Corporate Criminal Liability

By Akhil Mahesh, National University of Advanced Legal Studies, Kochi

Editor’s Note: A corporation is a separate legal entity and considered a legal person. However, a corporation can be made criminally liable for unlawful acts done by its agents when they are acting within the scope of authority. The criminal act should be committed in furtherance of the benefit of the corporation as well as the benefit of the agent. This doctrine of corporate criminal liability is increasingly gaining importance all over the world and is a recognized principle in India, especially after the landmark judgment of Standard Chartered Bank v. Directorate of Enforcement.

INTRODUCTION

A corporation is a separate legal entity established through some legislation or registration process. They have rights and liabilities separate from that of their shareholders. Some of these corporations have assets and facilities in other countries apart from their home country as well and such corporations are known as multinational corporations (MNCs). Multinational corporations have come to play a huge role in most aspects of human life today. Their powers have grown at an astonishing rate over the last couple of centuries, so much so that they are often compared to entire nations. Therefore, imposing some sort of means of accountability and control over these multinationals and corporations is of paramount importance and should be extremely high on the list of priorities for every nation.

In layman’s terms, the doctrine of corporate criminal liability is essentially the doctrine of respondeat superior which has been imported into criminal law from tort law. This doctrine states that a corporation can be made criminally liable and convicted for the unlawful acts of any of its agents, provided those agents were acting within the scope of their actual or apparent authority. Apparent authority is that authority which an agent can be inferred to have by an average reasonable person, whereas actual authority is authority that a corporation knowingly entrusts to its agent or employee. To simplify matters, if a rational relationship can be established between an employee’s criminal conduct and his corporate duties, the corporation will be held criminally liable for the employee’s conduct.

CORPORATE CRIMINAL LIABILITY THROUGH THE AGES

Throughout the ages, the evolution of the doctrine of corporate criminal liability faced many major issues, the main ones being:

  • The failure to identify or prove criminal intent of a juristic, fictional being. As corporations are intangible legal entities, finding the mens rea necessary for the commission of a criminal act proved to be quite the obstacle.
  • Sanctions were the second problem. A corporation cannot be imprisoned or put to death and hence the threat of imprisonment which plays a major role in criminal law could not be applied here. This lead to speculation that criminal law was not appropriate for the enforcement of this doctrine.
  • Courts required the accused in a criminal case to be physically brought before them for proceedings to take place. This was obviously not possible in the case of corporations.

Prior to the twentieth century, it was believed that a corporation lacked the mens rea required for the commission of a criminal act and hence to attain a criminal conviction. The idea that “A corporation has no soul to damn, and no body to kick” was widely prevalent at that time.

At present, the directors, employees and officers are all liable for criminal acts committed by them which they have actual authority to perform or appear to have authority to perform as observed by an average reasonable man. Further, directors and officers may also be subject to criminal liability under the “accomplice theory” which states that they either encouraged or instructed a subordinate to commit a criminal act or failed to exercise due care and supervision of their subordinates which in turn led to the commission of the crime. This theory states that a person is criminally liable by virtue of his “responsible relation” to the misconduct regardless of whether or not he possesses any knowledge regarding the criminal activity.

Today, for the doctrine of corporate criminal liability to be applicable, the criminal act of the employee must:

  1. Be committed with the intention of benefiting the corporation in some manner, or
  2. Be committed with the intention of increasing his own personal gain, and this conduct ultimately ends up benefiting the corporation as well.

REQUIREMENTS FOR ESTABLISHING CORPORATE CRIMINAL LIABILITY

There are a few necessary requisites whose existence must be established before criminal liability can be imposed on a corporation of any other kind of legal entity:

  1. Act within the scope of employment: For corporate criminal liability to arise, there are several requirements that must be met. First and foremost, the employee committing the offence must be acting within the scope of his employment, i.e. he must be performing duties authorized by his parent company. But not all agents of a corporation are considered worthy of representing a corporation for the purpose of establishing liability. There are two conflicting systems which approach this issue differently, namely the common law and the Model Penal Code (MPC). Common law states that a corporation is liable for its agents’ activities irrespective of the employee’s status or position in the corporation’s bureaucracy. In the case of Dollar Steamship Co. V. United States,[i]the common law system upheld the criminal liability of a steamship company for polluting the waters even though the employee dumping refuse overboard was a mere kitchen worker. MPC on the other hand states that the illegal act must be “authorized, requested, commanded, performed or recklessly tolerated by the board of directors or by a high managerial agent acting in behalf of the corporation within the scope of his office or employment.” [MPC § 2.07 (1) (c)]. Thus the MPC allows corporations to evade liability as long as the higher ups in their hierarchy exhibit due diligence in the monitoring and stamping out of wrongdoing.
  2. Benefit to the Corporation: The second requirement is that the agent’s behaviour must, in some way, benefit the corporation. The corporation need not actually directly receive the benefits nor must the benefit be enjoyed completely by the company, but the illegal act must not be contrary to corporate interests. This has been elaborated on because it is extremely rare that an employee commits an illegal act selflessly, with no intention to make any personal gain.
  3. Special problems arise when it comes to establishing mental culpability of a corporation. There are two main methods by which this is done:
  • The Collective Blindness Doctrine

Courts have found corporations liable even when it wasn’t a single individual who was at fault. The Courts considered the sum knowledge of all the employees to come to this conclusion. This is known as the “Collective Blindness Doctrine”. The rationale behind this is to prevent corporations from compartmentalizing their work and duties in such a way that it becomes elementary for them to evade liability by pleading ignorance in the event of any criminal prosecution.

  • The Willful Blindness Doctrine

Corporations are made criminally liable if they knowingly turn a blind eye to ongoing criminal activities. If a corporate agent becomes suspicious of some ongoing illegal acts but to avoid culpability, he takes no action to mitigate the damage or investigate further or bring the offender to book, the corporation becomes liable.

How Corporations can be made Liable

Courts today have devised a number of methods and ideologies to impute the employee’s actions and knowledge to the parent corporation to stamp out illegalities from the economic sphere of life:

  1. The Collective Blindness Doctrine

Courts have found corporations liable even when it wasn’t a single individual who was at fault. The Courts considered the sum knowledge of all the employees to come to this conclusion. This is known as the “Collective Blindness Doctrine”. The rationale behind this is to prevent corporations from compartmentalizing their work and duties in such a way that it becomes elementary for them to evade liability by pleading ignorance in the event of any criminal prosecution.

  1. Willful Blindness Doctrine

Corporations are made criminally liable if they knowingly turn a blind eye to ongoing criminal activities. If a corporate agent becomes suspicious of some ongoing illegal acts but to avoid culpability, he takes no action to mitigate the damage or investigate further or bring the offender to book, the corporation becomes liable.

  1. Conspiracies

A conspiracy has been traditionally defined as two or more people who agree to commit an offence, with one or more people taking affirmative action to further the aim of the conspiracy. Corporations can be made liable for a criminal conspiracy amongst its employees or involving one employee and others not on the payroll of the corporation.

  1. Mergers, Dissolutions and Liability

Corporations can be made criminally liable for the previous criminal acts and violations of another corporation with which it has merged or has consolidated. Corporations, after a merger, will also have to defend themselves against charges of conspiracy against the predecessor corporation. Similarly, it is not always necessary that corporations will evade prosecution if dissolution occurs before filing of charges. Depending on the law of the land, sometimes even defunct corporations are forced to defend themselves against criminal prosecution.

  1. Misprision of Felony

A corporation may also be held liable for misprision of felony, that is the offence of concealing and failing to report a felony. This consists of four elements:

  • That the principal committed a felony
  • That the defendant knew about said felony
  • That the defendant failed to notify the concerned authorities at the earliest, and
  • That the defendant took proactive steps for the concealment of the felonious act.

Merely failing to notify the authorities is not enough to qualify as misprision of felony and neither is merely having the intent to conceal the felony if such intention is not carried out.

CORPORATE CRIMINAL LIABILITY: IS IT REALLY NECESSARY?

Time and again, the question has arisen about the need for corporate criminal liability. It is often asked whether we need to address the issue of “corporate criminals” or ‘criminal corporations”. There is no general correct answer to this question. Each case has to be carefully examined and then a decision has to be taken regarding the corporations liability.

