difficult to justify when the act imputed on the corporation is totally against its instructions. Yet most courts apply the theory regardless of other surrounding issues as rightly pointed out by Lowell Brown that “isolated acts of low-level employees often comes to the shock, incomprehension and outrage of senior management.” The genesis of this doctrine is generally the creation of the courts. Congress determined that corporations can be deemed capable of committing crimes but has not legislated on how the courts are to impute the action and state of mind and thus it has been up to the courts to determine how vicarious liability should be applied. It has been argued that the misreading of the New York Central case decision is to be blamed for the present legal standard. In fact the Federal courts have repeatedly misread and applied the doctrine for example in “U.S. v. Basic Construction Co” .,a jury in the Fourth Circuit convicted the corporation of intentionally violating antitrust regulations, notwithstanding the fact that the corporation had introduced evidence to show that it had a longstanding, well known, and strictly enforced policy against bid rigging. This misguided view must change. Moreover this thought also is contrary to criminal law as criminal law does not apply agency principles of vicarious liability to corporations that have taken all reasonable measures. In short, the corporations which are good citizens are put at risk. Sadly even now the Supreme Court has not addressed how vicarious criminal liability should be determined but has addressed how vicarious liability should be applied to corporations in the civil context and that unlimited vicarious corporate liability is undesirable. The current standard has been criticized as giving unwarranted powers to federal prosecutors and facilitates unjust prosecution agreements. Post Enron, FBI’s “Financial Crimes Report” reported that the number of pending corporate fraud cases had doubled since 2003 bringing in $3.1 billion in restitution orders and $151.4 million in fines. Nevertheless there has been enactments holding corporations criminally liable such as The New Zealand Crimes Act 1961 and the Interpretation Act 1889 which defines ‘persons’ and includes corporation as well. At present the Sarbanes-Oxley Act 2002 is enacted to control corporate crimes.

In general, extending the scope of the criminal system to include corporations may be said to have developed along three lines. First, the doctrine of liability was expanded from offenses of omission to include offenses of active behaviour, later the doctrine was broadened from absolute liability offenses to include offenses of criminal intent developing from vicarious liability to principles of direct liability. But now time’s changed and the last two decades have created a new socio-political-economic reality which has dictated the change in the law’s approach to the imposition of penal liability on corporations. In the last decade, legal bodies in England have been charged with manslaughter, and some have even been convicted. At present, The Corporate Manslaughter and Homicide Act 2007 has been enacted in England relating to death caused by the failure of a corporate board to adopt necessary precautionary measures, thereby significantly departing from reasonable standards of care. In the United States, rendering legal bodies criminally liable for manslaughter has become a matter of routine, an even more far-fetched option was considered when corporate directors were charged with murder.

