INTRODUCTION


Image: William Hogarth, "The Bench," via Wikipedia.

Most of our research pages focus on the behavior of individuals, and the ways that individuals interact within companies. But the companies themselves are embedded in a network of laws and institutions that create the “ecosystem” within which firms compete and cooperate. On this page we describe some of the most influential U.S. laws that were designed to promote ethical behavior, as well as certain general legal phenomena—i.e. principles of interpretation or practices in enforcement applicable to a wide array of laws—that help shape the ecosystem of business.

Note: This page differs from others on the site in that it is not a summary of empirical research, nor does it offer specific ideas to apply. It is rather a primer, giving an overview of the most important laws under which businesses and business people are prosecuted. For advice on how businesses should respond to these laws, please see our Compliance and Ethics page.


CONTENTS

Major Laws

Issues to Understand in the Application of Business-Crime Related Laws

Questions to Ask About Your Organization

To Learn More


 

MAJOR LAWS

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Some of the major laws and governmental rules in the USA designed to promote ethical behavior by business people and organizations are:


 

ISSUES TO UNDERSTAND IN THE APPLICATION OF BUSINESS-CRIME RELATED LAWS

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While understanding individual laws is important to designing ethical systems, equally important for these purposes are various phenomena concerning how laws are applied. As described below, many of these phenomena would seem to enhance the deterrent force of at least some of the laws in question and thus play an important role in promoting ethical behavior (although there are different views on whether this is desirable, i.e., whether deterrence is being optimized or has gone overboard). On the other hand, some of these phenomena clearly have the opposite effect.

  • Broad notions of liability

    • Some business-crime related laws are drafted very broadly, meaning that relatively harmless as well as genuinely harmful conduct could be the basis for prosecution under them, (although the extent to which the government in fact files charges in cases of the former is not clear). The laws that have traditionally been the principal focus of concerns about being overly broad are the mail and wire fraud statute, although more recently much attention of this sort has been directed at the FCPA and, to a lesser extent, the False Claims Act. For more information see:

      • Sivachenko, I. (2013). Corporate Victims of 'Victimless Crime': How the FCPA’s Statutory Ambiguity, Coupled with Strict Liability, Hurts Businesses and Discourages Compliance, Boston College Law Review, 54, 393-431.

      • Zelcer, A. (2012). Mail and Wire Fraud, American Criminal Law Review, 49(2), 985-1287.​

      • Winkler, R. (2012). The Civil False Claims Act and its Unreasonably Broad Scope of Liability: The Need for Real "Clarifications" Following the Fraud Enforcement and Recovery Act of 2009, Cleveland State Law Review, 60(2).​

    • Under traditional notions of conspiracy and accessorial liability (the latter is often referred to as “aiding and abetting” liability), marginal players in an offense can be prosecuted to the same extent as the leaders of the offense. While liability of this sort is not limited to business crimes, the circumstances in which many such crimes occur—which often involve low- or mid-level employees of a business organization being instructed by a superior to engage in conduct that is part of an offense—lends itself to prosecutions of this nature.

    • Criminal intent is not always required for prosecution. Arguably this means that an individual can be prosecuted even if she did not engage in conduct that would be traditionally seen as morally blameworthy. This seems unfair to many people; but on the other hand, as with many of the phenomena discussed on this page, this does tend to promote strong internal compliance measures.

      • Strict Liability (WikipediaCornell).

      • Leibman, A., The Responsible Corporate Officers Doctrine--Powerful Tool for Prosecutors, Fox Rothschild, March 27, 2012.

      • Cohen, J. & Gershman, B.L., Prosecuting Executives Who Lack Criminal Intent, Huffington Post, October 6, 2011.

      • Copland, J.R., Regulation by Prosecution: The Problems with Treating Corporations as Criminals, Manhattan Institute, December 13, 2010.

      • Foerschler, A. (1990). Corporate Criminal Intent: Toward a Better Understanding of Corporate Misconduct, California Law Review, 78(5), 1287-1311.

    • Liability of a corporation (or other business organization) can be based on the misconduct of a single employee or agent. Particularly for large organizations, where it is virtually inevitable as a statistical matter that over the course of time some employee will commit a crime, this approach strikes some observers as unfair (and perhaps a cause of over-deterrence)—although it does have the beneficial approach of encouraging strong compliance measures.

  • The impact of being prosecuted is potentially very high, which can lead to, on the one hand, greater compliance measures, and on the other, unfairness and economic waste. The high costs of prosecution affect both prosecuted individuals and business organizations, both of which are covered by the Sentencing Guidelines.

    • The Sentencing Guidelines can dictate long prison terms in business crime cases (sometimes).

