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Do Nothing

The Department of Justice is increasingly under attack for its policies governing the prosecution of corporations. A federal district court recently ruled that the DOJ unconstitutionally pressured KPMG to cut off its employees' attorneys fees if they did not cooperate with the government. The Senate Judiciary Committee is currently holding hearings on its policy of requiring corporations -- if they want to be regarded as cooperating with government investigations -- to waive their attorney-client and work product privileges. And questions have been raised about its policy of charging individuals with obstruction of justice for lying to or concealing information from corporate counsel during internal investigations.

So what should Congress do about these potentially abusive policies? How about nothing!

DOJ policy is merely a symptom of the underlying disease: the untenable standard of corporate criminal liability embodied in federal law. Attempting to reform DOJ policy without changing the law is a bit like treating a lung-cancer patient's cough. It won't hurt, but it won't help that much either.

When should corporations be subject to criminal punishment? Perhaps never. These entities cannot be imprisoned, only fined; and the fines are paid by the corporations' shareholders. The defining characteristic of the modern publicly traded corporation is the separation of ownership and control: Shareholders do not control the actions of corporate employees. Thus, imposing criminal punishment on a corporation, rather than on the employees who committed the offense, punishes shareholders who are innocent of wrongdoing.

But perhaps corporations should be punished when its employees' wrongdoing is a matter of corporate policy. Or when its corporate culture encourages, or fails to adequately discourage, employee wrongdoing. However one answers these questions, one thing is clear. A corporation should not be punished when it has done everything in its power to prevent its employees from violating the law.

Yet under federal law, a corporation is criminally liable for the actions of any of its employees taken within the scope of their employment. It makes no difference whether the employees' conduct violates corporate policy and contravenes explicit instructions to the contrary. It makes no difference whether the corporation has the most pristine corporate culture and has done everything humanly possible to prevent its employees from violating the law. Corporations are strictly liable for the crimes of their employees.

This is the root of the problem. Under this strict standard of criminal liability, it is impossible for a corporation to ensure that it is not guilty of an offense. No matter how good its internal controls, no corporation can guarantee that there will be no intentional violations of the law by rogue employees.

Further, in today's highly regulated business environment -- where merely negligent or even innocent actions can constitute criminal offenses -- no corporation can guarantee that an employee will not inadvertently violate the law. Since the corporation has no defense if such violations occur, its financial health, and in some cases its continued existence, rest entirely on its ability to avoid indictment.

This gives DOJ the whip hand. Under current law, whenever an employee comes under suspicion of criminal wrongdoing, the corporation must choose between betting the company's future that its employee will be exonerated, and doing whatever DOJ demands to avoid indictment. Faced with these alternatives, it is hardly surprising that most corporations waive their privileges, cut off their employees' legal fees and refuse to enter into joint defense agreements with them, and fire them if they refuse to cooperate with the government.

But this also demonstrates that there is no need to reform DOJ policy to prevent prosecutorial overreaching. Instead, corporations that have a good corporate character -- that do nothing to facilitate employee wrongdoing and make good-faith efforts to obey the law -- should be allowed to assert this as a defense when charged with a crime. Corporate criminal liability should require some form of corporate wrongdoing for corporate punishment.

What should the reformed standard be? A highly restrictive standard would require the prosecution to demonstrate some positive step taken by corporate policy makers to facilitate the employees' criminal conduct. A less restrictive standard would require only that upper management be willfully blind or perhaps merely negligent with regard to employee misconduct. An even less restrictive standard would presume corporate involvement in employee criminal activity, but allow corporations to raise their good faith efforts to discourage employee wrongdoing as an affirmative defense. But even the least restrictive standard would be sufficient to break DOJ's stranglehold on corporations.

If the corporation could introduce its good character as a defense, it need no longer regard indictment as equivalent to a conviction; and it could take affirmative steps to ensure that it was in compliance with the law. In these circumstances, a corporation's decision to cooperate with the government could be based on its best judgment as to whether its employees engaged in criminal activity, rather than on fear of an indictment against which, if its employees have misbehaved, there is no defense.

Changing the standard of corporate criminal liability in no way interferes with the government's ability to prosecute employees of a corporation as individuals. It simply removes DOJ's power to force corporations to enlist as deputy law-enforcement agencies.

Adopting a standard for corporate criminal liability that requires wrongful corporate action for corporate conviction would, by restoring the balance of power between the prosecution and the corporate defendant to one more appropriate to an adversarial system of justice, remove the source of DOJ's coercive power. It is the proper prescription for the malady currently afflicting the federal government's effort to combat white-collar crime.

Mr. Hasnas teaches ethics and law at Georgetown University's McDonough School of Business.

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