Holding companies, not just individuals, responsible for corporate crime

oecd-anti-corruptionBrandon L. Garrett (@brandonlgarrett), Justice Thurgood Marshall Distinguished Professor of Law at the University of Virginia School of Law and author of Convicting the Innocent (2011) and Too Big to Jail (2014).

The OECD Working Group on Bribery (WGB) is correctly interested in examining more closely the question of legal liability of organizations, including corporations. The broad question raised is what makes for an effective system for the liability of legal persons and as the WGB recognizes, there are many choices that follow if corporate criminal liability is adopted. Corporate criminal liability has evolved enormously in the United States, not in the legal standard, but in the details of its implementation, and many lessons can be learned from that experience.

Costs and Benefits of Corporate Criminal Liability

One advantage of entity legal liability for foreign bribery, and a range of crimes, is that often employees and agents are not facilitating the payment of bribers purely or even chiefly for their own benefit, but rather for the benefit of a corporation.  The bribe money may come from the corporation, with the intent of securing business for the corporation, and the employees may at best want to be rewarded in their careers at the corporation.  The corporation may create the environment that encourages employees, officers, and agents to pay bribes to secure business.  The corporation itself must be deterred from promoting bribery.  The corporation may also be in the best position to adopt measures to prevent bribery in the future.  Employees may be fired or prosecuted, but their replacements will continue the same practices if the corporation does not change its own policies and culture.

For those reasons, punishing only individuals may not affect the incentives and the culture that the corporation created.  That said, corporations need not be punished criminally if civil alternative suffice to deter bribery.  Whether civil fines and civil injunctions are adequate to do so, may depend on what penalties are available to civil enforcers and whether they have the investigative resources to effectively uncover and penalize bribery schemes.  In many countries, civil regulators cannot impose punitive fines.  If a company, for example, need only disgorge its gains from bribery when it is caught, there is little incentive not to continue paying bribes to secure profitable business.  However, if civil regulators can impose punitive fines (for example fines up to twice the gains to the company or the losses to victims – the standard under the criminal Alternative Fines Act in the US) then the outcome may not be much different than if the case was denominated as criminal.  The only difference may be the reputational threat of a criminal case, the collateral consequences of a criminal action, and requirements in criminal cases that a company cooperate in any investigations of individuals.  Each of those features of criminal enforcement in the US could in theory be made part of a civil enforcement scheme – even cooperation in any pending criminal investigations of individuals.  Collateral consequences such as debarment or suspension can also (and often are) be associated with civil enforcement.

The main reasons to denominate penalties and sanctions (such as monitoring or compliance) as criminal would be that civil authorities in a given country might not have the enforcement resources, investigative resources, or penalties and sanctions available to sufficiently deter and punish foreign bribery.

Procedure may enhance or limit the ability to adopt corporate criminal liability in a jurisdiction.  For example, if entities have self-incrimination rights, then an entity target will be able to resist providing documents and information about wrongdoing – corporate criminal liability will make it more difficult for enforcers to secure information about what transpired.  Or if corporate criminal liability better incentivizes cooperation in investigation of individual offenders, it may enhance accountability in such cases.

Jurisdictional obstacles to bringing bribery cases against employees of a multi-national corporation may not exist for corporations that have an operating presence in a country.  As a result, jurisdiction may be another practical reason to have corporate criminal liability (however, civil liability could also be premised on the same concept of jurisdiction).

Form of Corporate Criminal Liability

Some countries adopt modified forms of corporate criminal liability in which prosecutors must prove involvement of high level officials, for example, or that the criminal actions were endorsed or ratified by top-level officers.  Such approaches make it far too difficult to impose liability and they lead to complex investigation and litigation of questions regarding knowledge of particular actors within a company.  Individual accountability can and should be investigated separately, but to intermingle such questions with the question of corporate liability hinders effective enforcement.

A strict or respondeat superior standard imposes liability on a company for the actions of agents acting with the scope of their employment and at least in part to benefit the corporation.  That broad standard, adopted in federal court in the United States, makes it clear that a company cannot avoid liability for actions of employees, or of contractors or subsidiaries acting at least in part in the interests of the corporation.  If a jurisdiction is to adopt corporate criminal liability, that liability standard is preferable, in my view.  All conduct by agents, including hired intermediaries, contractors, broadly defined, should support liability.  Nor are such agents “unrelated” if they are hired by the corporation.