      • Pavlo, W., Insider Trading Shows Absurdity of Sentencing Guidelines, Forbes, July 29, 2013.

    • However, individuals can often avoid long prison terms by cooperating with the government in the prosecution of others—a practice which is both necessary for law enforcement purposes but which can lead to results that often seem unfair.

  • There seems to be a trend toward increasingly large fines for convicted business organizations. By way of example, five of the ten largest fines ever imposed under the Federal Sentencing Guidelines for Organizations were imposed in 2012 (although note that the $900 million criminal fine agreed to in 2013 in the insider trading case against SAC will, if approved by the court, alter this list).

  • Other factors that increase the cost to business people and organizations of prosecutions:

    • Regulatory penalties are often imposed in addition to criminal ones.

    • Liability to private parties can be imposed in addition to criminal or regulatory penalties, and for some offenses this can result in treble damages.

    • Prosecutions by more than one sovereign. Although the US Constitution prohibits double jeopardy, overlapping prosecutions by more than one sovereign (e.g., by a state government of another national government, in addition to the US government) are not considered to constitute double jeopardy.

    • Prosecutions under other nations’ laws. There is a recent trend toward this in anti-corruption enforcement. Please see our page on corruption.

  • Costs of defense—meaning fees paid to lawyers and investigators—can be very high.

    • For instance, in August 2013 Wal-Mart disclosed that it had to date paid $300mm in legal fees relating to an investigation concerning possible violations of the FCPA. Avon apparently had spent a similar amount on FCPA investigation as well.

Each of the above-described laws and legal phenomena—particularly when combined with the others—support a need by business people and organizations operating in the US to be cautious with respect to conduct covered by the relevant laws. As noted above, in the eyes of some commentators these laws and legal phenomena lead to an excessive degree of cautiousness. But there are also reasons to believe that the current system does not go far enough in preventing and detecting business-related crimes. For example:

  • Some business-related crimes are very difficult to detect. Insider trading is a commonly cited example of this.

  • An offense may be difficult to prove.

    • Most notable in this regard is the relative lack of criminal prosecutions arising from the financial industry crisis of 2008, with the prosecutorial shortfall attributed by many to the inherent difficulty in proving intentional criminality in the context of highly complex dealings involving financial institutions.

    • See Rakoff, J. (2013). The Financial Crisis: Why Have No High-Level Executives Been Prosecuted? The New York Review of Books, Jan. 9, 2014 issue.

  • Finally, even where detected and prosecuted, punishment may not work well as a deterrent.

    • Managers of a company commit and reap the rewards of a crime, but shareholders bear the cost of the penalties, etc. (i.e., a moral hazard related failure). Some enforcement agencies allow companies/individuals to settle cases without admitting liability (although the SEC is changing its practice in this regard).


 

QUESTIONS TO ASK ABOUT YOUR ORGANIZATION

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  • Am I sufficiently aware of the principal laws that relate to my work?

  • Are others in my organization sufficiently aware of the principal laws that relate to our work?

  • Are the potential impacts of a violation of these laws sufficiently appreciated in my organization?


 

TO LEARN MORE

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  • Sivachenko, I. (2013). Corporate Victims of 'Victimless Crime': How the FCPA’s Statutory Ambiguity, Coupled with Strict Liability, Hurts Businesses and Discourages Compliance, Boston College Law Review, 54, 393-431.

  • Coffee, J.C. (2012). The Political Economy of Dodd-Frank: Why Financial Reform Tends to be Frustrated and Systemic Risk Perpetuated, Cornell Law Review, 97(5), 1019-1082.

  • Brickey, K.F. (2012). Perspectives on Corporate Criminal Liability, Washington University in St. Louis Legal Studies Research Paper No. 12-01-02.

  • Bebchuk, L.A. & Weisbach, M.S. (2010). The State of Corporate Governance Research, Review of Financial Studies, 23(3), 939-961.

  • Nerlich, V. (2010). Core Crimes and Transnational Business Corporations, Journal of International Criminal Justice, 8(3), 895-908.

  • Laufer, W.S. (2006). Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability. University of Chicago Press. (amazonB&Npublic library)

  • Keatinge et al (1992). The Limited Liability Company: A Study of the Emerging Entity, The Business Lawyer, 47(2), 375-460.

  • Foerschler, A. (1990). Corporate Criminal Intent: Toward a Better Understanding of Corporate Misconduct, California Law Review, 78(5), 1287-1311.

 

This page is edited by Jeffrey Kaplan. Other researchers may have contributed content.

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Miscellaneous Links & References 

(This is where other contributors might list relevant links/references they come across.)

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