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Lecture 6
Lecture 6
Corporate culture and ethics are an integral part of business operation whether it be a
large corporation or small business. In the aggregate, the decision-making of executives
and business owners impacts more than just the business interests at hand but likewise
the interests of the general public who purchase products and services.
Profitability for executives and shareholders is a key motivator behind corporate
decision-making. Within this pursuit for financial growth, a toxic mindset can develop
that focuses solely on personal gain whereby what constitutes ethical or unethical
behavior becomes a subjective exercise.
When unethical conduct rises to the level of being labeled as criminal within the
corporate decision-making process, the term often used is white collar crime or white
collar criminal behavior.
When we discuss white collar crime, we can think crime committed for financial gain.
This can include examples of securities fraud, embezzlement, corporate fraud, and
money laundering. Interestingly, we often think of white collar crime as only occurring
on Wall Street or in large corporations. However, unethical behavior likewise happens
within small businesses and amongst lower level employees.
Some definitions of white-collar crime consider only offenses undertaken by an
individual to benefit themselves. But the FBI, for one, defines these crimes as including
large-scale fraud perpetrated by many throughout a corporate or government
institution (Chen, 2019).
The majority of corporate fraud cases involve accounting schemes that are conceived to
deceive investors, auditors, and analysts about the true financial condition of a
corporation or business entity by manipulating financial data, the share price, or other
valuation measurements to make the financial performance of the business appear
better than it actually is (Chen, 2019).
Through such fraudulent actions, it is commonplace to how the perpetrators of fraud
self-benefited. Such conduct is often termed as embezzlement and it involves a situation
where the person or entity has lawfully attained the assets but uses them for personal
purposes.
Embezzling funds can be as minor as a store clerk pocketing a few dollars from a cash
register, but on a grander scale, embezzlement also occurs when the executives of large
companies falsely expense millions of dollars, transferring the funds into personal
accounts (Chen, 2019).
Regardless of the precise criminal acts taking place, there seems to be the common
denominator of self-interests, breaches of fiduciary duty and some form of justification
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 2
for the acts committed. As such, it appears that the business ethic theories behind
decision-making go off tangent and into a rationale opposite of what ethic theories
advocate.
As we explore corporate and white-collar crime, take a look at this 24:04 minute video
on The Business of White-Collar Crime by InsideOut TV. While watching the video,
keep in mind the following points:
Reflect on how corporations where fraud took place likewise had regulatory
compliance programs
Assess the critique that criminal sentencing of white collar criminals is generally
light
The reflective question was then posed on whether through the lens of Utilitarianism,
can this concept realistically be applied to how businesses operate in the real world?
Does it make sense to one who is both a majority shareholder and CEO of a company to
only see the “good” results in light of the obvious “bad” consequences?
White-collar crime professor, Ellen Podgor (2010) provides her opinion that:
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 3
The Utilitarian Method: follows the idea that if the crime is for the "greater
good", then it is not punishable or punishable by lenient methods. Those who
believe in this perspective tend to take the view that it is acceptable to accept plea
bargains if some criminals turn state’s witnesses and turn their partners in crime
in. Here, punishment is doled out according to the final utility value created.
The Utilitarian method begs the question – who decides what the greater good
is? What’s good for you may not be as good for me, so under what conditions is
the overall utility value of the crime judged?
As such, ethic theories take on a new twisted perspective whereby unethical decision-
making is justified where it can result in corporate profits, personal gain, and the
preservation of employee jobs. In essence, the rewards from bad conduct is the greater
community good.
In a landmark study by Harvard Professor Eugene Soltes (2016) of nearly 50 of the most
prominent executives convicted of white-collar offenses, he reflects on a general lack of
remorse as in their words:
“Morals go out the window when the pressure is on,” explained Steven
Hoffenberg, who confessed to running a Ponzi scheme that stole thousands from
of investors in his company, the Towers Financial Corporation. “When the
responsibility is there and you have to meet budgetary numbers, you can forget
about morals.” The reactions to engaging in crime were not always as I expected,
either. David Myers, the former controller of WorldCom, recalled thinking that
he was “helping people and doing the right thing” while perpetrating one of the
largest accounting frauds in history. In his mind, the fraud was superficially
sustaining the company, its stock price, and the jobs of its employees.
If we step back and look at this issue, does it become a matter of whose interests are at
stake in order for a decision to be ethically justified? If you were to ask an employee
about unethical conduct by executives that saved the company and ultimately their job,
would the cost-benefit analysis taken then make sense and/or become justified.