There is no reason to excuse bribery when it is a “low-level” employee that commits it.  The problem is not a mere failure to supervise; the low level employee has no reason to engage in bribery except to benefit the corporation.  If there is a low-level employee exception to bribery law then corporations can tacitly encourage the most dispensable low-level employees to violate bribery laws.

Nor is there any reason to excuse successors from the criminal actions of the entity they acquired.  A sale or merger should not wipe the criminal slate clean.  Otherwise, companies would play a shell game, engaging in mergers or sales simply to avoid consequences of their crimes.  Companies should be expected to do due diligence regarding criminal exposure before making a purchase, and that potential liability and need to do due diligence will further encourage compliance to detect and prevent bribery.

More nuanced questions concerning whether the corporation should be fully blameworthy can be addressed as a matter of sentencing or through settlement with prosecutors.  Whether to credit corporate cooperation and self-reporting or existing compliance efforts, for example, can be considered as a matter of sentencing, or in negotiation of settlement agreements.  Keeping such case-specific questions separate from the question of the liability standard, however, has real advantages.

Settlements and Remedies

There is much to discuss regarding how settlements can or should occur and options for guiding and structuring corporate settlements.  I have argued that having judicial involvement in the approval and supervision of settlements enhances the legitimacy of the process and permits the public interest to be better considered.  Purely out-of-court settlements should be avoided.

Compliance may be important to reforming a corporation going forward, and as a condition of resolving a bribery case. Prospective compliance is more important, in my view, than the question whether to reward retrospective compliance.  It is problematic to excuse penalties based on pre-existing compliance – which was by definition ineffective in detecting bribes – and because assessing compliance from the outside is challenging.  It is important to carefully assess a company’s compliance, and if it truly did everything it could to prevent bribers, then it should be mitigating factor, but not a shield from liability.

There should also be clear incentives to audit and assess compliance, even if the result uncovers self-critical information.  Indeed, there should be incentives to share best practices across industry.  Enforcers and prosecutors should make the rewards for sharing best practices clear and they should promote sharing of best practices.

More important will be imposition of deterrent fines – and on the detection side of the equation, rewarding self-reporting by companies, since it can be very difficult for enforcers to know whether bribes were paid.  Enforcers should also reward whistleblowers who report bribery.

General Corporate Criminal Liability

Having a general standard for corporate criminal liability has the advantage that bribery crimes may be accompanied by other corporate crimes, like money laundering, fraud, or antitrust violations, to name just a few examples.  Adopting anti-corruption crimes but not having mechanisms to address accompanying criminal conduct can weaken enforcement. That said, as with any crime, it is far better for bribery crimes to be detailed in statutes to provide clear notice as to what conduct is prohibited.

Finally, I note that as more countries adopt corporate criminal liability for bribery and other crimes, it will be important to develop coordination rules, including double jeopardy norms, so that corporations do not face multiple overlapping punishments for the same conduct.

Useful links

These comments on corporate criminal liability are a contribution to a public consultation being conducted by the OECD Working Group on Bribery in the lead-up to a Roundtable being held on International Anti-Corruption Day on 9 December. This will provide inputs to the fourth round of Working Group monitoring of the Anti-Bribery Convention, which will include a focus on corporate liability. 

Public consultation on foreign bribery and the liability of legal persons

OECD Anti-Bribery Convention

Fighting fish crime through global co-operation

fish-crimeAntonia Leroy and Robert Akam, Natural Resources Policy, OECD Trade and Agriculture Directorate

The captain of a boat sinking his ship a few hundred kilometres off the coast of West Africa to hide his illicit catch. Migrants transported across the Mediterranean on rusty, leaking fishing vessels. A tonne of cocaine worth €85 million found on a boat off the English coast. Indentured labourers alleged to have been murdered at sea.

