Originally Published 2nd February 2009

In a closely watched case, the Second Circuit Court of Appeals has refused to cut back on traditional standards for corporate criminal liability. The Association of Corporate Counsel, the U.S. Chamber of Commerce and other groups had asked the court to depart from a century of judicial precedent holding corporations broadly liable for criminal acts committed by employees. The groups argued that such broad vicarious criminal liability was counterproductive and asked the court to bar corporate criminal liability unless prosecutors could show that the corporation lacked an effective compliance program.

The court rejected those arguments and reaffirmed that corporations and other entities can be criminally liable whenever an employee commits a crime for the benefit of the corporation and within the scope of his or her employment – regardless of whether the corporation maintains an effective compliance program. Although the court declined to erect a new barrier to corporate criminal liability, the decision does not detract from the recognized benefits of corporate compliance programs. Such programs remain an essential tool for avoiding and mitigating the consequences of corporate criminal liability.

United States v. Ionia Management S.A., F.3d, 2009 WL 116966 (2d. Cir., January 20, 2009)

The case arose from the prosecution of Ionia Management S.A., a Liberian company that operated an oil tanker along the East Coast of the United States. The tanker's crew routinely made false entries in the ship's records to conceal the illegal dumping of oily wastewater into the high seas. The crew also obstructed a federal investigation into the illegal dumping. Ionia was charged with multiple felonies and a jury convicted Ionia on all counts. Ionia appealed.

A coalition of business and white collar defense groups filed an amicus brief challenging the jury instructions given by the district court. Since early in the 1900s, federal courts have held that a corporation may be criminally liable for the misconduct of an employee who acts within the scope of his or her employment and intends to benefit the corporation. Consistent with that authority, the district court instructed the jury that Ionia "may be held criminally liable for the acts of its agent done on behalf of and for the benefit of the corporation, and directly related to the performance of the duties the employee has authority to perform." The court went on to instruct that "the fact that the agent's act was illegal, contrary to his employer's instructions, or against the corporation's policies will not necessarily relieve the corporation of responsibility for the agent's acts."

The amicus groups acknowledged the cases supporting the jury instructions but argued that the court of appeals should depart from those precedents for several reasons. First, the amicus group argued that the precedents were based on a misreading of the seminal U.S. Supreme Court decision in New York Central & Hudson River Railroad v. United States, 212 U.S. 481 (1909). In that case, the Supreme Court determined only that Congress may include respondeat superior principles in a criminal statute if it wants to do so – not that such liability inheres in every federal criminal statute. Second, the amicus group argued that recent Supreme Court decisions in the civil context have rejected respondeat superior liability in analogous situations, and it would be anomalous to impose criminal liability more broadly than civil liability. Third, broad respondeat superior criminal liability creates perverse incentives that discourage corporate compliance. Especially in light of the dire consequences of a corporate criminal conviction, the groups argued that corporations should be able to protect themselves from criminal liability by adopting effective policies and procedures to deter employee wrongdoing.

The Second Circuit sidestepped these arguments and held that the amicus groups' arguments contradicted clear Second Circuit precedent. The court pointed to a 1989 decision holding that a compliance program, no matter how extensive or well-intentioned, does not immunize a corporation from liability when its employees, acting within the scope of their authority, fail to comply with the law. See United States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 660 (2d Cir. 1989).

What Does It Mean?

Commentators have criticized traditional principles of corporate criminal liability. Despite those criticisms, the Ionia decision suggests that lower courts will not rewrite those principles on their own. Change will probably require congressional action or a U.S. Supreme Court decision. Neither seems imminent, so the traditional standards will continue to apply – at least for the foreseeable future.

The Ionia decision should have little impact on corporate compliance programs. The decision does not diminish the existing benefits of such programs; it simply refused to confer additional benefits. Thus compliance programs will continue to protect corporations and management in a number of ways.

Compliance programs help corporations deter criminal misconduct by employees, thereby avoiding the severe consequences that come with criminal charges. These consequences can include fines, debarment, jail time for executives, negative publicity, impaired relations with regulators, customers and stakeholders and even bankruptcy.

Even where they fail to deter employee misconduct, compliance programs can help mitigate the consequences for the corporation. The Department of Justice, the Securities and Exchange Commission and many other agencies have adopted policies that direct prosecutors and enforcement attorneys to give corporations credit for effective compliance programs when making charging decisions and assessing penalties. The U.S. Sentencing Guidelines likewise call for reduced penalties for corporations with effective compliance programs.

As the Ionia court noted, a well-designed compliance program may provide evidence that an employee acted outside the scope of his or her duties. Thus, a compliance program may protect the corporation from criminal liability even under the traditional principles affirmed by the court.

Compliance programs help protect officers and directors from claims that they have breached their duties to protect corporate assets and monitor the business. Directors and officers of a corporation charged with a crime can point to the company's compliance program as evidence of their diligence and care.

Practical Tips for an Effective Compliance Program

An effective corporate compliance program will include a number of elements: (i) written standards of conduct and written procedures; (ii) appropriate involvement by the board and senior management; (iii) adequate resources, including specific individuals with day-to-day responsibility for the compliance program; (iv) procedures to ensure the responsible delegation of management authority; (v) training concerning the company's standards of conduct and legal requirements; (vi) appropriate processes for monitoring, auditing, reporting and investigating possible violations; and (vii) appropriate remedial action when violations are identified.

How can directors and senior management help ensure that a corporation's compliance program is effective? First, make sure that the corporation is using risk assessments to design, implement and modify the program. Since a compliance program cannot address every potential risk, this will help the program focus resources on the right risks. Second, benchmark against government standards and generally accepted practices and procedures of similar businesses. Third, regularly evaluate the compliance program. During those evaluations, consider the following questions:

  • What are the key compliance risks for the company?
  • Is the correct management structure in place?
  • Is there an effective hotline or similar anonymous reporting mechanism in place?
  • Are there appropriate processes for monitoring, auditing and investigating alleged violations?
  • Is the company's training focused on appropriate risks?
  • Is the company responding appropriately to violations?
  • Is management setting the right tone at the top?
  • Does the program promote a culture of compliance?

Additional Information

You can find more information about corporate compliance programs at:

http://www.perkinscoie.com/news/pubs_detail.aspx?publication=1155

http://www.perkinscoie.com/news/pubs_detail.aspx?publication=885&op=updates

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.