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The Corporate Crook Escape Clause

The federal sentencing guidelines were created under the Federal Sentencing Reform Act of 1984. Before the guidelines were first implemented in 1987, judges were given broad discretion in sentencing. In particular, the guidelines were designed to address huge disparities in sentencing, particularly between rich and poor, whites and minorities. They apply primarily to individuals, but include a chapter on organizations (including corporations).

As the WSJ reported (1/17/05), the Court ruled in January 2005 that the sentencing guidelines should be considered advisory, rather than mandatory, to avoid violating a defendant's Sixth Amendment trial rights. Since corporations are considered "legal persons" (a dubious doctrine), the decision has the potential to affect corporate cases as well.

Yet observers suggest that the decision will have little impact on corporations, primarily because there has been little judicial involvement in corporate sentencing to begin with, at least with regards to publicly-traded corporations.

For most corporations the key issue is not how large a fine they might receive as established by the Sentencing Guidelines, but rather how to avoid any criminal prosecution to begin with. Companies prefer to quietly settle any charges instead of going to trial, in part because they would rather not risk the damage to their reputation. The collapse of Arthur Andersen shortly after its obstruction of justice conviction is still fresh in the minds of many corporate executives and their attorneys.

That is one reason why the Department of Justice established a new prosecution policy in a 2003 memo written by then Deputy Attorney General Larry Thompson, the then-head of President Bush's Corporate Fraud Task Force. The policy establishes the use of pretrial diversion agreements, or "deferred criminal prosecution agreements" in major corporate crime cases, thus overturning a previous policy outlined in a June 1999 memo by then-deputy attorney general Eric Holder, which suggested that "a corporation should not be able to escape liability merely by offering up its directors, officers, employees, or agents in lieu of its own prosecution."

The new policy gave prosecutors the discretion to grant corporations immunity from prosecution in exchange for the company's cooperation with investigations into culpable executives or employees, as well as an agreement to improve internal compliance procedures (measures which reflect proposed revisions to the organizational sentencing guidelines ) within the company.

The policy allows the Justice Department to cut these deals without filing a public document -- thereby allowing the company to avoid any adverse publicity. (Adverse publicity is recognized by many criminologists as an effective way of changing corporate culture and bringing companies into general compliance with the law.)

These deferred prosecution agreements (so-named because they reserve the government's right to prosecute a company in the future if it does not live up to its end of the deal during a determined period of time), were previously reserved for minor street crimes and were never intended for major corporate crimes.

"This is a favorable change for companies," a top corporate criminal defense attorney told the Corporate Crime Reporter. "The memo now explicitly says that pretrial diversions, which had been reserved for small, individual, minor crimes, is now available for corporations."

For more background, see this report by the Corporate Crime Reporter.

Related Links:

DOJ's Corporate Fraud Task Force
Remarks by President Bush (9/03)
Corporate Crime Reporter
Transaction Records Access Clearinghouse (independent data on federal law enforcement)
White Collar Crime Prof Blog
"Corporate Crime Time" (Mokhiber/Weissman, 2002)
Doug Berman's sentencing blog

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