This is the darker side of the global fisheries industry, where the challenges of policing the world’s oceans mean crimes can go undiscovered or unpunished. And when they are found out, the brazen flouting of laws is shocking. On 13-14 October 2016, the OECD, the UN Food and Agriculture Organization (FAO) and Office on Drugs and Crime (UNODC) are jointly holding a conference at the OECD to encourage global co-operation to prevent such crimes and ensure that those responsible are sanctioned for what they have done.

The Thunder, a trawler that illegally fished all around the world, is perhaps the most prominent case in recent years of a boat that travelled the globe, fishing without permission and yet often still managing to sell its catches. Interpol put out a Purple Warning, reserved for only a tiny number of boats, to show the severity of The Thunder’s crimes. Its voyages only came to an end after a 10,000 nautical mile chase across the high seas by the Bob Barker, a boat belonging to the NGO Sea Shepherd. And the trip only ended when the captain decided to sink his own ship to hide evidence of what happened.

Illegal and unreported fishing alone costs the global economy up to $23 billion each year, a figure which probably underestimates the full negative impact of these activities. Governments and international organisations need to also consider the economic losses faced by legitimate fishers whose catches may dwindle, or the costs associated with the criminality surrounding illegally-caught fish. Tax revenues from fishing also fall and the appropriate licencing fees are not collected. A ship like The Thunder will have caused untold economic disruption as it travelled across the world.

The crimes committed in the fisheries sector go far beyond illegal fishing. There have been a number of documented cases of fishing vessels being used to transport migrants and to facilitate human trafficking and drug smuggling. When these boats arrive in port, the criminality continues with bribery of local officials, the evasion of tax payments and laundering of the profits.

There is growing understanding that more action needs to be taken to tackle these problems. For example, the United States has designated large marine conservation areas in efforts to discourage illegal fishing and is even expanding the use of satellites to find the lights used by illegal fishers at night to attract their fish.

But individual countries face challenges in policing their own waters, let alone taking responsibility for boats that fly their flag on the other side of the world. Fisheries authorities are not mandated to fight crime, while customs and tax authorities may not be fully aware of the scale of the evasion and fraud issues. Gaps between the competencies of these different bodies need to be filled.

This conference is recognition that countries and international organisations agree they cannot work alone. A complex web of enforcement needs to be built to end criminals’ belief that they can conduct illegal operations at sea with impunity.

The resources exist but by working together we can make sure they are better deployed. The OECD’s work focuses on fighting tax crimes and developing a sustainable economy. This complements the FAO’s work on fisheries management, governance and sustainability issues. Both these organisations’ work is re-enforced by the UNODC which fights all aspects of transnational criminal operations, including human trafficking and drug smuggling. The work of these international organisations is buttressed by agencies such as Interpol and the World Wildlife Fund, as well as regional fisheries management authorities and regional economic blocs.

Together countries and organisations can support efforts to fight fisheries related crimes by sharing good practices, collaborating on projects and promoting effective inter-agency co-operation at national, regional and international level. At the end of this week we will have a stronger understanding of how this will be achieved in practice.

Useful links

OECD work on fisheries

OECD work on tax and crime

Fisheries: While stocks last? OECD Insights book

 

Net losses: tax crime and fishing

Pirate treasure
Pirate treasure

Earlier this year, the Parkham Women’s Institute in the south of England invited Colin Darch to speak about piracy. To get into the spirit of things, the ladies came equipped with eye patches, parrots, cutlasses, shiver-me-timbers accents, and all the usual pirate paraphernalia.  Mr Darch came to talk about being hijacked off Somalia and held hostage for 47 days. But whether the word “piracy” conjures up visions of Somali speedboats and AK47s or peg legs and the skull and crossbones, fish are probably pretty far down the list of things that spring to mind when somebody mentions pirates.