Critics argue that this doctrine is completely unnecessary on two grounds. Firstly they challenge the deterrent effect of fines and other sanctions against corporations on the grounds that it is not the corporations that commit crimes, it is the individuals who do and the second being that the retributive effect is borne by innocent shareholders (by decreasing the value of their shares) and consumers (by driving up the prices of commodities and services).

The critics’ first objection is very simplistic in the fact that it doesn’t account for the labyrinthinian structure of corporations in today’s world which makes it nigh impossible to pinpoint individual responsibility for any specific decision. Also, the existence of corporate criminal liability provides the top officers with a great incentive to supervise middle and lower level management very closely. The existence of individual liability would encourage a “don’t ask, don’t tell” kind of attitude from the top brass, thereby keeping themselves clear of all liability whilst reaping the profits from illegal acts.

The second objection is that the cost of corporate criminal fines and sanctions is borne by shareholders and consumers, and this too seems baseless. Shareholders are well aware of the risks involved in investing in any venture and are seemingly happy when illegal acts bring them profits so it is only fair to expect them to bear a part of the brunt when those illegalities are discovered and duly sanctioned. As for the brunt borne by the consumers, it seems highly illogical that a sanctioned corporation would try and pass on the fine to them by raising prices of goods and services because that would only lead to consumers looking for alternate sources which would in turn lead to loss of profit and reduced viability of the company, and in some cases leading to irreparable harm that’d push the company down the slippery slope towards bankruptcy.

CORPORATE CRIMINAL LIABILITY AROUND THE WORLD

Corporate criminal liability in the United States of America

Initially, corporations were not held criminally liable for corporate activities as acorporation was considered to be a fictitious legal entity incapable of forming the requisite mens rea necessary for the commission of a crime. The Supreme Court ultimately rejected this notion in 1909 in New York Central & Hudson River Railroad v. U.S[ii]. A railroad company employee paid rebates to shippers in violation of federal law. The court upheld the corporation’s criminal conviction, finding no reason that corporations could not be held “responsible for and charged with the knowledge and purposes of their agents, acting within the authority conferred upon them.” The Supreme Court concluded that criminal liability could be imputed to the corporation based on the benefit it received as a result of the criminal acts of its agents.  This case essentially imported the doctrine of respondeat superior from tort law into criminal law. There are a plethora of federal statutes applicable to corporations under which criminal liability may be imposed. Although federal statutes may apply, this does not mean that the federal statutes overrule state laws that overlap, i.e. a corporation can be prosecuted under both federal and state laws.

Punishments under U.S. Law

A corporation may be punished by fine or seizure of its property which can be levied by an execution order issued by the court. The fact that the penalty provided for the violation of a statute is a fine or imprisonment, or both in the discretion of the court, does not render it inapplicable to a corporation, and the same rule applies where the statute creating the offence provides for imprisonment if the fine imposed not paid. Sometimes, a statute providing that the penalty for a particular crime is imprisonment may be read in conjunction with a general statute allowing the imposition of a fine, and the fine may be imposed on the corporation in lieu of imprisonment.

Corporate Criminal Liability in the United Kingdom

Prosecution of a company isn’t seen as a substitute for the prosecution of criminally culpable individuals such as directors, officers, employees, or shareholders. Prosecuting such individuals provides a strong deterrent against future corporate wrongdoing. Equally, when prosecuting individuals, due consideration is given to the possible liability of the company where the criminal conduct is for corporate gain.

In the case of Tesco Supermarkets Limited v. Nattrass[iii], Tesco relied on the defence of the “act or omission of another person” who in this case was a store employee, to show that they had taken all reasonable precautions and due diligence necessary to not be criminally liable. Lord Reid held that, in order for liability to attach to the actions of a person, it must be the case that “The person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company.”