As Professor Soltes notes:
When prosecutors try to explain white-collar misconduct, they often describe it
as resulting from a cost-benefit calculation… This idea that white-collar offenders
weigh expected costs against expected benefits comports with notions of how
executives ought to make decisions. The explanation is also rooted in the
influential work of Gary Becker, the University of Chicago economist who was
awarded the Nobel Prize for, among other things, mathematically modeling
crime based on such trade-offs. Becker’s work contrasted with decades of prior
scholarship that characterized criminals as somehow psychologically aberrant.
Instead, he argued that crime could be explained by seeing criminals not as
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 4
Does the challenge therefore become “ethics is in the eye of the beholder?”
For those negatively impacted by unethical decisions that have a criminal connotation,
such an explanation by the accused will not have merit in a criminal court. Rather,
government prosecutors can rely on established case law decision, federal or state
statutes or government regulations as their justification to bring criminal charges
against corporate offenders, whether they be individuals or the business entity itself.
As we look at the rationale behind corporate and white-collar crime, take a look at this
2:41 minute video on Making Money Off White-Collar Crime by CNN TV. While
watching the video, keep in mind the following points
Making Money Off White-Collar Crimes
Assess how the government makes money off of white collar criminals.
Reflect on the motivation behind the commission of white collar crime
Evaluate the actions the government can take to deter while collar criminals.
In this video, we learned that upon prosecution and conviction of white -collar
criminals, the government can seize assets obtained from funds that were illegally
gained. These assets are later sold and on average, they bring in about $800 million at
auction to the government. Money is later disbursed to victims and federal policing
agencies. For prosecutors, they see the motivation for white-collar crime as basic greed.
If prosecutors can send the message that these criminals will be caught and that they
will lose those material possessions they obtained, then corporate criminal conduct can
be deterred to some degree.
Now that we have covered the theoretical explanations as to why corporate crime
happens, let us take a quick break and review the material with an ungraded
knowledge check.
Check Your Knowledge
True or False: Federal prosecutors see greed as the motivating factor for corporate
crime.
Answer: True. Prosecutors note that corporate criminals purchase an expensive lifestyle
and pricey items are their reward for committing malfeasant acts.
Fill-In the Gap: When prosecutors try to explain white-collar misconduct, they often
describe it as resulting from a
A) An email conversation
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 5
B) A cost-benefit calculation
C) Their attorneys
D) None of the above
Answer: ‘B’. This idea that white-collar offenders weigh expected costs against expected
benefits comports with notions of how executives ought to make decisions.
True or False: Fraud can be viewed as helping the company, its stock price, and the jobs
of the employees.
Answer: True. David Myers, the former controller of WorldCom, recalled thinking that
he was “helping people and doing the right thing” while perpetrating one of the largest
accounting frauds in history. In his mind, the fraud was superficially sustaining the
company, its stock price, and the jobs of its employees.
Prosecuting Corporate Criminals
It is an age-old principle of corporate law: corporations can act only through their
agents, Ensley v. City of Nashville, 61 Tenn. 144, 146 (1872) ("Corporations can only act
through their agents, and must be held accountable for their acts, otherwise citizens
may be ruined through irresponsible citizens") and as such, companies are generally
liable, both civilly and criminally, for the conduct of agents acting on their behalf
(Crudo and Schalkwyk, 2017).
Because a corporation is only criminally liable as a derivative matter of the criminal
liability of an individual, the government would have to put forward a theory of some
individual liability in order for the corporation’s deferred prosecution to be approved
(Werle, 2018). In other words, a corporation can be made criminally liable for unlawful
acts done by its agents when they are acting within the scope of authority.
Therefore, corporate criminal liability applies where the criminal act of the employee
must:
As such, one can see the opportunity to shrug-off criminal liability on the wrongdoing
employee under the guise that it was the employee not the company that was the
wrongdoer.
For example, prosecutors commonly use of deferred prosecution and non-prosecution
agreements whereby corporations can avoid criminal charges if they pay large penalties
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 6
Along this same line of thought, the Department of Justice provides the opinion that the
prosecution of corporations is beneficial to the public because:
Corporations are likely to take immediate remedial steps when one is indicted
for criminal misconduct that is pervasive throughout a particular industry, and
thus an indictment can provide a unique opportunity for deterrence on a broad
scale…individual criminal liability may provide the strongest deterrent against
future corporate wrongdoing (Hunt and O’Rouke, 2014).
As such, focus seems to center on the individual actor and not the company as a whole.