And yet, most of the “pirates” on the high seas today are involved in pirate fishing, or illegal, unreported and unregulated (IUU) fishing as it is known. As we said in the Insights book on fisheries While Stocks Last? these pirates are neither the vicious thugs portrayed by Robert Louis Stevenson nor the seductive rascals so beloved of Hollywood. All they have in common with the heroes of swashbuckling romances are ruthless, unscrupulous masters, and harsh and dangerous working conditions with more chance of getting killed than of getting rich. The International Transport Workers’ Federation gives numerous horrifying examples from fishers’ contracts. Chinese fishers from Yongchuan County in Sichuan province not only had to pay $470 to secure a place on a boat, they had to agree to have their appendix removed before going to sea and to pay $47 for the operation themselves. And remember, these are the ones who had a contract.

Fish piracy takes several forms. The “illegal” in IUU fishing is when vessels violate the laws of a fishery. “Unreported” is fishing that is undocumented or misreported to the relevant national authority or regional fisheries organisation. “Unregulated” fishing describes fishing by vessels without nationality, or vessels flying the flag of a country that isn’t a member of the regional organisation governing that fishing area or species. This is particularly attractive since many of the states offering flags of convenience are also tax havens. If you click on the unambiguously named www.flagsofconvenience.com, you’ll see how easy it is to move vessels from one register to another, even for a few months. The fact that some of the countries proposing flags are completely landlocked doesn’t seem to stop them having extensive fleets.

IUU fishing is also big business, but like any illegal activity it is hard to know exactly how much it is worth. According to some estimates, a quarter of the fish taken from the Antarctic fishing area could be IUU catches. The media regularly report scams involving millions of euros worth of fish, such as the six Scottish trawlermen convicted in 2010 of landing 15 million euros worth of illegal herring and mackerel over a three-year period.

Pirate fishing destroys the livelihood of other fishers and threatens the existence of fish species. Combating it is hard because the penalties for those caught are low compared with potential gains, and even catching them is difficult given the vast areas of ocean to be covered, the limited means of anti-piracy authorities, and the complicity of some states and customers, like the wholesalers those Scottish fishers sold their “black landings” to.

The method used in this case was “forensic accounting”, that revealed unexplained discrepancies between actual and declared incomes. Again, you probably never think of accountancy and tax inspectors when you think of the fight against piracy, but it’s a battle that’s been going on for centuries. Rudyard Kipling’s “Gentlemen” were being hunted down by King George’s tax men in the eighteenth century for smuggling brandy, tobacco and other illegal cargoes. Their modern counterparts are not just stealing fish, they’re also involved in people trafficking and drug running.

Tackling tax crime is one way of combating IUU and associated criminal activities. A report to the Third OECD Forum on Tax and Crime  taking place in Istanbul on 7-8 November discusses the extent of the problem, the form it takes and what can be done about it. Offences include the evasion of import and export duties on fish and fish products transported across national borders; fraudulent claims for VAT repayments; failure to account for income tax on the profits from fishing activity; and evasion of income tax and social security contributions and false claims for social security benefits by fishers and their families.

The complexity of the fisheries sector and the number of participants means that a broad range of actions need to be taken at various levels, ranging from technical training for local tax people to international cooperation such as sharing of information. Such recommendations may sound vague, but in preparing the report, the discussions between specialists from tax administrations, customs administrations, fisheries authorities and law enforcement “already yielded significant benefits through the sharing of experiences and analyses, highlighting further areas for research and, in a number of cases, leading to specific international co-operation in tackling actual cases of tax crime and illegal, unreported and unregulated fishing”.

The authors give concrete examples. For instance a large cash withdrawal made from a bank to pay a cash bonus to the crew of a fishing vessel was analysed by tax officials using the money laundering model found in the 2009 OECD Money Laundering Awareness Handbook for Tax Examiners and Tax Auditors (the very name strikes fear into the heart of the most ruthless pirate). The case also involved the sale of a fishing quota, which was illegal in itself. The sale was made via a company registered in an offshore jurisdiction through a bank account in an onshore financial centre. This led to a “multilateral tax compliance action” being undertaken by three countries, which demonstrated that each of the three had a different picture of the facts underlying the case. By working together, each country was able to apply its laws based on a clear understanding of the real transaction.

And if you’re wondering what happened after that misunderstanding at the Women’s Institute, the BBC has more.