In considering the seriousness of any offence, the courts consider whether the corporate entity’s culpability in committing the offence and any harm which the offence caused, was intended to cause or might, foreseeably, have been caused.  Guidelines issued on the assessment of seriousness of any given offence identify four levels of culpability for sentencing purposes starting with intention to cause harm to negligence in committing the offence. The guidelines also refer to aggravating factors which are familiar territory: as whether the offence was planned, whether the offence resulted in high profit and whether there was a failure to respond to warnings or concerns expressed by others about the offender’s behaviour. The corporate entity’s level of co-operation with the prosecuting and regulatory authorities is also a factor in assessing the course of action taken by a regulator and the level of penalty appropriate where there has been corporate criminal offense. Penalties which corporate entities can face include fines, confiscation, compensation orders and debarment from public procurement.

Corporate criminal liability in the rest of Europe

Western European countries initially resisted the imposition of criminal liabilities on corporations and other such legal entities until the 1970s. This opposition was expressed in the principle societasdelinquere non potest, which means, ‘a legal entity cannot be blameworthy ’. the modern trend of imposing on corporations criminal liability for acts done by their agents began in earnest in the 1970s.

The Netherlands

In 1976, the Netherlands became one of the first Western European countries to adopt legislation enacting comprehensive corporate criminal liability. The legislation made corporations liable for all offenses. The 1976 legislation also dispensed with the requirement that liability be predicated on the actions of natural persons acting on the corporation’s behalf, which was a requirement of the previous existing law. Liability may be predicated on deficient decision-making structures within the corporation or on the aggregate knowledge of multiple individuals.

Denmark

In 1926, with the passage of the Butter Act, Denmark introduced corporate criminal liability for some offenses. By the end of the century, Denmark had greatly expanded the list of enterprise offenses.

Switzerland

It was only in late 2003, that Switzerland imposed criminal liability on corporations, after having previously rejected such liability time and again for doctrinal reasons. Swiss criminal liability is based on the concept of ‘subsidiary liability’, i.e. a corporation can be held liable for offenses committed on its behalf only if fault cannot be attributed to a specific individual ‘because of a lack of organization within the enterprise.’ The offense must be ‘in furtherance of a business activity consistent with the purpose of the enterprise,’ a requirement which undoubtedly will need to be defined by the courts. Criminal fines can range up to 5 million Swiss francs.

France

The basis for corporate criminal liability in French law is codified in Article 121-2 of the new French penal code, which states: “Juridical persons, with the exception of the State, are criminally liable for the offenses committed on their account by their organs or representatives . . . in the cases provided for by statute or regulations.” Article 121-2 further provides the “criminal liability of legal persons does not exclude that of the natural persons who are perpetrators or accomplices to the same act.”

There are three basic requirements for liability to be imposed on a legal entity. First, the French legislature must have enacted a substantive criminal offense which the corporation contravened. Second, actual criminal responsibility for the offense must lie in the conduct of a corporation’s representatives or its organs. Third, the acts on which criminal liability is predicated must have been committed for the benefit of the corporation.

An important feature of the new French law is that it provides an expansive list of statutory criminal penalties. In most cases, these will be monetary penalties five times the rate for natural persons committing the same offense, with greater monetary penalties for recidivist conduct.

Corporate Criminal Liability in India

The issue of whether a company or a juristic person can be prosecuted for an offence for which the mandatory punishment prescribed is both imprisonment and fine has come up in several cases in India such as the cases of TheAssistant Commissioner, Assessment-II, Bangalore & Ors. v. Velliappa Textiles[iv] and State of Maharashtra v. Syndicate Transport[v] wherein a ruling was given stating that the court cannot impose only a fine where the mandatory punishment laid down by the appropriate statute is both imprisonment and fine. The majority view is that the court should not deviate from the minimum prescribed punitive sanctions. If the court did prosecute for such offences and found the defendants guilty, it ran a massive risk of stultifying itself by not being able to impose an effective order by way of sentence.

