Corporate Criminal Liability: Theory and Evidence

Abstract

This Chapter examines the existing structure of corporate criminal liability, providing empirical evidence on the types of firms convicted and the magnitude and nature of the sanctions imposed. It then examines whether existing U.S. enforcement practice is consistent with optimal corporate liability, especially for firms where ownership is separated from day-to-day control. The first part of this analysis determines the optimal structure of corporate liability. It shows that optimal corporate liability has different purposes, and thus a different structure, from individual criminal liability (Becker, 1968) whenever the optimal deterrence requires expenditures to detect and investigate corporate wrongdoing. This chapter also shows that the core purposes of corporate liability and optimal structure differ fundamentally from those articulated by the classic economic models of vicarious liability (Kornhauser, 1982; Sykes, 1984) and from analyses of corporate criminal liability that employ a similar model (Polinsky and Shavell, 1993). In contrast with these analyses, firms should not be strictly criminally liable for their employees’ crimes. Instead, corporate criminal liability should be duty-based, in that firms should be able to avoid criminal liability if they engage in optimal policing (monitoring, self-reporting, and cooperating). This structure is consistent with the current regime. Moreover, in contrast with classic analysis which holds that the state should reduce corporate criminal liability to reflect individual criminal liability and market sanctions, this Chapter shows, the state should not reduce the duty-based criminal sanction to reflect either sanctions imposed on individual wrongdoers or market-sanctions. The state generally should impose residual civil liability on all firms, even those that undertake optimal policing; the state should reduce (or eliminate) the residual civil sanction to the extent that the firm otherwise bears the full expected cost of crime as a result of individual liability or market sanctions. Finally, this Chapter examines the federal government’s current practice of using deferred and non-prosecution agreements to impose structural reforms on firms and discusses analysis showing that this practice can be consistent with optimal deterrence when corporate policing decisions are distorted by agency costs.