Useful links

Evading the net: tax crime in the fisheries sector

OECD Forum on Tax and Crime

OECD work on fisheries

Born a girl: bad karma?

international women's dayThe ILO estimates that at least 2.45 million trafficking victims are currently working in exploitative conditions worldwide, and that another 1.2 million are trafficked annually, both across and within national borders. Of these, up to 80% are women and girls according to the UN.

A widely-quoted UN estimate says that human trafficking and slavery is the third most lucrative illicit business in the world after arms and drug trafficking, although the UN doesn’t actually give any source for this claim. That could be because of the inherent difficulty in obtaining data on criminal activity or because the estimate includes other activities like taking money to smuggle illegal immigrants into a country. The US Department of State definition of trafficking is “all of the criminal conduct involved in forced labor and sex trafficking, essentially the conduct involved in reducing or holding someone in compelled service.”

Why does it still happen, and why are women the main victims? Economics, culture and tradition are all to blame.

Economically, you can look at it on the global or local level. Trafficking and the modern slave trade are driven by the same factors that encourage other aspects of globalisation such as increased mobility, cheaper travel and the ease of organising international networks. They are also reinforced by economic misery and absence or removal of social protection in countries opening up to the international economy, and the illusions engendered by images of a better life elsewhere on satellite television and other easily accessible mass media.

It sounds cynical, but you can also look at trafficking of women in terms of supply and demand factors, as the World Bank does here. For instance, on the demand side, employers want cheap labour, and not just in the sex industry. In 2004, the Council of Europe drew attention to the fact that domestic slaves are predominantly female and usually work in private households, starting out as migrant workers, au pairs or “mail-order brides”.

The supply of women and girls is maintained by poverty (some UN estimates say that nearly 70% of the world’s poor are women) and lack of opportunity. But social norms that consider women as inferior play a role too. Religion is one of these, and the World Bank report linked to above says that one of the factors pushing women into prostitution in the Mekong region is that under Theravada Buddhism, “women and girls are thought to be unable to achieve enlightenment. Thus, while men can show gratitude and respect to their parents by becoming monks and pursuing the spiritual life, many girls feel that they must make sacrifices for the benefit of their families, villages and their own karma.”

In addition, as this short guide published by the OECD points out, trafficking often emerges where many human rights violations are prevalent already. The most common violations are the right to personal autonomy, the right not to be held in slavery or servitude, the right to liberty and security of person, the right to be free from cruel or inhumane treatment, the right to safe and healthy working conditions and the freedom of movement. Governments can be guilty too, even towards people who have escaped from trafficking. Policies often give priority to detention, prosecution and expulsion of trafficked persons for offences related to their status, including violation of immigration laws, prostitution or begging. Victims may be treated as “disposable witnesses” whose sole value is their ability to assist in prosecuting traffickers.

What can be done?

The 2003 “Protocol to Prevent, Suppress and Punish Trafficking in Persons” is the leading international instrument. It goes beyond trafficking for forced prostitution and takes into account other forms, including forced domestic work and commercial marriage. These aren’t just problems in developing countries. The slaves referred to by the Council of Europe were working in its member countries. Earlier this week, the UK’s Forced Marriage Unit reported that a two-year-old girl was among the victims it helped last year.

The 2003 Protocol recommends that governments allow victims of trafficking to remain in the destination country, temporarily or permanently. Governments should also ensure their safety and protect their privacy and identity. It also recommends that governments establish legal measures to award victims compensation.

At national level, efforts in source countries to tackle poverty and lack of rights would strike at the root of the problem, but a number of measures can have more immediate impacts, such as awareness-raising campaigns, given that many victims are deceived into migrating. Given the importance of poverty in fuelling trafficking, funding to start small businesses could help women.

Destination countries can contribute to such programmes. They can also help victims by protecting them even if they are not prepared to help the authorities investigating the trafficking networks, and not deporting them back to the country they were trafficked from.

Useful links

A Women’s Day Challenge, article on the educationtoday blog by Barbara Ischinger, OECD Director for Education and Skills

OECD work on gender

OECD work on gender equality and development

Evaluation of the International Organization for Migration and its Efforts to Combat Human Trafficking  

Sahel and West Africa Club (SWAC) Regional conference to combat child trafficking