Moreover, a corporate compliance program that is effectively designed to prevent and
detect wrongdoing which is enforced by corporate management “may result in a
decision to charge only the corporation’s employees and agents or to mitigate charges
or sanctions against the corporation (Hunt and O’Rouke, 2014).
In fact, corporations will receive a “cooperation credit” from the Department of Justice
that can help them escape prosecution if they do the following:
Companies are eligible for criminal cooperation credit if they identify individuals
substantially involved in or responsible for the alleged misconduct, as opposed
to all culpable individuals.
Companies are eligible for partial civil cooperation credit if they identify
wrongdoing by senior officials. To receive maximum civil cooperation credit,
companies must identify all those substantially involved in or responsible for the
alleged misconduct (Latham and Watkins, 2018).
Answer: True. A corporation can be made criminally liable for unlawful acts done by its
agents when they are acting within the scope of authority.
True or False: Corporations never place allege that it was the employee not the
company that was the wrongdoer.
Answer: False. To avoid criminal culpability, corporations often inform prosecutors that
they will cooperate in the investigation of individuals who engaged in wrongdoing. As
such, the focus is on the employee and not the corporation or its executives.
Fill-In the Gap: Attorney General Eric Holder acknowledged that the threat of
constrains Department of Justice prosecutors investigating global banks’
crimes.
A) Slow revenue
B) Paperwork
C) Economic distress
D) None of the above
Answer is ‘C’. The Attorney General noted the following: I am concerned that the size
of some of these institutions becomes so large that it does become difficult for us to
prosecute them when we are hit with indications that if we do prosecute—if we do
bring a criminal charge—it will have a negative impact on the national economy,
perhaps even the world economy.
shy away from holding corporations and their actors accountable even where non-
prosecution agreements are reached.
The “Principles of Federal Prosecution of Business Organizations” in the Justice Manual
describes specific factors that prosecutors should consider in conducting an
investigation of a corporation, determining whether to bring charges, and negotiating
plea or other agreements (Department of Justice Manual Section 9-28.000 et seq, 2019).
A screenshot of the Department of Justice Manual Section 9-28.000 et seq, 2019, is
provided below and can be found at https://www.justice.gov/jm/jm-9-28000-
principles-federal-prosecution-business-organizations
The DOJ noted the nature and seriousness of the offense conduct, including knowing
and willful falsification of books and records which lasted for at least six years and
spanned multiple countries, and there was participation in the scheme by high-level
executives of the Company.
The Company admitted that it was responsible under United States law for the acts of
its officers, directors, employees, and agents. The Company also made the commitment
to use its best efforts to make available for interviews or testimony, as requested by the
Fraud Section, present or former officers, directors, employees, agents, business
partners, distributors, and consultants of the Company.
The Company received credit for its cooperation with the Fraud Section’s investigation,
including conducting a thorough internal investigation; making factual presentations to
the Fraud Section; providing facts learned during witness interviews conducted by the
Company; voluntarily making U.S. and foreign employees available for interviews in
the United States with the Fraud Section and the SEC; in one instance, proactively
alerting the Fraud Section to material information relevant to the investigation;
collecting, analyzing, and organizing voluminous evidence from multiple jurisdictions;
and disclosing to the Fraud Section conduct in the Middle East of which the Fraud
Section was previously unaware.
The DOJ did comment that the Company has enhanced and has committed to
continuing to enhance its compliance program and internal controls.
The Company agreed to pay a monetary penalty in the amount of $137,403,812 (which
included the 20% re: Corporate Credit) to the United States Treasury no later than ten
business days after the Agreement is fully executed.
The Fraud Section further agreed that if the Company fully complied with all of its
obligations under this Agreement, the Fraud Section would not continue the criminal
prosecution against the Company. Within six months after the Agreement’s expiration,
the Fraud Section sought dismissal with prejudice of the criminal information filed
against the Company and agreed not to file charges in the future against the Company.
Hence the title of this document, DEFERRED PROSECUTION AGREEMENT.
To summarize this case study, we see that the Department of Justice did take action
once it was apprised of the violations taking place. Criminal charges were filed against
Panasonic Avionics Corporation.
We previously read that corporations cannot be held criminally liable unless first, there
was an employee who committed a crime while acting on behalf of the Company. Here,
the Company acknowledged that it was responsible under United States law for the acts
of its officers, directors, employees, and agents.
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 11
However, the DOJ took notice of the cooperative actions of the Company for which is
received it corporate credit (the 20% discount in the settlement fee to the government).
Finally, the DOJ commented on the Company’s compliance program as a reason to
justify its deferred prosecution agreement. In the DOJ’s view, the Company was making
good faith efforts to make amends.