Test To Attribute Corporate Criminal Liability

The imputation of crimes on a corporation has always been debatable where for conviction the prosecution must prove presence of elements of crime which is difficult especially when mens rea is an element and where there is evidence of multiple agents being involved, then there is a possibility of exploitation by the defence to create reasonable doubt. The attribution of corporate criminal liability and the law on such offences are at a crossroad and the reason for the inconvenience is the very nature of corporate personality and that the rationale for liability at present is filled with loopholes calling for a more compelling approach. The question is what is meant by punishing the corporation? Does it have the capacity for culpable conduct or is it a fiction where members are to be responsible? There are theories propagated on this issues for example the Nominalist theory views corporation as a collection of individuals and here the whole idea of corporation to be blamed is unreal, whereas the Realist theory asserts that corporations are separate from its members and hence can be at fault. The common law principle of corporate responsibility as developed in ‘Tesco supermarkets Ltd. V Natrass’ has often been criticised as it restricts corporate criminal liability to the faults of high level managers thereby making it difficult to establish liabilities against large companies for offences are often committed by lower management. But the rule is good only for small companies where the involvement of the top managers is more easily proved. However, advances in the identification theory were made after the decision in ‘Meridian Global Funds Management Asia Ltd v Securities Commission’ by relaxing the strictness of the directing mind and will test and that individual actions are to be attributed to the corporations and should not be identified with corporate hierarchy but it brought greater uncertainty regarding who will be deemed the relevant person within the corporate hierarchy. This lack of cogent basis for liability may deter the legislators to provide additional sentencing options or the courts to impose high fines, thereby facilitating corporations to resort to defensive methods. The deficiencies in the doctrine are a well known yet few solutions are provided and the recent proposals of the Committee on the Review of Commonwealth Criminal Law do not resolve the problem but one possibility is to construct a scheme of liability for the organisational fault of the corporation. This approach has three features, firstly vicarious liability is imposed in relation to external and not mental element, secondly liability is based on organisational blameworthiness and not on Tesco rule and thirdly liability is based when there is a failure to take precautions or due diligence and statutory implementation of this approach has also been seen in the Commonwealth Crimes Act. Because the corporation does not have physical existence the common understanding is that it can only work through agents but as I have mentioned earlier the whole concept of vicarious liability contradicts criminal law, hence corporate criminality cannot be imposed on agency law leaving us with the only solution of attributing personal liability on them and for which we need to locate the directing mind and will of the corporate structure whose acts can be imputed on the corporation in order to criminalise. There is a need for identification as not all employees are the corporation itself nor can every act expose the corporation to criminal personal liability. A corporation may act as a principle and as such can be vicariously liable and confined to agency law, but since it is not responsible for the criminal acts of its agents, it can avoid the liability for the illegal acts. Therefore classifying an actor as an agent or corporation is crucial and can help to protect the entire entity. Imposing criminal liability on a corporation has been practised for long in the UK and USA but the response to the need has been different. The English applied the ‘organic theory’ where it distinguished the acts of organs attributable to the corporation and the acts of agents which are not attributable, thereby rejecting the American perception. In ‘Lennards Carrying Co. v Asiatic Petroleum’ the theory was first applied in common law and it was held that the corporation may be liable “for the acts of the directing mind and will of the corporation, the very ego and centre of personality of the corporation.” But this does not solve the problem as the term ‘organ’ is very ambiguous and the question is who is an organ as only the organ’s crimes are the corporate crimes. The term has left courts and scholars in a dilemma. Nonetheless efforts have been made to clarify and it has been suggested that the ones at the top of the hierarchy in the corporate structure is the directing mind and the ones in the lower level are the agents. Even then there have been diverse views on this classification as it is very vague and as a law student does not give me a clear picture about the organs and the agents. Due to this difficulty some commentators have taken an opposite approach adopting varied tests to base the liability for instance the ‘primary organ test’ where liability is based on the acts of the agents who acts under the direct authority of the constitutional documents but practically, can this work as today the company’s are divided into departments each having its own powers and functions, so how then can we uphold this theory which is obselete and worse the theory can also be discriminatory holding officials liable who are mentioned in the documents as there are officials who may be appointed but not named. In contrary to this test is a more flexible test, i.e., the ‘delegation test’ where organs are those who have authority delegated under the legal documents, but again this too is very uncertain where the courts will have to look into the delegation to see if it is powerful enough to form an organ. Another approach focuses on the acts and not on the actors known as the ‘authorised acts test’ which asserts that the acts directly authorised by the primary representatives are the acts of the corporation no matter who performs them which again is vague like the ones discussed above. Contrary to the former is the ‘corporate selection test’ where each corporation are to file reports identifying the organs, specifying which officials are the corporation itself and can impose liability but this approach encourages the corporation to minimise the organs to avoid personal liability, hence few supports a ‘pragmatic approach’ where terms such as ‘superior or primary or responsible agent or policy makers’ are used to refer to the organ giving it more flexibility and the criterion is that the court shall decide on case to case basis by engaging in analysing the structure and functions of the corporation but this too has been open to criticisms for such terms can also complicate the court which needs to identify the organs and there may be various hidden queries like does policy makers includes lower officials? Can an officer with administrative function be a policy maker or is the final decision maker the policy maker? Therefore identification here is an enormous job especially when the company’s today take inputs from every level of officials. However statutory provisions with regard to this are found in the Model Penal Code, even though it lacks clarity. Failure of the above tests, called for an approach where organ is formed not on the basis of status but on the basis of function. So each person who fulfils a corporate function is an organ but for this the courts need to verify whether the act was a function ‘for the corporation’ or ‘of the corporation’ and it is only the latter form that draws personal liability. This ‘function test’ has also been criticised as this means we are attributing mens rea of all the workers. Nevertheless the inflexibilities inherent in the function and hierarchy test suggests a solution that is by combining both the tests whereby the courts should first detect whether the act is a function of the corporation and within scope and then whether the person is of high stature to bring criminal personal liability. This way the acts of high officers will not impose liability if the acts are not function of the corporation and the latter test will eliminate the acts of low ranking employees acting with delegated authority.Apart from these, another approach that was developed in America was the ‘aggregation model’ which allows for conviction of the entity by linking the thoughts of different agents and forming required mental element but this was opposed by the English Law Commission. In my view, indeed due to corporations having a separate legal entity, it is hard to attribute criminal liability on them as ultimately there are humans behind the veil and moreover corporate crimes are highly concealable as mostly victims are unaware of the injury and even when crime is revealed identification of the actor is difficult. Therefore the combined test is a practical approach to determine criminality as it gives wider discretion to the courts and discards the ambiguity found in the other tests with regard to defining organs. Here, organs can be determined based on the function, in a way reducing the dilemma.