The doctrine of corporate criminal liability in India was made crystal clear in the recent groundbreaking judgement in 2005 of the Apex Court in the case of Standard Chartered Bank and Ors. etc. v. Directorate of Enforcement and Ors. Etc.[vi]that overruled all the previous views. This case was related to the now defunct Foreign Exchange Regulation Act (1973), otherwise known as FERA. The majority held that there is no immunity to the companies from prosecution merely because the prosecution is in respect of offences for which the punishment prescribed is mandatory imprisonment. As the company cannot be sentenced to imprisonment, the Court cannot impose that punishment, but when imprisonment and fine is the prescribed punishment the Court can impose the punishment of fine which could be enforced against the company. Such a discretion is to be read into the Section viz., S. 56 of Foreign Exchange Regulation Act (1973) (FERA) and Ss. 276-C and 278-B of Income-tax Act (1961) so far as the juristic person is concerned. Of course, the Court cannot exercise the same discretion as regards a natural person. As regards company, the Court can always impose a sentence of fine and the sentence of imprisonment can be ignored as it is impossible to be carried out in respect of a company. It cannot be said that, there is ablanket immunity for any company from any prosecution for serious offences merely because the prosecution would ultimately entail a sentence of mandatory imprisonment.The bench by a majority of 3:2 held that a corporation can be punished and is criminally liable for offences for which the mandatory punishment is both imprisonment and fine. In case the company is found guilty, the sentence of imprisonment cannot be imposed on the company and then the sentence of fine is to be imposed and the court has got the judicial discretion to do so. This course is open only in the case where the company is found guilty but if a natural person is so found guilty, both sentence of imprisonment and fine are to be imposed on such person. This particular judgment in has further crystallized the Court’s interpretative power with regards to a penal statute, by departing from the traditional view and endorsing that for the punishment of the crime the court should go beyond the strict word, and not let offences go unpunished due to application of too technical an interpretation that is restrictive, strict and constricting to the very intent of the statute.

If a corporate entity or juristic person is found to have breached the law, the Courts, though bound to impose the sentence prescribed under law, now have the discretion to impose the sentence of fine as a corporate entity cannot be subjected to imprisonment. However, if a natural person is found to have committed a crime, the sentence of imprisonment is still applicable. There is no blanket immunity for corporations just because prosecution would ultimately lead to the sentence of mandatory imprisonment.

The judgment of the Supreme Court in Iridium India Telecom Ltd. v. Motorola Inc.[vii] on 20 October 2010 merely reiterated the principles laid down previously in the Standard Chartered Bank case. This was a case in which Iridium India Limited filed a criminal complaint against Motorola Inc. alleging offences under section 420 (cheating) read with section 120B (conspiracy) of the Indian Penal Code (IPC). The complaint alleged that Motorola Inc. had floated a private placement memorandum (PPM) to obtain funds/investments to finance the ‘Iridium project’. The project was represented as being “… the world’s first commercial system designed to provide global digital hand held telephone data … and it was intended to be a wireless communication system through a constellation of 66 satellites in low orbit to provide digital service to mobile phones and other subscriber equipment locally.”On the basis of the information contained in and representations made through the PPM, several financial institutions invested in the project. The project turned out to be unviable and resulted in massive losses to the investors which was alleged by Iridium India Limited to have been caused as a result of Motorola Inc.’s false representations in the PPM.

M.J. Antony, while commenting on the case, said the following[viii]:

The question of punishing a corporation came up recently in the Supreme Court in a criminal case filed by Iridium India Telecom Ltd against Motorola Incorporated. The allegations were cheating and criminal conspiracy. The magistrate in Pune started proceedings against Motorola. It moved the Bombay High Court against the prosecution. The high court quashed the proceedings giving several reasons, one of them being that a corporation was incapable of committing the offence of cheating as it has no mind. According to the high court, although a company can be a victim of deception, it cannot be the perpetrator of deception. Only a natural person is capable of having a guilty mind to commit an offence.

However, the Supreme Court set aside the high court’s finding and asserted that a corporate body can be prosecuted for cheating and conspiracy under the Indian Penal Code. The offences for which companies can be criminally prosecuted are not limited only to the specific provisions made in the Income Tax Act, the Essential Commodities Act, and the Prevention of Food Adulteration Act. Several other statutes also make a company liable for prosecution, conviction and sentence.

