This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.
The debate over corporate wrongdoing, punishment and deterrence continues. Corporations are not people, but entities that operate through collective behavior. It is interesting to consider whether individual punishment versus corporate entity punishment effectively deters corporate wrongdoing. After all, a company is only liable for individual conduct that is attributed to the organization.
The issue of corporate wrongdoing is on the front burner at the U.S. Sentencing Commission, which launched a proceeding to examine increasing corporate penalties for cartel violations. Some have claimed that the punishment of companies involved in cartel activity is too lenient and should be increased.
Under the sentencing guidelines, a company’s fine range is primarily calculated based on 20 percent of the volume of affected commerce. The 20 percent figure is a proxy for two components – a 10 percent assumed increase in price from the cartel and a second 10 percent for the further harm to consumers who are unable to buy a product because of higher prices. The Sentencing Commission is considering raising this proxy amount from 20 percent to increase corporate penalties.
In recent comments filed before the Sentencing Commission, Judge Douglas H. Ginsburg of the U.S. Court of Appeals for the District of Columbia (former Assistant Attorney General of the Antitrust Division under the Reagan Administration) and FTC Commissioner Joshua Wright argued that harsh corporate penalties may not deter cartel behavior and the focus of punishment should shift to target individuals responsible for the illegal conduct. Antitrust offenders already face some harsh crimes (with a base offense from 10 to 16 months to as high as 87 to 108 months of incarceration). Judge Ginsburg and Commissioner Wright suggest that higher individual penalties are warranted.
Interestingly, Judge Ginsburg and Commissioner Wright suggest a set of other punishments for specific actors in a corporation, including directors and officers who may act negligently in failing to oversee and monitor a company’s ethics and compliance program and individual actors who may engage in cartel behavior. Specifically, they propose that corporate directors and officers should be subjected to fines and potential corporate debarment for negligent oversight. Together, they suggest that individual criminal penalties for cartel participants, along with fines and debarment for negligent actors, will have a greater deterrence effect on corporate behavior.
Judge Ginsburg’s and Commissioner Wright’s argument is interesting, but it omits any potential organizational credit for an effective ethics and compliance program. The Justice Department’s Antitrust Division has been criticized for its failure to award credit for a company’s compliance program. Such credit, if awarded, would increase a company’s incentives to implement such programs to detect and prevent antitrust (and other) violations.
The debate in the antitrust context extends into other corporate wrongdoing issues, such as sanctions/money laundering, bribery, and fraud. Increasing fines against corporations may not have as much deterrence value as punishing individuals with incarceration and punishing negligent conduct with civil penalties and debarment.
The Obama Administration will go down in history for its aggressive enforcement program, despite the fact that many claim that the financial industry escaped prosecution for the financial crisis in 2008. Whether this aggressive enforcement strategy has deterred corporate wrongdoing remains to be seen.