International And National Responses

The development of corporate criminal liability has become an international problem. Under the common law system, English courts began sentencing corporations for statutory offenses, while a large number of European continental law countries have not been able to incorporate the concept. The fact that crime has shifted from individual perpetrators to white-collar crime has not yet been taken into account in many legal systems. The approaches that have been taken by common law jurisdictions and continental European jurisdictions differ in a number of ways. The first attempts to impose corporate criminal liability were taken by common law countries, such as England, the United States and Canada despite an earlier reluctance to punish corporations. There were a number of reasons for this reluctance. The corporation was deemed to be a legal fiction, lack of the necessary mens rea, and the inability to appear in court personally and the lack of adequate sanctions. Over time, the English courts followed the doctrine of vicarious liability. However, it was only used for a small number of offenses, and later on replaced with the identification theory. In the United States, the approach was different. Instead of holding the corporation indirectly liable, the federal courts applied the concept of vicarious liability. On the other hand the continental European systems’ penal codes are based on the finding of individual guilt which has been criticised. Nevertheless, sanctioning the corporation in these jurisdictions are followed.

Now let me discuss corporate criminal liability present in various legal systems to see the difference of attitude and hope for an uniform law in the future. In the UK, true corporate criminal liability was not firmly established until this century. Corporate entities could only be held liable for crimes which did not require mens rea. In 1915, the House of Lords laid down the directing mind principle to attribute fault. That means that the directing minds are identified as the corporation, and thus the corporation is directly liable, rather than vicariously liable, whereas in USA after the Elkins Act, relied on the concept of vicarious liability. In Canada, the situation is characterized by the fact that the directing mind concept can be instituted at a lower level within the corporation. This was clearly defended in ‘Dredge & Dock’ which established the existence of a corporate mens rea. Despite this move, a recent civil damages case before the Supreme Court, ‘The Rhone v The Peter A.B. Widener’, suggests at least implicitly that in future cases directing minds will only be found at higher levels of authority. Coming to France the new Code Pénal of 1992 makes specific mention of this concept. In 1982 the Conseil Constitutionnel had made it clear that the French Constitution did not prohibit the imposition of fines on a corporation. However, there are tight restrictions on its application. Moreover, corporations can only be held liable under the French Code Pénal when one of the legal representatives of the corporations has acted. Differing from the rest Germany developed an elaborate structure of administrative sanctions which includes provisions on corporate criminal liability but there has been debate in legal circles about the incorporation of corporate criminal liability in Germany due to the lack of capacity to act and will, they are not capable of being culpable and cannot undergo punishment. Nevertheless, the German legislature has instituted a working group in early 1998, to review and improve the current situation by strengthening the role of criminal law with regard to corporate entities. However in Japan corporate criminal liability is an integral part of Japanese law and there are more than 700 criminal provisions on the national level alone, which can punish entities.In addition, the Japanese Supreme Court decided that corporate entities must establish and implement policies that prevent their subordinates from committing crimes.

Apart from individual countries’ penal codes, administrative regulations or civil statutes, corporate criminal liability is also mentioned in a number of international documents. A number of conferences have dealt with the issues since the end of World War II. Among them are the 8th International Conference of the Society for the Reform of Criminal Law in 1994 in Hong Kong and the International Meeting of Experts on the Use of Criminal Sanctions in the Protection of the Environment in Portland, in 1994, the Seventh United Nations Congress on the Prevention of Crime and the Treatment of Offenders of 1985 in Milan mentioned that consideration should be given by Member States to making criminally responsible not only those persons who have acted on behalf of an institution but also the institution by devising appropriate measures that could prevent criminal activities. Another document, which advanced the formulation of corporate criminal liability on an international level was Recommendation (88) 18 of the Committee of Ministers to Member States concerning Liability of Enterprises having Legal Personality for Offenses committed in the Exercise of their Activities. The latest attempt to include the concept of corporate criminal liability is Article 5 of the draft United Nations Convention against Transnational Organized Crime. These international documents have put a considerable amount of pressure on a number of European countries to consider reforms to their criminal laws. Notwithstanding these trends, there remain countries that do not provide for corporate criminal liability. These include Brazil, Bulgaria, Luxemburg, the Slovak Republic, Greece, Hungary, Mexico, Sweden and the Ukraine.