The court allowed the prosecution to go on, stating that companies and corporate houses can no longer claim immunity from criminal prosecution on the ground that they are incapable of possessing the necessary mens rea for the commission of criminal offences. The legal position in England and the United States has now crystallised to leave no manner of doubt that a corporation would be liable for crimes of intent. This is the position all over the world where rule of law supreme

CONCLUSION

Corporate criminal liability is steadily gaining importance in the spheres of social concern such as consumer protection, environment law and occupational health and safety norms. Till the recent past, corporate governance wasn’t given much thought, but with the emergence of this particular doctrine that focuses on organizational blameworthiness and accountability of superiors, this mindset is changing rather rapidly. Issues regarding the operation of corporations are now being closely linked to their governance so as to avoid potentially triggering criminal liability.

As Lord Reid so rightly said,

A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these; it must act through a living person, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his act is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persons of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent. In that case the liability of the company can only be a statutory or vicarious liability.[ix]

Over time, Courts have ruled that corporations too can have mens rea, which is a vital component for the commission of a crime. This ruling was delivered in India in the case of Iridium India Telecom Ltd. v. Motorola Incorporated &Ors.[x]by the Supreme Court, thereby establishing that it was possible for a corporation to be party to a conspiracy. Indian social legislations like the Essential Food Commodities Act 1955, the Prevention of Food Adulteration Act 1954, the Negotiable Instruments Act 1881, the Environment (Protection) Act 1986 state that at the time of the commission of the offence, the company, along with every person in its employment, shall be deemed to be liable for that offence and if pronounced guilty, they could be punished with not only a fine, but also with imprisonment.

Thus it has now become possible to hold a corporation criminally liable for acts committed through their agents and employees, and attributemens rea to them. In this day and age of economic advancement where corporations have a say in almost every aspect of life, such a principle has assumed paramount importance in corporate governance.

REFERENCE LIST

  • Online sources:
  1. Dharm Veer Singh, “Corporate Criminal Liability: A Jurisprudential and Comparative Approach”, available at http://www.legalserviceindia.com/articles/cor_dr.htm, last visited on 30/03/2013.
  2. UmakanthVarottil, “Corporate Criminal Liability: The Iridium/Motorola Case”, available at http://indiacorplaw.blogspot.in/2010/11/corporate-criminal-liability.html, last visited on 30/03/2013.
  3. PrateekAndharia, “Corporate Criminal Liability: Finding Settled Shores?-A Comment On Iridium India Telecomv. Motorola Inc”, available at http://www.commonlii.org/in/journals/NALSARStuLawRw/2011/5.pdf, last visited on 30/03/2013.
  4. Corporate Prosecutions, The Crown Prosecution Service, available at http://www.cps.gov.uk/legal/a_to_c/corporate_prosecutions/, last visited on 30/03/2013.
  5. Clifford Chance, “Corporate Liability In Europe”, available at http://www.cliffordchance.com/content/dam/cliffordchance/PDFs/Corporate_Liability_in_Europe.pdf, last visited on 30/03/2013.
  6. All Indian cases taken from http://www.indiankanoon.org/
  • Offline sources:
  1. David Brody and James Acker, “Criminal Law”, 2nd ed. Jones & Bartlett Publishers.
  2. KD Gaur, “Criminal Law: Cases and Materials”, 6th LexisNexis ButterworthsWadhwa Publishers.
  3. K I Vibhute, “P S A Pillai’s Criminal Law”, 11th LexisNexis ButterworthsWadhwa Publishers.

Edited by Sinjini Majumdar

[i]101 F.2d 638 (9th Cir. 101)

[ii]212 U.S. 481

[iii][1971] UKHL 1

[iv](2003)11 SCC 405

[v]AIR 1964 Bom 195

[vi]AIR 2005 SC 2622

[vii]2004(1)Mh.L.J. 532

[viii]M J Antony: Dissecting Body and Mind, November 17, 2010 , available at http://www.business-standard.com/article/opinion/m-j-antony-dissecting-body-and-mind-110111700038_1.html, last visited on 28/03/2013.

[ix]Tesco Supermarkets Limited v. Nattrass [1971] UKHL 1

[x]2004(1)Mh.L.J. 532

One Reply to “Corporate Criminal Liability”

Leave a Reply

Your email address will not be published. Required fields are marked *