Now that we have analyzed the case study of US v. Panasonic Avionics, let us take a
quick break and review the material with an ungraded knowledge check.
Fill-In the Gap: The Company agreed to pay a monetary penalty in the amount of
$137,403,812 (which included the 20% re: ) to the United States
Treasury no later than ten business days after the Agreement is fully executed.
A) Attorney Fees
B) Corporate Credit
C) Court Fees
D) None of the above
True or False: The government agreed that if Panasonic fully complied with all of its
obligations to help in the investigation and improve its own internal compliance
programs, the government would not continue the criminal prosecution against
Panasonic.
Answer: False. The DOJ took notice of the cooperative actions of the Company for
which is received it corporate credit (the 20% discount in the settlement fee to the
government).
Weekly Recap
In this week’s lecture we analyzed corporate criminal liability. Application of
traditional business ethic principles seems to run contrary to explain why those in a
position of authority decide to engage in criminal activity. In many instances, partaking
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 12
References
Chen, J. (April 29, 2019). White-Collar Crime. Investopedia. Retrieved from
https://www.investopedia.com/terms/w/white-collar-crime.asp
Chen, J. (August 22, 2019). Embezzlement. Investopedia. Retrieved from
https://www.investopedia.com/terms/e/embezzlement.asp
Crudo, T and Schalkwyk, A. (2017, May 31). United States: Prosecuting the Corporate
Mind. Retrieved from
http://www.mondaq.com/unitedstates/x/598518/Corporate+Crime/Prosecuting+the
+Corporate+Mind
Department of Justice Manual Section 9-28.000 et seq. (2019) Principles of Federal
Prosecution of Business Organizations. Retrieved from https://www.justice.gov/jm/jm-9-
28000-principles-federal-prosecution-business-organizations
Doyle, C. (2013). Corporate Criminal Liability: An Overview of Federal Law.
Congressional Research Service. Retrieved from
https://fas.org/sgp/crs/misc/R43293.pdf
Hearing Before the S. Comm. on the Judiciary, 113th Cong. (Mar. 6, 2013),
http://www.judiciary .senate.gov/meetings/oversight-of-the-us-department-of-
justice-2013-03-06 [https:// perma.cc/JK8C-JYWC] (statement of Eric Holder, Att’y
Gen. of the United States).
Hunt, H. and O’Rouke, T. (2014, May 6). Prosecuting a Faceless Corporation: Indictment
of a Company. Retrieved from
http://www.fromthesidebar.com/2014/05/06/prosecuting-a-faceless-corporation-
indictment-of-a-company-3/
InsideOut TV. (2013, Jan 11). The Business of White-Collar Crime. Retrieved from
https://www.youtube.com/watch?v=MEoYxQgYT2w
BUSS213 Week 6 Lecture -Corporate Culture and Ethics 13
Latham and Watkins (2018, Dec 18). DOJ Announces Revised Guidance for Corporate
Cooperation Credit. Retrieved from https://www.lw.com/thoughtLeadership/DOJ-
Revised-Guidance-Corporate-Cooperation-Credit
Podgor, E. (March 20, 2010). The Utilitarian vs Kantian Methods of White Collar Crime
Punishment. White-Collar Crime Prof Blog. Retrieved from
https://lawprofessors.typepad.com/whitecollarcrime_blog/2010/03/the-utilitarian-
vs-kantian-methods-of-white-collar-crime-punishment.html
Soltes, E. (2016, Dec 14). The Psychology of White-Collar Criminals. The Atlantic.
Retrieved from https://www.theatlantic.com/business/archive/2016/12/pyschology-
white-collar-criminal/503408/
Uhlmann, D. (2013, Nov 6). The Erosion of Corporate Criminal Liability. Retrieved from
http://clsbluesky.law.columbia.edu/2013/11/06/the-erosion-of-corporate-criminal-
liability/
U.S. Department of Justice Criminal Division. (2019, April). Evaluation of Corporate
Compliance Programs. Retrieved from
https://www.justice.gov/criminal-fraud/page/file/937501/download
United States of America v. Panasonic Avionics Corporation. Case 1:18-cr-00118-RBW
Filed 04/30/18, United States District Court For The District Of Columbia.
U.S.S.G. §§ 8B2.1, 8C2.5(f), and 8C2.8(11).
Werle, N. (2018, October 4). Nick Werle on Prosecuting Corporate Crime When
Corporations Are Too Big to Jail. Corporate Crime Reporter. Retrieved from
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corporate-crime-corporations-big-jail/