Effect Of Corporate Criminal Liability And Problems Of Enforcement

Corporate crimes have never been a new issue but even then resolution processes has been slow over the time. This is because when it comes to enforcement, it poses greater barriers for governmental detection, investigation and prosecution. The problem is the lack of a systematic enforcement regime and the corporations claims to lawful privileges. Therefore there is a need for reformation on collection of information and gaining voluntary co-operation from the corporation in breaching privacy. However studies have shown that civil litigation is more effective for law enforcement. Recently Jennifer Arlen has argued that corporate criminal liability also has perverse effects that lead to less detection of law breaking and enforcing because the difficulty in detection encourages enforcing officials to depend on firms for assistance and this gives the latter to escape liability. She also asks for re-examination of the effects of vicarious liability rules and propagates alternatives such as mitigation rule, negligence rules and evidentiary privilege rules and asserts that higher sanctions do no minimise corporate crimes. Nonetheless there have been various suggestions on the sanctioning of corporate crimes. Emphasis has been laid on criminal sanctions, being most appropriate as it has deterrent effect but the question is does it really work and prevents injustice? What can be the sanctions? Either it is fine or imprisonment. Earlier I have discussed the tests that can be resorted to for attribution; now let me discuss what can be done once the liability is found. Firstly we can impose huge fines on the corporation but can we ignore the reality that it deprives innocent stockholders property rights? In reply to this it has been argued that this view is not right in number of situations like in closely held corporations, where majority of shareholders, directors etc are engaged in the wrongdoing , here the levy simply punishes the guilty through the entity but no doubt in certain cases it can be unjust. Again it has been put forward that at times the fines are nominal compared to the illegal gains, then where is the point of punishment? In sum if fines are to be imposed it should be as large as the profits so that every person involved can feel the brunt of it. Apart from fines, surrendering the illegal gains can also be another sanction, but most importantly prosecution of the officials responsible for the corporate crimes is considered the best device for retribution.

On the basis of above discussion, it is quite apparent that all we need is appropriate legislation specifying the liability and sanctions in clear terms. Corporate crimes is a major agenda in the US and UK, leading regulatory bodies to tighten the laws. Paradoxically, business houses are considered the most powerful lobbyists today and yet we are witnessing an expansion of laws that criminalises their behaviour. How did this happen? The obvious answer perhaps is the numerous scandals and the outcry of public.

Conclusion

Enquiry in the purposes of corporate criminal liability is rarely expressed in judicial reasoning but for reforms we need to have a deeper look into it since the identification approach seems inconsistent with justification of entity responsibility and for the corporate criminality to survive the aims must be reflected in the reforms. In my view even though many may think that holding corporation criminally liable is absurd and that civil provisions are a better option which results in compensation, but to me having criminal liability at least ensures sanction especially where locating guilty offenders cannot be proven. Moreover such liability will encourage more precautions and proper care and shall prevent harsher individual sanctions. There will be more public information and a possibility of corporate rehabilitation. In fact one can always argue that the aim of criminal law is retributive but we cannot overlook the chief purpose of the law, i.e. deterrence. Therefore what is significant is not whose mind is guilty but whose responsibility shall serve this purpose especially when we see that immuning the company can result to illegal gains for the crimes.

There will always be questions in relation to the fundamental basis for criminal imposition and that if civil liability captures certain features of the criminal liability, it can serve a better purpose as most doctrines are borrowed from civil law for criminal liability, then why have the latter form? To this V.S.Khanna has lucidly replied by focusing on the historical development of criminal liability and mentioned that earlier Government conducted public enforcement through criminal proceeding as private enforcement was not feasible and when locating the guilty was difficult, corporate liability was required. He also focussed on giving us a thorough detail on which liability is preferred. Reading the article, I personally feel that perhaps corporate criminal liability is better without denying the importance of direct liability as it has more deterrent effects, it affects the reputation thereby creating loss, makes the shareholders more cautious, has a stigma attached to the word ‘crime’ which influences the society and has efficient risk-sharing even though one cannot overlook the fact that sanctions can be costly but we can always look at other deterrent alternative which are socially desirable.

Hence, we can see that there are numerous reasons why corporate criminal liability is not upheld but one needs to consider the reasons for having it namely, corporations are held liable for torts involving intent then why not crimes?, public redressal is important when crimes committed by irresponsible agents and it can be difficult to prove individual guilt and prosecute a large number, of individuals, even if their identity is known whereas the corporation is always readily available and corporate criminal responsibility tends to prevent crime not only by influencing the corporation’s representatives but also by influencing those of higher to restrain subordinates. Indeed there will be difficulties changing this regime into a system capable of regulating the activities of corporations because they lack the physical and mental attributes but is not impossible to conceive a new system which will hold corporations liable for its actions. This can serve to foster a keener corporate health and safety culture and that would seem to be justification enough for a sharpening of the law.

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