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Jennifer Arlen

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Brandon L. Garrett

This chapter focuses on the role of individual prosecutions in corporate actions. In only about one-third of those federal deferred or non-prosecution agreements with organizations, including some of the highest profile corporate criminal cases of recent years, were any officers or employees prosecuted. What explains this pattern? This chapter proceeds as follows. Section 2 describes the HSBC case, introducing practical and procedural obstacles that arise in cases involving both organizations and employees. Section 3 describes data on individual prosecutions in corporate cases. It further explores why prosecutors so frequently do not or cannot prosecute individuals in corporate cases, why they so often achieve limited success when they do. The chapter concludes by describing alternative means to deter individual behavior and what significance this has for the approach to corporate prosecutions more generally.

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Geoffrey P. Miller

Tests for “effective” compliance programs take the form of lists specifying required elements in varying level of detail. From an economic perspective, an effective compliance program can be defined more fundamentally as the set of policies and procedures that a rational, profit-maximizing firm would establish if it faced an expected sanction equal to the social cost of violations. This chapter explores the idea and several of its extensions and qualifications.

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Cindy R. Alexander and Jennifer Arlen

Critics of deferred prosecution agreements claim they undermine deterrence by lowering the cost to firms from reputational damage or stigma resulting from a criminal settlement. We evaluate the claim that the choice of a DPA, instead of a guilty plea, reduces the cost to corporations of reputational damage from a criminal settlement, holding constant other factors such as the identity of the offender and offense magnitude. Criminal settlements cause firms to sustain costs from reputational damage when they cause the release of information that leads interested outsiders—e.g., customers and suppliers—to anticipate an enhanced risk of harm from future dealings with the firm. DPAs could lower the cost of reputational damage if the use of a DPA, instead of a plea, would lead interested outsiders to anticipate a lesser risk of harm from future misconduct, holding all else constant. We consider and reject three potential channels through which the choice of settlement form could plausibly alter the qualitative information about the risk of future misconduct that reaches interested outsiders: direct revelation, prosecutorial selection, and managerial selection. We then turn to the effect of DPAs on the ability of federal agencies to protect their interests by excluding or delicensing firms whose criminal settlement reveals they present an enhanced risk of causing future harm to the agencies’ interests that is best addressed by exclusion instead of mandated reforms. We conclude that agencies may be better able to serve their interests as interested outsiders when prosecutors employ DPAs, rather than pleas, because DPAs leave many agencies free to use permissive exclusion and thus enable them to exclude when, but only when, appropriate.

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Samuel W. Buell

Because of their leverage over employees, corporate managers are prime targets for incentives to control corporate crime, even when managers do not themselves commit crimes. Moreover, the collective actions of corporate management—producing what is sometimes referred to as corporate culture—can be the cause of corporate crime, not just a locus of the failure to control it. Because civil liability and private compensation arrangements have limited effects on management behavior—and because the problem is, after all, crime—criminal law is often expected to intervene. This chapter offers a functional explanation for corporate criminal liability: individual criminal liability cannot effectively address the relationship between senior managers and corporate crime but corporate criminal liability can, at least in part. Thus the practice of corporate criminal liability has grown and will continue to do so, at least in the absence of major restructuring of criminal law.

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Tina Søreide and Susan Rose-Ackerman

Fighting corruption requires careful analyses of its underlying causes and consequences. This chapter provides an economic analysis of corruption as a trade in decisions that should not be for sale. The size of the bribe and the consequences of corruption are functions of the bargaining powers of those involved. We suggest ways to re-organize decision-making procedures to reduce the risks of corruption but stress the difficulty of breaking up entrenched collusive environments. Furthermore, even if corruption in a public institution is well recognized, it may not be possible to identify individual offenders. The question then is whether one should sanction the entire public body. Like private entities, public institutions can be encouraged to self-police and self-report (for example upon information from a whistleblower) if such steps will reduce the extent of some penalty. However, the criminal and administrative monetary sanctions applied to private sector entities are a poor fit for state institutions with on-going responsibilities to the citizenry. We propose non-monetary penalties, including intensified external monitoring, reorganization of authority, disqualification of leaders, and the removal of service provision responsibilities.

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Michael Klausner and Jason Hegland

Some commentators have accused the SEC of going easy on executives responsible for securities fraud and instead penalizing shareholders by imposing fines on corporations. This chapter investigates that claim empirically and concludes that it is unsupported. The SEC frequently penalizes executives and imposes fines on corporations far less often. The chapter goes on to provide more detail on SEC practice with respect to penalizing corporations and executives in cases alleging disclosure violations by public companies.

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David Freeman Engstrom

Whistleblower bounty schemes that pay individuals a cash “bounty” for surfacing information about illegal conduct have rapidly become a central policy tool in efforts to combat corporate crime and financial misdealing. This chapter offers a theoretical and empirical overview of these “bounty regimes” in three steps. First, it catalogues existing bounty regimes by comparing the structure and workings of two of its most prominent exemplars: the False Claims Act and the more recent Dodd-Frank whistleblower scheme. Next, it surveys the existing scholarly literature, with particular attention to a trio of recurrent design problems. Among these are how to incentivize an optimal level of reporting, how to harmonize bounty regimes with internal corporate compliance systems, and how to weigh efficiency and democratic-control concerns when deputizing whistleblowers to do regulatory work. The final part turns to an aspect of the regulatory design puzzle that has yet to attract substantial attention: how the organizational structure of wrongdoing (e.g., organizational complexity, the degree to which the misconduct is centralized or compartmentalized, and the like) presents opportunities and challenges in the design of bounty regimes. It is here that scholars are most likely to find fruitful avenues for further research.

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Matthew C. Stephenson

Advocates of stronger enforcement of the Foreign Corrupt Practices Act (FCPA) have proposed a number of reforms—such as the creation of a private civil remedy, more aggressive targeting of individual defendants, and expanded use of corporate debarment—that would, according to proponents, deter FCPA violations more effectively. That may well be, but this chapter points out that such reforms might also lead to a substantive narrowing of the FCPA, because such reforms would lead to more litigation, much of it against more sympathetic defendants, and this in turn could lead to both judicial narrowing of ambiguous statutory terms and Congressional revisions to the statute. The possible unintended consequence should be considered when conducting a more comprehensive evaluation of the costs and benefits of proposed FCPA reforms.

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Donald C. Langevoort

Research in psychology and organizational behavior under the heading of “behavioral ethics” is growing rapidly, offering new insights into how people (individually and in groups) choose whether to comply with legal and ethical norms. In legal scholarship, a robust literature is emerging on the subject organizational compliance, as public enforcers become more insistent that corporations build and maintain state-of-the-art systems. This chapter joins these two bodies of research, demonstrating the potential payoffs—and challenges—in using a behavioral frame of reference to assess compliance risks, design appropriate interventions, and communicate more effectively about both law and ethics with corporate managers and other employees. Just as compliance requires good economics skills, it requires psychological savvy as well, to help predict how incentives and compliance messages will be processed, construed and acted upon in the field.